Mergers and acquisitions (M&A) are significant vehicles of corporate strategy because of their ability to contribute to the overall strategic value creation in firms in the highly-competitive global business environment. By bringing together the capabilities and capacities of different firms, M&As can help reduce threats from competitors, markets and industry (Andriuškevičius, 2015). They can also increase market access and power, improving the market position of organizations. Besides, M&As can increase the financial health of firms, thus providing the capital required for expansion and growth strategies. Altogether, M&As aim at creating strategic value by increasing the total shareholder return (TSR), market capitalization, market presence and profitability. However, 83% of M&A fail, mainly because of strategic misfit (Bradt, 2019). Despite the high failure rate, the value of M&A transactions continued to increase, reaching $3.9 trillion globally in 2018 (Szmigiera, 2019). This means that firms continued to pursue M&As even when the prospects of failure were high. The ensuing discussion addresses the claim that M&As contribute to the overall strategic value creation in firms by delving into situations in which this claim has been justified or not justified.
For M&As to deliver strategic value creation successfully, they should not only be inspired by the right motives but should also be implemented judiciously. In this regard, synergy rather than hubris and managerial self-interest should motivate M&A. Synergy-driven motives pursue a combined firm value post-M&A that is greater than the sum of the values of the independent firms before M&A (Haspeslagh & Jemison, 1991). This motive contrasts with hubris in which the value-creating potential of the post-M&A firms is overestimated by arrogant and overconfident managers. Likewise, managerialism causes the overpricing of acquisitions, and exorbitance for personal gain, to the disadvantage of shareholder wealth (Haspeslagh & Jemison, 1991). In the same vein, the integration process after an M&A is often the most challenging because it is fraught with many risks that endanger the success of the resulting entity. While different integration methods exist, namely symbiosis, holding, preservation and absorption, they can fail if decisions are made and implemented slowly, and the integration process focuses on the technical aspects, ignoring the cultural issues (Haspeslagh & Jemison, 1991). Firms should therefore, consider the motives and implementation strategies carefully before concluding M&A transactions.
Various examples evidence support the claim that M&A contributes to overall strategic value creation in the resulting companies. The full potential approach has been touted to deliver mot value creation from M&As because it focuses on identifying all the possible areas of improvement in the resulting company post-M&A. This approach captures all the synergies presented by the merging or target companies, while capitalizing on all the opportunities available to upgrade the deficient areas (Löfgrén, et al., 2018). The companies that have employed the full potential approach have enjoyed strategic value creation that has exceeded expectations.
Charter Communications, Inc. (Charter) is a US-based mass media and telecommunications firm that used acquisitions successfully to deliver strategic value creation through the expansion of its market share. In 2015, Charter Communications acquired Bright House Networks and Time Warner Cable to make it the third-largest multichannel video and second-largest broadband provider in the United States. This acquisition created strategic value for Charter Communications by protecting not only protecting its market share and profits in the wake of fierce competition but also outperforming its peers with a 289% increase in the annualized total shareholder return by the close of 2017 (Löfgrén, et al., 2018). After paying $67 billion for Bright House Networks and Time Warner Cable, which controlled 3.6% and 20.8% market share in the United States’ cable market, Charter embarked in an elaborate transformation to capture the extensive synergies presented by the three firms in the areas of information technology, engineering, product development and overhead reduction. Charter also harmonized the packaging, pricing and operating practices of the three companies, helping it increase its scale, which enhanced its bargaining power with content producers and suppliers in the industry, along with increasing its capital and operating efficiencies.
Similarly, Sanofi, a pharmaceutical firm based in France, used M&A to confront industry headwinds and transform its business strategy. The move created strategic value by repositioning the company in the pharmaceutical industry, cutting costs by about %700 million to gain operational efficiency and growing its revenue from a rate of 5% to 17% between 2011 and 2012 (Löfgrén, et al., 2018). The M&A was motivated by the impeding loss of patent protection on many of its products and the wish to enter into the biologics industry, which was a lucrative emerging field away from traditional drug manufacturing. Therefore, Sanofi acquired Genzyme in 2009 for $20 billion and embarked in a swift integration processe right after. Genzyme brought in its robust innovation capability, despite its dismal performance due to the closure of its two production facilities, which caused drug shortages and reduced sales. By streamlining the manufacturing and operational processes, and research and development pipeline, along with reducing of the workforce force and divesting the diagnostic unit, Sanofi gained operational efficiency and product innovation capabilities within a year of the M&A.
In other cases, companies use M&A to turnaround their failing business and avoid closure. Groupe PSA, which is a French automotive manufacturer, managed to turnaround its failing business following the financial crisis of 2008 by acquiring the Opel brand from general motors, which was also experiencing business turmoil. Groupe PSA had lost $5.4 billion and $2.5 billion in 2012 and 2013, respectively, while Opel had lost $19 billion since 1999 (Löfgrén, et al., 2018). However, the strategic value lay in the manufacturing and research and development capabilities, and targeted brand focus. Since Groupe PSA did not have the finances to close the M&A transaction and fund the turnaround program, it sold off 14% of its stake the French government and another 14% to Dongfeng in China, to raise $1.74 billion (Löfgrén, et al., 2018). The acquisition was finalized in 2017, after which Groupe PSA embarked in an integration process and the implementation of its turnaround strategy, immediately. The turnaround strategy after the acquisition involved brand strengthening through the reduction of model varieties and enhancing financial discipline. Within a year of the acquisition, the market capitalization of Groupe PSA increased by more than 700%, while it rebounded from making loses to a 6% EBIT margin (Löfgrén, et al., 2018). This example demonstrates that M&A can be used to turn around failing businesses and create strategic value when implemented swiftly and prudently.
Contrastingly, the claim of strategic value creation from M&A has been negated by equally numerous examples as well. Hubris and managerial self-interest are poor motives that have been implicated in many M&A debacles. Moreover, the lack of a strategic fit between the merged companies along with overconfidence of the management and the overstating of their capabilities has caused numerous M&A failures. Moreover, turf wars, cultural clashes and organizational politics can hinder the proper execution of the integration plans, leading to M&A failure (Martin, Butler & Bolton, 2017). As observed earlier, M&A failures outnumber the successful ones because of these reasons.
History is not short of M&A disasters. For instance, the merger between America Online and Time Warner to form AOL Time Warner in 2000, is memorable for its dramatic failure. The merger sought to capitalize on the convergence of the internet and mass media technologies and the emerging digitized media industry (Haspeslagh & Jemison, 1991). The merger was concluded for $165 billion, making it the largest M&A deal at the time. However, the merger was unable to deliver the anticipated strategic value because AOL Time Warner lost $99 billion within the first year and by 2003, the merger had failed (McGrath, 2015). The reasons attributed to this failure include the inability to leverage the synergies of the two companies, America Online and Time Warner. American Online, which was successful in the internet industry, sought to diversify into the cable industry by merging with Time Warner, which was a successful media company. However, America Online executives were incompetent in running a large media company using their internet industry know-how. Likewise, AOL was unable to capitalize on high-bandwidth connections that were emerging in the internet industry because of the lack of capital (McGrath, 2015). Besides, AOL Time Warner experienced the devastating dot-com crash, which devastated its internet business. Moreover, the culture clash fomented suspicions from the executives of both companies, with Time Warner viewing AOL as a threat, while AOL considered Time Warner to be old-fashioned (Feloni, 2018). These perceptions caused turf wars, with every side striving to protect its business, causing the merger to lack synergy due to the selfish interests and inflexibility of the senior management (Benitez, Ray & Henseler, 2018). Steve Case, the founding CEO of AOL confessed that although the merger had the right vision, it was executed poorly because of mistrust among senior executives (Feloni, 2018). Ultimately, the company succumbed to the politics in the organizations and dissolved the merger.
Quaker Oats, a food company based in Chicago in the United States, acquired Snapple to expand its business into juices and teas. This M&A is memorable because it was highly overpriced at $1.7 billion, despite being warned by Wall Street. This purchase demonstrated the lack of due diligence and poor negotiations, which can lead to disastrous decisions (Cuypers, Cuypers & Martin, 2017; Haspeslagh & Jemison, 1991). The reasons for its failure include the inability to synchronize the marketing and distribution of products. In this aspect, Quaker Oats relied on large retailers and supermarkets, while Snapple used small retail channels such as gas stations, convenience stores and independent distributors. Also, the company lacked a cohesive marketing strategy and undertook marketing campaigns that failed because of divergent cultures (Rahman, Lambkin & Hussain, 2016). Ultimately, the company lost strategic value when Snapple lost the popularity it had in the market due to brand dilution and inappropriate marketing signals. These blunders enable Coca-Cola and PepsiCo to capture Snapple’s market. This debacle demonstrated that Quaker Oats lacked a strategic vision because it did not plan for future competition properly (Cuypers, Cuypers & Martin, 2017). In the end, Quaker Oats sold Snapple at $300 million, which was a significant loss from the $1.7 billion it has spent in the acquisition.
This discussion has addressed the claim that M&A contributes to the overall strategic value creation. The claim has been supported and dispelled using examples drawn from various industries ranging from automotive manufacturing to pharmaceuticals, communications and beverages industries. It has emerged that M&As succeeded in delivering strategic value when they were premised strategic and coherent vision along with meticulous, prompt and continuous integration programs to ensure strategic-fit of the processes and culture. Contrastingly, M&A failed to deliver strategic value and consequently failed because they were motivated by hubris and managerial self-interest, which often caused the incoherent implementation of the integration program, turf wars and lack of trust among the senior executives.
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