Promoting Success of Mergers & Acquisitions – Pre and Post Critical Factors to Consider

Thesis

by Lukáš Bláha

Submitted in Partial Fulfillment of the Requirements for the Degree of

Bachelor in Science In

Business Administration

State University of New York Empire State College

2016

Reader: David Starr-Glass

Acknowledgment I would like thank to my mentor David Starr-Glass for his advice, encouragement and

guidance through the senior project writing. In addition, many thanks to everyone who

supported me during this process, especially my family and friends.

Abstract

Mergers and acquisitions are phenomena of the past century. Proficiency and expertise in

the industry is weighted with gold and the truly competent people are viewed as

champions. Buying another company is finest profit allocation there is, to become

superior in the world of business. Yet, based on available data, majority of the

transactions fail.

The purpose of this paper is to provide an insight into the comprehensive world of

mergers & acquisitions, by analyzing the best practice process, transaction undergoes and

then uncovering what is the main reason for the failure rate to be in the range of sixty to

ninety percent. As employees’ role and ability to cope with change appears to be the

primary cause of failure, we will focus on this area as well.

If successful, the paper will provide reader with fresh, yet profound perspective and helps

to understand different factors that could affect the entire process, and later utilize this

knowledge either in career or in life as well.

Table of Content

I. Introduction 5

II. Definition of Mergers & Acquisitions 9

a. Types of Mergers & Acquisitions 12

b. Transaction Motives 15

c. DrivingFactors 17

III. TheProcess 21

a. Pre-MergerAnalysis 21

b. Search&ScreenTargets 24

c. Investigate&ValuetheTarget 26

d. AcquireThroughNegotiations 32

e. Post-MergerIntegration 34

f. ProblemStatement 35

IV. HumanFactorofTransactions 36

a. CulturalMismatch 37

b. OrganizationalFit 41

c. Change&Resistance 45

d. ChangeManagement 48

V. Conclusion 52

VI. References 53

5

I. Introduction

In Fall 2015, Mergers and Acquisitions were part of headlines now more than usually.

When ABInbev, largest beer manufacturer on the planet announced and later reached an

acquisition agreement with second largest beer manufacturer – who also owns famous

Czech Pilsner Urquell – SABMiller, the business oriented websites all over the world

flooded their social media channels to spread the news. A deal worth around $106 billion

is according to Bloomberg, the largest acquisition in the history of United Kingdom

(Buckley and Muller). Major media outlets reported this as to be the largest transaction

of 2015, but they did not know what was coming. Few weeks after ABInbev and

SABMiller announcement, Reuters reported, Pfizer, pharmaceutical giant, announced

$160 billion purchase of Botox maker Allergen, a figure much higher than in the ABInbev

case. This is going to be the second largest transaction in history pushing ABInbev to

third place, second to Vodafone’s acquisition of German Manneman a

telecommunications vertical. It is also the largest deal in the healthcare industry. (Pierson

and Berkrot, 2015)

Taking company perspective into account, Mergers & Acquisitions are part corporate

structure and restructuring, where multiple departments comes together to form a strategy

and to make a decision. These departments include Corporate Finance, Corporate

Governance, Strategic Planning and of course members of c-Suite. Transactions are the

master class of what company can do with its hard earned resources. Being part of this

process is a highlight and career milestone for every business executive and if successful,

personal reputation shoots through the roof. The entire process also involves other issues

to be dealt with, such as legal principles applied in the country of transaction – laws differ

based on countries. Question of financing, valuation, and form of payment needs to be

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crystal clear and by all means national or supranational regulators’ approval is required

if the deal is sizeable or threatens market power or concentration. All of above-mentioned

makes the transaction process enormously dense, convoluted and organization around it

very demanding, thus explaining why the transactions take weeks and months to complete

to go through this entire round.

Mergers & Acquisitions are the phenomena of the beginning of current millennium. As

displayed in Figure 1 below. After 2007 and 2008, record years for Mergers &

Acquisitions’. Historically, we are in the now era of activity peak, after global slowdown

between 2009 and 2013.

According to data of M&A statistics from the Institute of Mergers, Acquisitions, and

Alliances, 2015 is set to be the second most successful year in the history. At Figure 1,

the blue columns show a number of transactions and the red line indicates dollar value of

all the deals combined globally. This industry as a whole was worth nearly $4 trillion in

2014 with over 40 thousand transactions during the same year. To put this enormous

figure into perspective, the United States total debt, accumulated over the whole history

of the country is approaching $19 trillion. It is apparent that this trend has gained

importance since 1985 – roughly $200 billion worth of activities & around 2500

transactions. We can see the above mentioned slowdown between 2009 – 2013 regarding

value, but the number of activities remained the same. The biggest drop has occurred after

the dot-com bubble and 9/11 both regarding value and number of deals. (Institute of

Mergers, Acquisition, and Alliances)

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Figure 1: Announced Mergers & Acquisitions: Worldwide, 1985 – 2015e

Source: Institute of Mergers, Acquisitions and Alliances, M&A Statistics

The data tell us that M&A is not something that companies, which are serious about their

way of conducting business and growing, could afford to overlook, but it has become a

critical driving force in corporate business, a must-category, and companies are investing

huge amounts and resources into improving themselves.

Companies chose to distribute its hard earned capital into this activity, with the vision of

future return on today’s dollar in multiple ways, be it synergies between the target and

acquirer, cost effectiveness, market expansion, geographical expansion, additional

revenue stream, more favorable tax system or strategic reasons and many others.

However, as Christensen, Alton, Rising, Waldeck mentioned in the very beginning of

their “The Big Idea: New M&A Playbook” in Harvard Business Review, multiple studies

“put failure rate of mergers and acquisitions somewhere between 70% and 90%”.

(Christensen, Alton, Rising, Waldeck, 2011)

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This does not seem to have the keen positive effect on shareholders’ equity that

companies should be putting their profits into if they expect high returns in the future, yet

as Figure 1, above, illustrates more and more capital is flowing into this industry.

Clearly M&A is not something that is going away; there will always be market for buying

and selling companies in capitalism. As Figure 2 shows, M&A is not limited to only

certain industries, but it affects economies as a whole - it is not a process where a couple

of Wall Street banks would buy and sell companies as they please.

Figure 2: Worldwide Announced M&A Target Industry by value in 2012

Source: Rodgers R. Thomson Reuters, Mergers & Acquisitions Review Financial

Advisors, 2015

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The purpose of this senior project is to examine and analyze this extremely complex, and

as it is turning out, a risky process and establish critical areas to look at in pre-merger and

post-merger state of the company, as well as the whole process needs to be understood.

After the process is described and explained, the senior project will shift the focus to the

most significant reason for failure, and that is corporate culture, human reaction to

change, what is the root cause, how to overcome it and best practice. If successful, this

will lead to better understanding and more precision in assessing good merger and

acquisitions targets for the outlined purpose, be it expansion, strategic or other, increased

capital efficiency, the more effective increase in shareholders’ equity and avoiding crucial

pitfalls also.

Other than fulfillment of bachelor program at State University of New York, Empire State

College, we hope this will serve as good starting material for anyone, who would be

interested in mergers and acquisitions and is looking for fresh perspective. This paper is

going to introduce key terminology to align author’s and readers’ understanding; then it

will move on to discussing what are the most common motives, what ways are common

for defining the motives. Description of transaction process will follow and then the focus

will be put on the reason for most mergers and acquisition failures.

II. Definition of mergers and acquisitions

As any other industry, especially those with a high level of specialization and knowledge,

mergers and acquisitions also have a specific set commonly used words in its glossary

and it is fair to clarify what means what before we proceed further. Even though, some

may not see quite the difference, and very often, we can see people fail to distinguish

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between a merger and an acquisition and even here, in this paper, we tend to put them

together. Yet it is vital to understand the difference.

Merger

According to Stanley Reed, Alexandra Lajoux and Peter Nesvold, authors of highly

reputable book “The Art of M&A”, a merger is “when one corporation is combined and

disappears into another corporation”. Merger is a legal operation conducted under the

legal system in given state, country or other legal entities with jurisdiction, during which

two legal entities become one. This legal process does not say anything about post-merger

operations of the newly established legal body, but rather it says which two parties are

coming together to form one entity (Reed, Lajoux and Nesvold, 2007). There is a specific

subset of mergers, so-called merger of equals, two companies of about same size merger

together. This case is not very often seen, as usually larger company mergers with smaller

one.

Corporate Acquisition

In “The Art of M&A” a corporate acquisition is described as “process by which the stocks

or assets of corporation come to owned by a buyer”. A word target, most likely adopted

from military dictionary, is the word often used to described acquired corporation.

Now we can clearly distinguish between the two. Merger is a legal process, conducted

under strict regulations of a legal system in the country of corporation’s origin, whereas

acquisition, on the other hand, is a simple change of ownership of either stocks or assets

between two parties. (Reed, Lajoux and Nesvold, 2007)

Friendly vs. Hostile Takeover

As we proceed in this paper, we will learn about acquisition process and all the steps and

stages that have to be taken, in order to acquire a target company. Friendly Takeovers are

considered as such, where management and board of directors of targeted company

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participates, discusses, and negotiates best terms and conditions of the transactions for of

their shareholders.

Hostile takeover is considered such, when the management and board of directors do not

buy into the idea of acquisition. Hostile takeover is finished when the acquirer gains the

shares or assets, without coming to an agreement with the target, and assets or shares are

gained without consent or acceptance of the other party. (Reed, Lajoux and Nesvold,

2007) The majority of transactions are friendly.

However, as Bill Anderson, head of Goldman Sach’s defense practice points out for

Financial Times’ “Hostile Takeovers rise to 14 years high in M&A as confidence grows”,

the hostile takeovers occur mainly in the beginning and at the end of the cycle, as

companies rush to close the transactions. Figure 3, shows hostile takeovers as a

percentage of total global M&A activity.

Figure 3: Global Hostile Takeovers – Percentage of M&A activity

Source: “Hostile Takeovers rise to 14-year high”, Financial Times, Massoudi,

Hammond

0%2%4%6%8%10%12%14%16%18%20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

GlobalHostileTakeovers- %ofM&A

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Hernan Cristera, co-head of global M&A at JP Morgan adds that the increase is directly

correlated with the confidence in boardrooms and sign of strong M&A market. This paper

is yet to demonstrate how difficult it is to successfully conclude a merger or acquisition,

but Vikas Seth of Credit Suisse concludes “The ability to get an unsolicited deal done

remain as of art as a science.” (Massoudi, Hammond, 2014)

Synergy

Synergy is the process of working together in a way that the two parties bring the value

to each other, so the “proverbial two-plus-two-equals-five effect” is in place. (Reed,

Lajoux and Nesvold, 2007) Synergy can have many forms, depending on what type of

merger is it. However to put synergic effects into general categories, either the

cooperation brings significant increase in revenues, for example in form of additional

revenue stream for the newly formed company (alternatively, strengthening of current

revenue stream), or significant cost reduction or cost sharing (final product has many

similar parts that could be produced more efficiently), not to mention elimination of

redundant processes, in operations and back-office, economies of scale, but also

combination of talent from both employee pools and technology that can enrich the other

party, whether it is in production or operations.

II. a. Types of Mergers and Acquisitions

There are many ways and many classifications how we can sort transactions because the

objectives or scope are different as well as every transaction is unique. Perspective on the

issue is not shared among authors of “The Art of M&A” and Adrian Ness of Johnson

Corporate, leading advisory company with 50 years of experience with middle size M&A

activity. In addition, McKinsey’s perspective, one of the most respectable companies in

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management consulting is completely different as well. Therefore, below is the

intersection of above mentioned.

Horizontal Integration

Horizontal integration as a philosophy is built upon an idea that if you are running your

businesses successfully, stick to what you know, but grow bigger. Company following

horizontal integration is aiming to acquire competitors in the very same market. It is

fulfilled in two different ways. Company of certain size will acquire or merge with a

competitor of similar size – merger of equals. Alternatively, it will build up by buying

smaller competitors and increase its market share like a mosaic. (Reed, Lajoux and

Nesvold, 2007) These transactions are under regulatory watch to prevent monopolistic

behavior, market concentration and pricing.

A great example of horizontal integration is very recent, and we will learn in couple of

years whether the acquisition was successful or not. Disney targeted and purchased

Lucasfilm. Disney is conglomerate doing business in multiple industries, but Disney’s

film division will surely welcome new addition to the roster. Lucasfilm is a studio behind

Star Wars saga – first episode under Disney’s ownership was released in December 2015.

It also has rights to Indiana Jones franchise. This allows them to capture more of the

mainstream commercial film market. (BBC, 2012)

Vertical Integration

The Second transaction type is called vertical integration. Vertical integration is derived

from the idea that supply chain and market is arranged vertically; industry based.

Therefore, vertical integration is an idea that company would choose to expand in the

same industry, but to a different level of supply chain or production line. There are two

options for the acquirer, either to do a backward or forward integration – depending on

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where its current position in the supply chain is. Purchase of supplier would be viewed as

backward integration, whereas acquisition of customer is classified as forward integration

– going forward in the supply chain; closer to the customer. (Reed, Lajoux and Nesvold,

2007)

Regulators tend to investigate these types of transactions very closely as it is highly

probable that it will lead to a reduction of competition in the industry – deducting from

the nature of the transaction (Reed, Lajoux and Nesvold, 2007). Good examples of

companies following a philosophy of vertical integration can be found mainly in first and

second sector of the economy. This does not mean that there are none in the third sector.

To demonstrate on specific example, let us introduce Royal Dutch Shell, one the largest

companies on the planet and also key player in oil market. According to their official

website, company is present in both upstream and downstream of the market. Shell

defines upstream as the part of the businesses that is responsible exploring new areas of

oil and natural gas for extraction. Downstream market is defined as ‘refines, supplies,

trades and ships crude worldwide, manufactures and markets a range of products, and

produces petrochemicals for industrial customers’ (Shell at glance)

Figure 4 below graphically visualize the difference between horizontal and vertical

integration

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Figure 4: Vertical and Horizontal Integration Matrix

Source: Martin Sauter, Wikimedia, derivative work of Andrew C

II. b. Transaction Motives

A motive for merger and acquisition plays a pivotal role as these are the expectations of

the management and board of directors from transaction and the benefit it is suppose to

bring to the overall well being of the company. Motive goes hand in hand with below

defined transaction types as each transaction type is associated with the motive. It is very

rare and highly improbable that transaction would be undertaken if only one motive is

present. The following list of motives is based on Johnson Corporate’s viewpoints. The

outcomes of the transaction differ, but very rarely the objective does not include the

increase in shareholder’s equity.

First of all, let us examine motives that create value. Growth and additional revenue

stream as a motive. Merging and acquiring allows new entities reach new dimensions of

cooperation. Growth and additional revenue stream are transactions that enable quick

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expansion in current market, increase market share or customer growth. It is quicker and

safer way to prosperity then to only rely on organic growth. (Ness, 2014) Additional

revenue stream makes company more stable and resilient to economic cycles, market

shocks as it is now able to rely on different customer base. Another motive that creates

value is acquiring target that increases market power. This is best achieved via both

horizontal and vertical integration.

Secondly, we have grouped couple of motives into an extension group. This group

includes motives that allow company to extend their activities either in terms of product

portfolio, geographical perspective or entering new market perspective. Enriching

product portfolio through acquisition and successfully integrating it makes sure that

company develops another revenue stream, but also ensures greater market share on the

current market. Geographical expansion allows to scale internationally (Ness, 2014) and

represents one of the easier ways of entering new foreign market. Local company is

already well established and so the acquirer is in very comfortable position of receiving

a market know-how and insights from local people, culturally similar, eliminating

possible issues with hiring and building entire organization from ground up. Market

expansion can also be geographical, but boarders aside, it is understood to be customer

base acquisition in order to increase market share.

Third category is resource acquisition. There are various kinds of resources worth of

acquisition – apart from physical inventory or raw materials, in 21st century, companies

look to ‘acqui-hire’ model, also know as hiring by acquiring. Hiring by acquiring

represents a model, where it is cost effective and efficient to purchase a company solely

for the purpose of obtaining the desired talent pool and team (Ness, 2014). This model is

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often seen in technological sector, where brain power & talent is considered as the most

important asset of each organization. A part from hiring by acquisition, companies look

to owned, protected and registered intellectual property to gain edge over competition.

Additionally, a strong brand and market positioning is not something that should be easily

overlooked as motive (Ness, 2014). FMCG conglomerates proved this strategy to be

successful, with goliaths as Kraft foods, Unilever or Procter & Gamble, owning hundreds

of brands in their portfolio and greater earnings results.

Last category, include all motives that help to overcome governmental regulations. These

acquisitions for example help to optimize taxes, trading tariffs or barriers to trade. For

example, analysts speculate that the Phizer’s latest announced acquisition of Allergan,

market capitalization of $113 billion is not only one of the few ways for Phizer to grow,

given its monstrous size, but also that it is attracted by the Allergan’s domicile tax rate in

Ireland, which would lead to significant tax cuts (Kollewe, 2015).

II. c. Driving Factors

All of above mentioned motives need to be clearly defined by to acquirer before decision

is taken. Acquirers are divided between two groups operator buyers and deal-driven

buyers.

Deal-driven buyer’s decision making process is much easier and has less variables

compared to operator buyer. It is price of the target, cash flows and financing. For deal-

driven buyer it essentially comes down to two simple to questions – “Am I valuing the

company correctly, and are the sellers willing to sell for my proposed price?” and the

other is “Can I finance my proposal?”. These include entities such as private equity funds,

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venture capital funds, hedge funds or high net worth individuals. Return on investment in

certain time horizon are key performance indicators for financial buyers when it comes

to evaluation and making decision whether or not the acquire a company. (Reed, Lajoux

and Nesvold, 2007)

The operator buyer, or as author prefers to call it – strategic buyer has a completely

different lenses in their glasses. Strategic buyers are driven by long-term firm prosperity

and shareholder’s value, compassed by fiduciary duty and so companies have created a

model, and a department, whose main objective is to evaluate important business

decisions, strategic planning.

Strategic planning falls under business strategy. The fundamental concepts were defined

in 1970s thanks to textbooks by Alfred Chandler Strategy and Structure, Igor Ansoff’s

Corporate Strategy, and a Harvard textbook Business Policy: Text and Cases by Learned,

Christensen, Andrews, and Guth as discussed in Business Strategy class lead by Mr.

Chvalovsky.

As corporate department, it is responsible for planning and executing ideas of leadership.

Strategic planning has evolved significantly since its beginning, from suggestions of

merging based on strengths and weaknesses analysis, to General Electric’s nine element

construct to world’s famous Boston Consulting Group’s (BCG) growth / share matrix.

According to The Economist’s article, originally published in print “Growth Share

Matrix”, The BCG growth / share matrix remains widely used in many departments even

today. It was developed by Boston Consulting Group’s founder, Bruce Henderson in

1960s. The BCG matrix is a great framework for companies to think about their resources

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and where to focus their attention. There are four categories and two axes. The X axis

represents market share. The further to the right, the higher the market share. The Y axis

is the growth indicator, the further from zero, the higher the growth. In Carthusian plane

matrix, the growth-share matrix would consist of only positive values. The four categories

define what kind of market is product or the company in and what is the potential for

growth, for cash generation and the need for cash.

Dog is the category that represents low market share and low market growth. These

companies or products do not pose value for acquisition or merger as no significant gains

can be made in this kind of market and company setting.

Cash cows are, on the other hand, strong market players, who hold high market share, but

low growth potential. Companies in this category are both good targets if the predator

looks for stable cash flow and strong market position and also represents best practice of

looking for ways to expand their area of business.

Question marks are companies with low market share, but very high market growth.

These companies are often times targets as they represent good opportunity.

Stars are high market share and high market growth companies. These businesses are very

well managed and do not lack any interest from potential suitors.

The aim of every successful resource manager is to allocate the cash from cash cows to

to question marks or stars and divest the dogs. (Growth share matrix, 2009)

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Figure 5: Growth-Share Matrix

Source: https://www.smartdraw.com/growth-share-matrix/growth-share-matrix-

software.htm

One of the reasons it became so successful is because it allowed to eliminate non-

economic reasons and interests, such as family ties, to play any role in potential merger

or acquisition. These were replaced by comprehensive strategic planning and business

governance systems that are able to tens of variables into account and form strategy based

on company’s mission and vision translated into key indicators of management’s interest.

These people are in charge when it comes to defining and considering pre-merger factors.

(Reed, Lajoux and Nesvold, 2007)

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III. The Process

Every complex and lengthy activity can be broken down into small steps that are

necessary to take in order to arrive at desired destination. Once the activity is properly

defined and formalized, all parties involved know what is expected of them or what the

next steps are, then such activity is also defined as process. Purchasing and fusing

companies also have clearly defined phases that need to occur in order to successfully

finish the transaction.

According to Václav Jirků, Investment Director at Penta Investments, says the process

can be divided into five major steps. Penta Investments is investment group based in

Prague with focus on long-term value investing with assets over 6 billion EUR. Author

obtained information from Václav Jirků on public lecture at University of Economics in

Prague on April 15th, 2015. The entire picture about the M&A process is completed by

information gathered based on analysis of “Applied Merger’s & Acquisitions” by Robert

F. Bruner, “The Art of M&A” by Reed, Lajoux and Nesvold, Course 7: Mergers &

Acqusitions by Matt H. Evans (CPA, CMA, CFM). The five steps consist of pre-merger

analysis of both internal and external factors, followed by deal sourcing, investigating

and valuing the target, that resumes in indicative offer and negotiations closed by post

merger integration. (Barney and Hesterly, 2008, Bruner 2004, Reed, Lajoux and Nesvold,

2007, Evans, Hanna 2005, Jirků 2015)

III. a. Pre-Merger Analysis

First of all, acquirer needs to define through its strategic planning department that there

is an urgency of resolving business issue or opportunity with acquisition or it needs to be

part of long-term company’s mission and vision. There are various ways of determining

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whether the transaction is an answer for given business case. This paper is going to

describe often used framework, VRIO (Value, Rarity, Imitability and Organization)

framework promoted by Barney and Hesterly. Alternatively, readers may also turn

toWOFC (Wheel of Opportunity / fit chart) proposed by Reed, Lajoux and Nesvold for

additional information. Both of these frameworks are used as tools for internal analysis

for the purposes of strategic management and planning. The reason why strategic

planning framework is significant for this is paper is that ultimately, it will provide the

business with definite answer, (based on data and information available at the time of the

decision) whether or not the transaction is going to fulfill its role. It designed to uncover

possible synergies, value to be gained, revenue to be added and other possible benefits.

VOIR (Value, Rarity, Imitability and Organization) Framework

According to the authors of Strategic Management and Competitive Advantage, Jay B.

Barney from The Ohio State University and William S. Hesterly of The University of

Utah, this model is tool of first choice when it comes to internal analysis. The VOIR is a

framework combining perspective and resource-based view (RBV). The framework is

built upon answer four main questions, the question of value, rarity, imitability and

organization and helps defining internal strengths and weaknesses. RBV says that

company’s performance comes down to resources controlled by the firm. For the purpose

of this paper, we should view resources as either the internal resources of acquirer that

are necessary to successfully gain control over the target or the resource can also be the

target it self, because once the transaction is successful, it will become the company

resource (Barney and Hesterly, 2008).

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The question of value in the VOIR framework answers the question whether the resources

will help take advantage of the opportunity or neutralize the possible threat. For internal

identification of the value of the resource, company may take a look at Michael Porter’s

Value Chain analysis. Porter divided activities to two large categories, primary and

support, see Figure 6.

Figure 6: Michael Porter’s Value Chain

Michael Porter’s Value Chain, By Dinesh Pratap Singh - Own work, CC BY-SA 3.0,

https://commons.wikimedia.org/w/index.php?curid=7480725

Primary activities are the core of the business, for example logistics, sales and marketing,

customer service, operations or procurement. Support activities include business

departments such as planning finance, legal services, design, research and development,

human resources. Activities in support category help to execute better the primary

business activities. All these activities lead to common goal and correctly using this value

chain analysis will help to identify key internal resources when it comes to evaluating

merger and acquistion.

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The question of rarity helps company distinguish and asses whether the resource they

have or are about to have will give them significant competitive advantage. Author’s

understanding is that the more unique the resource or target is, the morel likely it is going

to contribute to the overall company well-being and therefore it is more likely to make

the acquisition successful. It is unlikely that resource many market competitors have is

going to make any difference when it comes to value creation. (Barney and Hesterly,

2008)

The question of imitability develops on valuable and rare resources by asking question

whether the company will maintain its competitive advantage or not face the cost

disadvantage. For example, O2 TV in Czech Republic has recently launched new feature

called Multi-Dimension, that allows viewers to switch between voice of commentators or

cameras on the stadium as well as watch “live cast” up to 30 hours later. The question of

imitability will help O2 CZ TV’s competitors asses whether or not it is worth to acquire

someone with this feature or know-how to match the feature parity race.

The last question of this analysis is the question of organization. A resource will not reach

its full potential if its not organized to best of the abilities. This ranges from firm’s

organizational chart, reporting structure, management controls and other control systems,

as well as compensation structure. (Barney and Hesterly, 2008)

III. b. Search & Screen Targets

According to Václav Jirků, investment director at Penta Investments, deal sourcing is one

of the key competences and skills required not only for private equity investors, but for

everyone who is looking to take advantage of opportunity. It is a multifarious skill

combining personal abilities in areas of business acumen and sense, networking and drive

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to make a transaction happen. A commonly used term is also deal sourcing. The process

begins as soon as the company developed acquiring strategy and discovered from within

what is its strategic fit. We have showed previously this can also be done either with

VOIR.

On the top of the list of steps to take is defining what industry will the search begin in.

This will be answered by the internal acquiring strategy document. After the industry is

decided, the industry analysis must be performed with key questions to answer such as

profitability, growth structure, cycles within the industry, seasonality or market maturity.

Employees inside defined industry, but also industry veterans, specialized organizations

or significant events. It could be summed up as infiltrating inside the industry because to

get a better understanding is crucial. It is upmost important that everyone involved in the

process knows its role and clear communication structure is developed to avoid

information bubble. (Reed, Stanley Foster, 2007)

Matt Evans stresses the importance of keeping the deal sourcing almost exclusively in-

house and in the beginning stages advises not to bring any investment firm on board yet.

Alerting the competition and starting rumors is not desired at early stages of the sourcing.

(Evans)

Once the list of prospects is compiled then it is time to rank to opportunities based on

their attractiveness for the acquirer. The list should contain key company information

such as 10-K reports, Security and Exchange Commission documents, size of the

prospect, profit margins, core competencies, unique selling points, credit ratings and the

main benefits and disadvantages and overall score that would rank to prospect according

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to the fit of acquiring company (Reed, Stanley Foster, 2007). Once the list of prospects is

finished, reviewed and final target is decided, the next phase of the process follows –

indicative offer. Václav Jirků says that it is entry ticker per se – but the acquirer needs to

show serious interest as once this offer is accepted that acquirer is entitled to start the

phase of the project. Withdrawal at this stage destroys credibility, Jirků adds.

III. c. Investigate & Value the Target

As soon as the target is selected and indicative offer is on the table, it is time to confirm

the assumptions and conclusions of the previous research and after initial talks it is time

to find out in what state the company is really in. This process is called due diligence and

detailed description of itself would be enough for the entire senior project, but this sub-

chapter serves as a quick introduction to the process of due diligence, its mechanics and

purpose. Due diligence withdraws key information for three main stakeholders in

transaction process, the investor, the planner and post-merger integrator. (Bruner, 2004)

Due Diligence

Due diligence is a process of reviewing and evaluation the target’s performance in many

different areas, including strategic, financial, human resources, company liabilities, legal,

competitors and the team of highly specialized analysts is on a mission to discover as

much as possible about the target and uncover potential skeletons in the closet as well.

According to Robert F. Bruner’s Applied Mergers and Acquisition, there are three

principles to approach due diligence with. First one is to “think like an investor” and it

encourages to not only consider risks, going outside of what Bruner calls compliance

mentality, but also focus on the returns and attractiveness of the target. Compliance

mentality is approach that is making sure that risks in different parts of business are

covered and overall, it asses the exposure of the target. Investor’s mindset is to asses

return of capital based on the risk it posses and it is the one that should set the tone for

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the whole due diligence. The second principle talks about due diligence as a mean of risk

mitigation. Viewing this tool as such, it needs to fit the overall risk management strategy

towards the transaction. The third principle is described as taking risk upon acquirer’s

back is costly. Bruner uses example of not insuring your own car because it is cheaper

and so the cheapest way to do a transaction and due diligence is not doing it at all.

Acquirer needs to always watch its interest because every mistake may cost it much more

in the future. (Bruner, 2004)

Václav Jirků views it as crucial for binding bid (also known as SPA – Sales Purchase

Agreement) and the future. It is key source for representation and warranties or liability

claims and buyer’s security. According to John O. Nigh, managing principal of Towers

Perrin in New York responsible for M&A and restructuring and Marco Boschetti,

principal of Towers Perrin in London leading HR services, program design, operation and

motivation with experience of working on 100+ mergers, acquisitions and divestures, due

diligence is process that will influence the success of the transaction as it uncovers the

actual value of the company, possible synergies but also lay out the risks that need

mitigation or liabilities and costs associated with the purchase (Nigh and Boschetti). The

entire process is legally defined as target is making their records available to serious

suitor. The depth and length of the process must be agreed upfront as well as the time

when the due diligence will take place. Everything depends on both parties involved and

there is no best practice other than that due diligence is necessary part of the process and

at least at some level should be conducted. The level of detail, length always depends on

how much time and money both parties have, the experience of parties involved, how

much information is the target willing to give up and not to mention mutual agreement.

(Jirků, 2015)

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Bruner defines two strategies of approaching M&A, broad review and narrow review plus

other insurance. Broad review represents direction of going beyond standard management

key performance indicators such as financial statements, assets that leaves a lot of place

for weaknesses, but rather should step back and adapt the investor’s mindset. Narrow

review supports the compliance mindset, risk management view. (Bruner, 2004) There

are two main due diligence areas, one is focused internally on management, operations,

organization, information technology systems, tax, insurances, intellectual property,

finance and more. The other is focused externally, on legal regulation and compliance.

Financial and Operational Review

This part of the key process is to make sure that financial and operational reports are to

be trusted. According to document “Financial Due Diligence” issued by Lehman Brown,

reputable international accounting company based in China, it evaluates the consistency

of the accounts and real situation with assets liabilities or potential tax risks. These

include document review or interviewing senior management. Once finished, due

diligence need to shed the light on potential liabilities, internal control and actual financial

situation. It gives a good ground financial forecasting and calculations of possible return.

(Financial Due Diligence, Lehman Brown)

Valuation

Financial statements also generate financial reports, such as balance sheet, income

statement or statement of cash flow. These key accounting documents determine previous

profitability, revenues, margins and cash flows. Cash flow is especially important because

it is fundamental metric to many valuation techniques, including popular and in many

industries standard discounted cash flow analysis. Valuation techniques and methods then

determine what will the final price of the transaction be. Jirků of Penta talked about

Penta’s valuation model from the helicopter perspective, the model is easy to understand

yet, there are complex accounting and financial calculations of multiple levels and

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complexity behind it. In short, the formula is Enterprise value less Net Cash Debt less

(Working Capital less Normal Working Capital).

Figure 7: Simplified Valuation model used by Penta as introduced by Václav Jirků

Source: Václav Jirků, Public Lecture at University of Economics in Prague, April 2015

Anti-trust compliance

A part from usual legal review process, one particularly interesting point when it comes

to evaluating a transaction is the dimension of expansion. The nature of the act of merging

or acquiring, it is logical if two things become one, the one newly created will be bigger

than the previous one. The nature of the business is to expand as much as possible. From

history, we know many examples of companies that become too big to allow other

companies to enter the market and compete fairly, without taking any unfair advantage.

These companies formed trusts or cartels to establish dominance or monopoly-like market

environment in order to increase revenue as much as possible. The United States were

pioneers in creating antitrust and competition laws. The first competition law was

Sherman Act after monopolies and dominant firms that could manipulate the market price

due its market power or remove competition all together. (August, 2004)

Nowadays, the index to determine whether or not the company would take up too much

of certain industry after a announced transaction in the United States is called Herfindahl

Index, also known as Herfindahl-Hirschman Index (HHI). According to the The United

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States Department of Justice’s Horizontal Merger Guidelines issued on August 19th 2010,

the formula is used for calculation of market concentration in following way:

“The HHI is calculated by summing the squares of individual

firms’ market share and thus gives proportionately greater

weight to the larger market shares. When using the HHI, the

agencies consider both the post-merger level of the HHI and the

increase in the HHI resulting from the merger. The increase in

the HHI is equal to twice the product of the market shares of the

merging firms.” (Horizontal Merger Guidelines, 2010)

Markets are classified into three main types: Unconcentrated Markets with HHI below

1500, Moderately Concentrated with HHI below 2500 but above 1500 and Highly

Concentrated markets, HHI goes over 2500.

After the score is calculated, if the change is not significant (less than 100 points, it will

not be subject to any further analysis. If the change is significant, it is then compared to

the overall market concentration, concentrated market, moderately concentrated and

highly concentrated. If moderately or highly concentrated, the transaction is at risk of

providing additional evidence to ensure authorities that this transaction will not contribute

to enhancement of market power. (Horizontal Merger Guidelines, 2010)

There are of course other legal documents that need to be reviewed, such as current

contracts, meeting minutes, stock transfers or leases, that would provide better

understanding of where the business currently is. Jirků of Penta suggested to not only

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perform financial and tax, but commercial as well and to take advantage of consultants

and external experts as if due diligence is done right, it plays incremental role in the

transaction for both parties.

Timeline Summary of the transaction can be described into four steps. First step is also

First proposal after throughout research and strategic planning. At this point, acquirer

approaches the target with proposal, sometimes with specific figures, but usually it only

indicates whether or not there is a will from both sides to start the negotiation. Frequently,

the target approves to provide information to aid the parties to craft letter of intent.

Second step, Signing Letter of Intent legally binds the companies to negotiate. Once

signed, the deep levels of due diligence commence, and in exchange, buyer usually agrees

to confidentiality. Once signed, the data are made available, normally in the data room.

Third step concludes in signing the merger or acquisition agreement. During this phase,

the team performing the due diligence is largest, and the nature of the work is to state

risks on one hand, and set conditions for buyer on the other.

Last step is about closing. During the stage, the conditions are reviewed and finals

remarks are noted and human and non-human part of post-merger integration may begin.

(Bruner, 2004)

III. d. Acquire through Negotiation

Next step in the M&A process is to negotiate. This process follows or runs in parallel

with the throughout due diligence process. After, the buyer knows exactly what he is

buying into and seller knows what fundamentals will be valued when the first offer will

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arrive on the table. For apparent reasons, the bidding strategy is different every time and

there are unique approaches for every individual case. Few things however remain almost

constant.

The obvious strategy of the buyer is to buy as cheap as possible and seller’s ambition is

to sell as high as possible – in businesses sense, M&A market works as any other market.

Jirků mentioned during his lecture on University of Economics, Prague that Penta

encounters with the two type of bidding transactions. First type is that the transaction is

proprietary, meaning the buyer is the only one offered and interested. The second one is

auction process, where buyer needs to compete with others just like during auction of for

example modern art. For each of those scenarios, this phase is different. (Jirků, 2015)

Evans adds that auction transactions end up above target’s current market capitalization

due to resistance of target management, who is actively part of the process and may attract

other buyers (Evans)

During this phase, buyer develops a plan based on four key ideas. Buy will need to asses

what resistance can he expect from the target, what the bidding strategy will be,

summarize the benefits of the transaction and what the initial offer will be. The plan needs

to adjusted for the case of cooperative seller or the one who would put up resistance

against the transaction – the hostile takeover. In case, where management is likely to fight

back, sometimes the buyer goes immediately to the shareholders. These offers then end

up significantly over the current market capitalization, the deal is valid for only certain

period of time and if applicable, the deal is offered to the public shareholders of the target.

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In other cases, different tactic is applied where acquirer buys certain percentage of the

company so the management is forced to communicate, but does not feel intimidated,

called partial offers. Evans notes that the partial offers are not as effective as complete

acquisition of all stocks.

As mentioned in the beginning, this process may run in parallel or can actually be prior

the due diligence. The most common flow of events, as well as the logical sense is that

once a first indicative offer is sent and accepted, or merger is negotiated, then the detailed

due diligence process starts. It is very rare that targeted company would let just analysts

and various experts run around their company and review and cross-checking financial

statements, legal relationships and more. (Bruner, 2004)

III. e. Post-Merger Integration

After successfully negotiating the transaction, due diligence it may seem that the whole

process is over. Nothing could be further from the truth. Post-Merger integration is term

used to described the process of pooling the resources together, aligning everyone with

the new strategy of the new business and making everyone cooperate with each other to

ensure the highest performance possible. The post-merger integration also consists of

setting up internal systems so it can work together and make sure that for example IT

systems of the target can now communicate with the IT system of the headquarter.

In the book, “The Art of M&A”, authors suggest that Post-Merger integration should be

handled as any other project, under the supervision of project manager, who will fulfill

clear strategic motivation, what is the relation to the core business of the new entity, what

are the goals to be achieved in this project and how do we achieve them, who is

responsible for achieving them and what is the schedule.

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In “The Complete Guide to mergers and Acquisitions: Process tools to Support M&A

Integration at Every Level” by Timothy J. Galpin and Mark Herdon, the authors state that

key principle is that

“The integration project team structure and governance model should be

customized and adapted to the requirements of each deal, but with common

core governance roles proven to be successful” (Galpin, Herdon 2014)

Integration strategy needs to be in line with the nature of the merger and that will lead to

the way to define key priorities. Bruner divides different areas of integration to three

categories, autonomy, interdependence and control.

Category called autonomy contains culture, leadership and decision making. These are

essential if required to meet the strategic vision of the transaction. Culture is something

that defines the company’s DNA and as such should remain autonomous if the reason for

purchase was the drive the company has, the know-how or it is related to the final product.

There will always be clash of company cultures as developed later in this paper.

Interdependent category contains value chain and business processes – the reason why

the target was bought. The companies following either horizontal or vertical integration

may find the level of interdependence quite high. Companies not following any of the

integration strategies find themselves quite independent even after the transaction.

Control category contains finance, quality or reporting. Level of control can either be

high or low, none the less, this is difficult to manage in all dimensions. For example,

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financial reporting systems need to be absolutely aligned across all subsidiaries otherwise

the headquarters could be receiving flawed data, that could then affect the reporting to

authorities and potentially public, affecting the stock price and company market

capitalization (Bruner, 2004).

III. f. Problem Statement

So far, we have thought of this process as something that is very mechanical and

technical, and almost as textbook approach as if managers do change number in their

spreadsheet, then desired outcome will be provided. We have described people as

resources and if the plan will be set, then everything will work as planned.

However, that is not entirely true. The previous is only process – these are hard skills and

if completed right, based on theory and practice stated above it will lead to successful

purchase from strategic and process perspective. The process of merging or acquiring is

also about many people coming together and working towards new goal, objectives in

new unknown conditions. In following chapter, we will discuss the main reason for

failures of M&A. We will decompose the nature of human beings when it comes to

dealing with change during merger or acquisition and what are roots of the problems, how

to recognize it and share the best practice.

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IV. Human Factor of Transactions

According to dissertation submitted as partial satisfaction for the degree of Doctor of

Education in Organization Change by Edward Milton Hanna titled Mergers and

Acquisitions: A systems approach to Pre-Acquisition Assessment of Potential Merger and

Acquisition Combinations, transactions “continue to fail at an alarming rate – estimated

to be between 50% and 80%”. Hanna derived this number from three independent

consulting studies by three different highly reputable consulting firms – A.T. Kearney,

Mercer Management Consulting and PriceWaterhouseCoopers (PWC). A.T. Kearney

reported that 58% failed to create significant tangible return, whether it was stock

appreciation or dividend. Mercer Management found that nearly 50% of the transactions

actually destroyed shareholders’ value. PriceWaterhouseCoopers were involved in nearly

97 transactions two thirds of the deals the buyer’s stock actually dropped after the

announcement and one third o them were still behind the average of the industry

performance. (Hanna, 2005)

This part is devoted to exploring and defining what current research and people taking

part in M&A activity marked as the key reason of the transaction failure. A failed

transaction is the one that did not contribute to the shareholders’ value, did not fit into

overall buyer’s strategy, did not meet the expectations, whether those were desired

synergies, or the company underperformed in the terms of financial results or simply the

people of both companies did not manage to work together in productive manner. (Hanna

2005, Straub 2006, Fletcher) The very last thing on the list we will examine on following

pages because that is where non-mechanical and non-technical chemistry of the

successful transaction occurs. We have identified four key areas of interest; cultural

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mismatch, organizational fit, the attitude towards change and roots of resistance and best

practice to overcome those by applying change management effectively.

IV. a. Cultural Mismatch

Alexa Fletcher, BearingPoint research identified in her “Avoiding post-merger blues”

key points when it comes to cultural mismatches. BearingPoint is leading management

and technology consulting company one of the largest public services organizations. She

claims that

“Executives surveyed ranked cultural integration as their greatest

business challenge during a merger, yet admit that it’s among the last

thing they consider when deciding whether to attempt a new merger,

acquisition or alliance.”

Nearly 60% of respondents ranked “Integrating the Corporate Culture of the Merged

Organizations” either very or extremely difficult task of the entire process, topping the

category. (Fletcher)

Figure 8: Business Challenges during Merger

Source: Avoiding post-merger blues by Alexa Fletcher, BearingPoint

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According to study conducted among 500 Australian corporations in the first half of last

decade of 20th century, more than fifty percent of the sample had experienced change

resistance and resistance was on the forefront on the list when it came down to discussing

problems in integrations.

To illustrate how company and social culture is important Fletcher chose a well-known

example of Daimler-Chrysler merger. The German and American culture are very

different from one another. Chrysler viewed themselves as “bold innovators” and the

overall company culture was “very relaxed informal”, whose main product was in

completely different class of market segmentation, whereas Daimler is symbol is perfect

German craftsmanship, quality and discipline. Management styles were also different,

Daimler was very organized and structured and used dominance over merged companies

(Daimler initiated the merger), but Chrysler had little more free-spirited work

environment, and shortly after, not only engineers but also management job roles started

to disconnect from one another. The merger did not last even a decade and Daimler sold

Chrysler in 2007 after years of unconvincing, not only financial results and it went down

to history as one of the worst mergers Fletcher notes.

To address this issue, it is important to count on it when it comes to planning, therefore

the pre-merger stage of the process. KPMG study “Unlocking Shareholder Value. The

Keys to Success” written by John Kelly, partner and M&A Integration, Colin Cock,

partner with Transaction Services Europe and Don Spitzer, partner at transaction services

global, the document states that the conducted survey 26% of the deals are more likely to

be successful if the acquirer focuses on identifying and resolving cultural issues.

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A great framework, fundamental asset to many business and management textbooks for

identifying cultural is derivative from the work titled “Culture’s Consequences” written

by Geert Hofstede and published in 1980s. The study itself has been cited more than three

thousand times since publishing. The Hofstede’s model consists of five cultural

dimensions. In “Re-Inquiry of Hofstede’s Cultural Dimensions: A Call for 21st century

cross-cultural research” a replication study conducted by Linda M. Orr and William J.

Hauser discussed background that gave birth to the five dimensions. It is important to

note, that despite the model being so popular and respected, as every model, it has some

flaws, and so the idea is to use it as a first screening model in pre-merger analysis and

strategic planning definition.

First Hofstede’s dimension is called power distance. Power distance is a category that

represents a “degree of unequal distributions of power expected and accepted. To explain

it a bit simpler, it represents the formal relationship between a person in position of power

and for example his team member of sub-ordinate. The higher the index is, the higher

the power distance is and translated into actual human behavior, the higher the power

distance is, the more formal and supervisor-employee mentality there is in the workplace

(Orr and Hauser, 2008).

Second category is uncertainty avoidance. Uncertainty avoidance is described as “the

extent to which people feel threatened by ambiguous situations and have created beliefs

and institutions that try to avoid these” Therefore, to what extent does the society trying

to prevent the unpredictable and is tied to level of certainty in their lives – or to reverse

it, the level of risk-awareness. The higher the index is, the more people are risk aware,

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the more business plan ahead and society creates new regulation in order to avoid

uncertainty (Orr and Hauser, 2008).

Next dimension is called individualism-collectivism. This dimension “describes the

relationship between the individual and the collectivity which prevails in a given society”.

Individualistic behavior is significant by the level of how people look after themselves

but collectivism is about looking after the good of group of people or some collective.

As an example, this approach is apparent in decision making, when a board of directors

is about to make a decision. Western nations, that are scoring higher on the individual

scale in this dimension, people on the board are fine each representing certain idea or

opinion when it comes to decision making. However, at collectivistic countries, the board

would tend to decide unanimously and therefore collectively (Orr and Hauser, 2008).

The fourth dimension is about masculinity and femininity of the society. The more the

society’s culture is feminine, the more it bears the spirit associated with the women, such

as nurturing one another, quality of life and caring for each other. Masculine society

exhibit patterns typical for men, such as money, success and material things (Orr and

Hauser, 2008).

The very last dimension, also the most recently added to the framework, in 2001, called

long-term and short-term orientation. This trait indicates whether culture is oriented

towards achieving long term goals and therefore the planning or whether they are more

focused on short-term objectives and are not too worried about the distant future (Orr and

Hauser, 2008).

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Going back to the original point with Daimler and Chrysler, below is a comparison chart

of Hofstede’s cultural dimensions, indicating many discrepancies between the two

nations.

Figure 9: Hofstede’s Cultural Dimensions – Germany vs. United States

Source: geert-hofstede.com

Hofstede’s framework tells us only part of the story. This will get us started but the other

part is company culture. In many cases it is connected with the culture in the society, but

companies also have cultures of its own.

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IV. b. Organizational Fit

Oxford dictionary describes corporate culture as “the ethos of a particular company, or

that of large businesses in general; the approach company takes towards the working

environment o its staff”. This implies that every company has a unique culture and set of

behaviors, perhaps every department inside that company has a different work ethic or

way getting things done. People are different and therefore organizations are. A merging

of two different organizational cultures – organisms in a way, is challenging process and

it generates a lot of change.

Dr. Spencer Johnson, author of motivational and highly regarded book on change and

how do people react to change titled “Who Moved My Cheese?” discusses some of the

most common approaches. The book is about two mice and two little people. They both

find same cheese, but mice were more alert and did not got used to the fact that cheese

would always be there, but little people on the other hand started to get used to the fact

that the cheese will always be there. Until it was not. Mice reacted by putting their running

shoes on again and went to search for another source of cheese. They have never counted

on the cheese to be infinite – mice were willing to adapt. However little people started to

complain, felt betrayed because they felt like some entitlement was due to them. Humans

thought the cheese will be infinite. The mentality is different and so is the attitude towards

the change. One of the humans thought of change – to start looking for new cheese, but

the other dismissed the idea.

While little people were analyzing and feeling betrayed and blaming each other, mice

found another cheese supply. After a while, one of the little people realized that he needs

to change in order to move on. He left message on the wall for the other in case he changed

his mind. On his journey, one of the humans found out that the cheese has not vaporized

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from thin air, but rather have been eaten continuously. He realized that if he ditched fear,

he is living happier life. Eventually, he found a bit of cheese and decided to bring it back

to his friend, but he refused to take it. He went back on his journey to find more cheese.

Eventually he found a place with significant supply of cheese and while eating, he

reflected on his experience. He wrote few key things on the wall for his friend to find it,

once he decides what to do next. The writing on the wall said following:

“Change happens – they keep moving the cheese”

“Anticipate change – get ready for the cheese to move”

“Monitor change – smell the cheese often so you know when it is getting old”

“Adapt to change quickly – the quicker you let go of old cheese, the sooner you

can enjoy new cheese”

“Change – Move with the cheese”

“Enjoy change – savor the adventure and enjoy the tase of new cheese”

“Be ready to change quickly and enjoy it again – they keep moving the cheese”

(Johnson, 1998)

What this short book summary contributes to this paper is that it uncovers how different

people react when changes occur and merging two different organizations is all about

change. The books describe the important motives in easy-to-digest way, however we

will take a closer look.

Naysan Firoozmand, in his “Managing Resistance to Change” published in Training

Journal, defined change as “a necessary response to one or more of a potentially endless

list of drivers: technological developments, mergers and acquisitions, increasing

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competitiveness in the organization’s target markets, achieving or maintaining growth,

globalization, economic conditions, strategic realignment, customer pressure and

legislative or regulatory changes.” Change as such is currently viewed as something that

is desired by management to meet the strategic objectives – for purpose of this paper our

strategic objective is to succeed with Merger or Acquisition. (Firoozmand, 2014).

Resistance is natural human reaction to change (Firoozmand, 2014) and leaders need to

anticipate it and ready to address it. Wayne Bovey and Andrew Hede published in Journal

of Managerial Psychology an article titled “Resistance to Organizational Change: the role

of defense mechanisms” where they extensively discuss resistance. It is part of process

of individual reacting to change because change leaves what individual already knows to

unknown. (Bovey and Hede) In fact, being afraid of unknown is rational rather than

irrational reaction and therefore managers need to anticipate issues during integration

process (Baker, 1989). People seek their individual boundaries and thresholds of

unknowns and uncertainty in their lives. These thresholds are individual and that makes

it very challenging to drive the change continuously and gradually. (Bovey and Hede,

2001) Peter Marris in his “Loss and Change” described it as “The will to change has to

overcome an impulse to restore the past which is equally universal”. (Marris, 1974) That

implies that change is nor negative or positive but rather a something deeply rooted inside

human beings and something managers always has to address when it comes to human

impact on life and change in humans’ way of obtaining means, work, during the mergers

and acquisitions process.

There are several reasons why the change may be unmanaged. Bovey and Hede present

two different views. First one is that the the change management becomes too technical

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and the human element is completely left out the the whole equation. Management is

easily caught up in different models, plans and schedules and the focus shifted from

humans on spreadsheets.

In the other scenario, management is very well aware of the human element in the whole

process and acts accordingly by organizing many workshops and activities that would

make the transformation and change easier. However, what happens during these efforts

is that the feedback from the field is often times ignored by the management and that does

not contribute to the success of the whole process. (Bovey and Hede)

IV. c. Resistance

On more practical note, understanding the resistance and leading employees through the

change is central to success. Rosabeth Moss Kanter, professor at Harvard Business

School and chair and director of Harvard Advanced Leadership Initiative took more a

structured take on the issue and in Management Review’s “Managing the Human Side of

Change” she outlined what she considers to be universal sources of the resistance,

explains it and shares best practice.

Change is exciting if it is initiated by us, but very scary if forced upon us. Participating

in decision-making and task ownership has fulfilled human necessity for control. The

more people can take part in making difference, the more engaged they are. Being

excluded from these mechanisms generates a feeling of loss that is transformed to

frustration and weakness. Creating situations and putting people into situations in which

they can influence the change makes the employees more dedicated (Kanter, 1985).

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If employees are unsure of what their future prospects look like, that creates a feeling of

resistance as well. Surplus of insecurity makes people stick to their old ways and habits,

instead of progressing forward. Leaders should be informing their team about every

upcoming phase of the change to prevent it. Slicing the large thing into smaller pieces

and creating a plan around it will help, because smaller goals do not intimidate.

The upcoming is connected with the previous. To avoid resistance, managers should

avoid surprise announcements, as completely unexpected event, naturally, triggers

undesired effects. Oftentimes, the mistake comes from communicating the news after all

decisions have been made. Early and smaller announcement will allow people to sink in

the news and the feeling the threat will be minimized if not eliminated.

An additional root cause why people feel uncomfortable with change is what Kanter calls

“the difference effect”. People are habitual creatures, consequently this nature is projected

into our work lives as well. As an example to illustrate is that if a chef would have to cook

every day of the year at new, different place, with unalike kitchen structure and equipment

spread out all over, would result in tiredness and mental energy drain, that it could even

result in burning out. In order to prevent this course of events, allowing employees to

have some pieces of familiarity will produce charge to change (Kanter, 1985).

Presuming that movement’s attempt is to fix the way things were done previously,

understandably will breed resistance. The reason being is humans do not cope with feeling

of embarrassment and are willing to go through many things in order to avoid loss of face.

Unaware management rhetoric criticizing the way things have been done in the past

regularly contributes and magnifies this issue. Communicating change effectively comes

from understanding of the past and explaining that the times vary (Kanter, 1985).

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Along with uncertainty, future also brings self-doubt. At times of change, people start to

doubt themselves more than before and wondering whether or not their skillset will be

necessary for either keeping their current position or advancing their career as well.

Important management duty is to make sure that people feel their proficiency is that

further qualification advancements and trainings are at their disposal. Perspective of what

is happening is crucial as well, consequently employees will know how to make the right

choice for additional education. Application of newly gained skills without feeling of

shame of embarrassment is important during the phase. Atmosphere of “no stupid

question exists, only stupid answers” needs to present so the employees feel comfortable

and get used to new way of doing things (Kanter, 1985).

The eight point of the article talks about broader energetic output that change requires. It

without any doubt that change require some extra effort, but that does not mean

employees should be sleeping over in their offices. Realistically, it takes time, and

resistance is present if it the effort is not to be put automatically. Increasing compensation

for certain period, acknowledgement of the hard work breeds commitment. Listening to

team members, granting their wishes and understanding their situation does as well

(Kanter, 1985).

The ninth on the list of reasons why people resist change are undelivered promises in the

past. Sometimes, the feeling of betrayal long over carried surfaces during such hard times

as times of change are. Kanter describes the case of factory workers at Honeywell, that

did not react at all to new wall of benefits. Eventually he found out that workers were still

in conflict with management due to their inability to solve air quality in their factory and

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it was not until he managed to fix the problem, the manager saw commitment from his

subordinates (Kanter, 1985).

The last reason is described as “sometimes the change is real”. Unfortunately, change

generates new environment, where sometimes who were kings yesterday are peasants

today. Key thing is to stay consistent and honest. People appreciate honesty and hearing

the news as early as possible rather than to lose sleep in uncertainty and the feeling of

being lied to. Bad news are to be delivered and executed fast. Even in cases where people

are let go as an outcome of the change, the quicker the procedure is, the quicker the

rebuilding process of their lives can commence. Change is rarely exclusively negative

process, despite the fact even the winners lose something. Endings are important and

rituals as saying good bye help humans to overcome the negative part of the change

(Kanter, 1985).

Understanding the roots of resistance sets every integrator into bets position of resolving

the problem by finding a solution (Kanter, 1985).

IV. d. Change Management

There are many disciplines that describe individual disciplines how to make change as

smooth as possible, but since organizations are complex organisms, the combinations of

disciplines are required.

Change and transformation is challenging, long-term and on-going process. Bovey and

Hede, Firoozmand and Jeanny Paren, PhD student at University of Economics in Prague,

49

author of Resistance to Change in Organizations have all discussed organizational change

and human resistance to it and introduced widely recognized Kotter’s change

management model. John P. Kotter, the professor of Leadership at Harvard Business

School and author of Eight steps to transform organization, in his “Winning at Change”

states that he had only seen less than 15% of companies to transform successfully. Kotter

is famously known for his fundamental framework for change management discipline. In

his “Winning at Change” and “Leading Change” he discusses his 8 step model.

The first step in Kotter’s model is called Sense of Urgency. To establish a sense of

urgency, change champion is start the communication with the group. During this step an

analysis is performed and opportunity and threat talking points are discussed. Change

requires extensive cooperation between people and starting off well is important step to

take. The harsh reality needs to spoken out and all parties need to understand what the

new situation is.

Second step, building powerful coalition is all about identifying the key people, partners

with enough authority, who will help lead and achieve the change. Coallition is not about

gathering as many powerful figures in the company, but rather those with attributes of

good leadership and ability to work as a member of a team. Support within the coalition

and nurtured sense of belonging are one of the key attributes of good coalition that will

make the difference in the end.

Next step that the coalition is set to build a vision. Kotter described vision as the direction

which the company is heading. Initially, the raw and first version may be defined by only

one member, but after coalition needs to work on it. The vision is both short-term and

50

long-term. The long-term vision is rather emotional, than rational, as human mind is

designed to go after such narratives. However, it also needs to be short-term so the

employees remain motivated and see the result. Short-term vision is in between 6 and 12

months in time range and can be more specific when it comes to numbers and goals. Sense

of urgency is to be kept at all times.

Vision needs to be sufficiently communicated. Every internal medium needs to sell the

vision at all times. Successful transformations were supported by the senior

management’s alignment with the vision.

Next step is to make sure that all employees can do their part without running into blind

spots or walls. The walls may range from unfitting organizational structure to manager,

who was not part of the coalition and has not identified himself with the vision and does

not permit others to fulfill their part. The highest barricade, whatever it is, needs to

eliminated so that allows the company to accomplish its vision.

Sixth step of the process is all about creating momentum by designing short-term wins

and celebrations. People will not devote their time and energy in long-term period, if

results are not visible in about a year. Planning short-term victories may include new

product launch or visible improvements of existing products thus subsequently successful

execution, triumph is celebrated, rewarded and confidence in the organization is increased

among majority of the employees.

Next step is especially important. Once the organization is charged with small victories,

the hard-earned reputation needs to be utilized, and the collocation and people on board

with the change, should take the advantage, revisit the structures that do not align with

the vision completely and attempt to change it. In addition, small victories are not to be

taken as as sign of success, but rather a sign of good direction and the management should

51

not stop after the first milestones are hit. Change is long-term process.

Finally, the last step of the framework is about fixing the changes into the corporate DNA

and policies. Oftentimes, once pressure and sense of urgency is removed, then the change

workflow may disappear as well. To maintain the new status quo, employees need to see

how the company performance improved, while the management was in place. Success

will be linked with the management and employees will truly believe that their effort and

commitment to change and vision has made it all possible. (Kotter, 1998)

52

V. Conclusion

To conclude with, the purpose of this paper was to present a comprehensive fresh

perspective on the discipline of business, mergers and acquisitions, outline fundamental

process steps and focus on improving failure rate by analysis what is the root cause of

most transaction failures other then of the technical sort.

The idea was to begin with introducing the entire industry, its past, present and the size

and define key terminology to built upon and reference to throughout the senior project.

After detailed introduction the attention shifted to precise description of what are the

necessary ideas, issues and factors to consider, ranging from where does the need to

acquire some other company comes from, how is it defined, what are the mechanisms to

ensure as much security of the transaction as possible through due diligence process and

not to mention actual post-merger integration of not only technical sort.

We have introduced and examined the most common reason for merger or acquisition

failure is human intolerance of externally imposed change, various reasons for which

people build resistance towards the new perspective, how the change should be

managed and communicated through the eight step model developed by Kotter, that

leaves successful and happy corporate culture. We have also took a look into a cultural

differences of corporations and understanding the approaches of recognizing and facing

them.

53

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