MERGERS and acquisitions have notoriously been renowned for having a ‘toss of a coin’ chance of success, save for the latest trends in the development of versatile models and skills, which have increased the activity’s chances of success.
However, despite the recent increase in success rate from 50 to about 70 per cent; many acquiring companies continue to stumble in areas of post-merger integration as well as materialising the so much publicised rationale for them.
In the previous article we looked at Atlas Mara’s acquisition of Finance Bank Zambia and subsequent combination with BANC ABC.
We considered a number of factors that drive the increasing prominence and prevalence of mergers and acquisitions.
We further looked at synergy as the most widely-used and misused rationale for mergers and acquisitions.
We saw that in most companies, managers decide which companies to acquire and how much to pay for such acquisitions.
This makes a number of mergers and acquisitions to be pursued in managerial self-interest, for business empire building, and also to satisfy the managerial ego at the expense of shareholder value maximisation.
Essentially, the positive outcomes of mergers and acquisitions have made remarkable contributions to the corporate business world which would otherwise not have been made without the activity.
As we shall see later on in this article, the “invincible power” of mergers and acquisitions led to the creation and development to some of the globally renowned products and corporate brands that we adore today.
On the other extreme, history shows that mergers and acquisitions have had their fair share of failures.
It’s always saddening to learn that a number of companies have suddenly disappeared after being acquired by another.
In such instances, it’s important for us to have a grasp of what makes these mergers and acquisitions successful or unsuccessful.
Walt Disney and Pixar provide us with one of the classical high profile example of a successful merger of all times:
Disney, from the early 1990’s outsourced the production of three dimension (3D) animated films to Pixar.
This relationship generated more than US$3 billion in box office takings worldwide and over 150 million home videos.
With the passage of time, 3D animation capabilities became vital for firms to gain sustainable competitive advantage in the animated film industry.
Alas, Disney had been unable to develop expertise in 3D animation in-house.
Therefore, the takeover of Pixar was a way for Disney to integrate 3D animation capabilities while at the same time making up for its apparent lack of creativity in innovation, which was critical for any additional meaningful success.
That is why; in 2006 Disney eventually bought its strategic partner, Pixar for $7.4 billion.
I’m sure you can see that there was a sensible, logical and clear strategic and synergic rationale for this combination.
As we have already alluded to, corporate mergers don’t always work out. Sometimes they end up in “corporate divorces” or even insolvency.
History further reveals one of the poorest merger and acquisitions case studies; Penn Central.
This was indeed a heartbreaking outcome of a business combination!
In 1962, at a time when transportation trends were shifting towards super highways and air-travel, the Pennsylvania Railroad Company and the New York Central Railroad Company merged to form Penn Central.
This merger occurred in 1968 and imagine, just two years down the line, the combined entity filed in for bankruptcy.
Surely, what went so terribly wrong?
At the height of the advent of the Internet, two media companies Time Warner Consolidated with American Online (AOL) merged together for $164 billion.
However, in the post merger period it was discovered that the cultures of these two firms were significantly different and incompatible!
This consequently led to a $45 billion dollar write-down and a further $100 billion dollar annual loss in 2003 and subsequently to a “corporate divorce” of he two companies in 2009.
What lessons do these case studies present to us?
Essentially, every merger and acquisition envisages being successful, however, this is no easy ambition.
That’s why success can only be achieved by envisioning an “end-state vision” right from the drawing board, then working backwards to establish integration expectations, developing a roadmap or a blueprint to mark progress.
Anyone undertaking a merger or acquisition should ascertain whether it is a scale deal, an expansion in the same or highly overlapping business, or a scope deal: an expansion into a new market, product or channel.
Scale deals are typically designed to achieve cost savings and will usually generate relatively rapid economic benefits while scope deals are designed to create incremental revenue.
Once this bedrock is laid down, then the success of the deal becomes imminent.
Essentially, every merger or acquisition needs to be a well-thought-out deal on how the deal enhances the company’s core strategy, the combined entity’s desired culture, synergy vis-à-vis a privileged access to potentially attractive new customers and markets.
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The author is the Managing Consultant at G.N Grant Business Consultant, a fellow of the Zambia Institute of Chartered Accountants (ZICA) and the Association of Chartered Certified Accountants (ACCA), a Master of Business Administration (MBA) holder and a candidate for the Herriot Watt University (Scotland) Doctor of Business Administration (DBA)