ACQUISITIONS & MERGERS (II): IS THIS THE BEST WAY OF STRATEGIC DEVELOPMENT?serialsjournals.com/serialjournalmanager/pdf/1345115468.pdf · ACQUISITIONS & MERGERS (II): IS THIS THE

IJER, Vol. 9, No. 1, January-June, 2012, pp. 175-201

ACQUISITIONS & MERGERS (II):IS THIS THE BEST WAY OF STRATEGIC DEVELOPMENT?

FRAGOULI EVAGGELIADepartment of Economics, University of Athens, Greece

ABSTRACT

One size doesn’t fit all. Many companies find that the best way to get ahead is to expandownership boundaries through mergers and acquisitions. For others, separating thepublic ownership of a subsidiary or business segment offers more advantages. At least intheory, mergers create synergies and economies of scale, expanding operations andcutting costs Investors can take comfort in the idea that a merger will deliver enhancedmarket power. By contrast, de-merged companies often enjoy improved operatingperformance thanks to redesigned management incentives. Additional capital can fundgrowth organically or through acquisition. The present study explores whether mergersand acquisitions is the best strategic development approach especially in the case ofbanks. The study, based on literature review and on research findings through thedevelopment of a questionnaire tries to answer this question exporing the negative andpositive aspects of this strategy.

1. INTRODUCTION

The A&M compose the basic ways to materialize the strategies of development andexpansion in business operations.

As Acquisitions (A) are defined the transactions where a company acquires all ora part of the participation of another company by money in exchange. Theacquisitions are divided into simple and amalgamative. In a simple acquisition theacquired company continues to exist as a legal entity, while in an amalgamativeredemption the company that transfers its property to another by money in exchangeloses its existence as a legal entity.

When, in an amalgamative purchase money is not paid in exchange, but bothcompanies share part of their participation, the acquisition is a merger of thecompanies. Specifically, as a Merger (M) (Petrakis, 2007) we call the combination oftwo or more economic units in one. Merging usually merger means that companiesgrouped together under the name and identity of one of them. But there is also thecase after the merging to terminate the previous legal status of the companies takingpart in it, and forming a new company together.

176 Fragouli Evaggelia

Therefore, there are no substantial differences between the A & M other than:

1. The type of exchange offered for their completion and

2. The “right of speech” of the former owners of the acquired business to thenew ownership.

A & M, depending on their type, can be divided in the following (Barney, 1997):

• Horizontal: “when the companies operating in the same industry decide tojoin. The combination of this type does not alter the production of goods andservices. The main advantage is less competition, eradication of doubleservices (accounting, marketing), and more improved products. For example,the merger of two iron companies is a merger of this type. In Greece,horizontal mergers occur in the banking, constructing and food industry”(Petrakis, 2007).

• Vertical: “when the companies operating at different production processstages decide to join. These A or M are governed by the link “supplier-customer”.Such a merger is an opportunity for a company to expand, undertakingactivities that are in an earlier or later stage of its production. In oil industry,for example, there can be discrimination between companies that specialize inextraction process and those responsible for the conversion to fuel and otheroil products”.

• Additional: “when their activities are complementary” (Petrakis, 2007).

• Uncorrelated: “when their activities do not show any substantial cooperation.

Depending on the procedure of their completion the A&M are divided in:

• Amicable, when both companies want the A&M and determine together itsprice and,

• Aggressive/hostile, where the administration of the target company does notapprove the proposed acquisition.

Two specific cases of mergers and acquisitions are:

• The leveraged buy-out: This form of acquisition has the characteristic that itsfunding comes from a large percentage (minimum 75%) from bank loans andnot from the funds of the acquired company, so it is called leveraged. This isconsidered one of the most aggressive and high - risk ways of growth, andtheoretically should only be used by mature and with predictable cash flowscompanies (Sahlman, 1990).

• The management buy-out: In this case, the high profits and sales companies tryto take over the administration of other smaller companies in order to exploittheir expertise (Petrakis, 2007). Following, in board 1, is given a short glossaryof acquisitions, including valuable information-tools to understand the rangeof acquisitions:

Acquisitions & Mergers (II): Is this the Best Way of Strategic Development? 177

Board 1: Terminology of Mergers and Acquisitions

• Friendly/hostile takeover: Friendly when it is welcome from the target company,hostile in the opposite case.

• Black knight: A company which seeks aggressive takeover of another.

• White knight: A company operating either by acquiring or by merging with the“victim” company in order to prevent the acquisition by the black knight.

• Shark repellant: The movements of the “victim” company in order to discouragethe purchase. (for example, the increase in the percentage of votes needed toapprove the bid).

• Pac man defence: the company which is the subject of the offer makes a counteroffer to buy its candidate buyer over.

• Poison pill: The “victim” company moves to the acquisition or merger withanother company in a way that is economically and structurally less attractive tothe prospective buyer.

• Golden share: The right of the state in some privatizations to put a veto in certainmajor decisions of the board of directors.

• Porcupine: Advanced agreement between suppliers, customers and creditors,which makes it difficult to integrate the company to the activities of a possiblebuyer.

• Golden parachute: The terms in the contracts of company directors that make itextremely costly to dismiss them in case of the company’s takeover,

Sources: Miller A., Strategic Management, Irwin-McGraw-Hill, 1998, (third edition),pp. 267.

2. WHAT ARE THE REASONS FOR ACQUISITIONS OR MERGERS TO BECONDUCTED?

The reasons that leads companies to strategic growth through A & M are various andcomplex, so they can not perform their realization on a single factor (Steiner, 1975).The individual causes of A & M are as follows:

2.1 Economies of Scale

Resulting from the increased size of the new company. The cost reduction is a resultthat is almost certain to be achieved, so it is very often the main reason to conduct anA & M. Scale economies can be achieved in the management of stocks, from the rawmaterials purchases, in the production field etc. They can also occur in otherfunctional areas such as promotion, research and development or distribution.Reducing costs, due to economies of scale, is more in case of horizontal A&M in thesame country.


2.2 Economies of Scope

They concern the provision of new specialized or highly altered products/services ofthe company. These stem from the vertical integration of production and theintegration, to the other system, of suppliers and distributors, with result thereduction of the costs from the presence of intermediaries.

2.3 Combination and Integration Resources

The resources have to do from raw materials to administration staff (for example, acombination of two pharmaceutical industries, one strong at research and development,with another good at marketing). Also, the “buyer” company may want to buy thetarget company, to exploit some of its advantages, such as its access to cheap rawmaterial, the distribution network, even the capable executives. For example, inGreece, there is the acquisition of NEON by GRIGORIS company. With that the latterstrengthens its presence in central Athens by using NEON shops and gains significantpotential due to the previous presence of NEON at the restaurant business, a marketwhich GRIGORIS has recently entered.

2.4 Increase of Market Share

Almost always the strength of the company is increased, because of the larger size ofthe new one. This enables it to deal with more confidence with its competitors, in thecountry and abroad and achieve greater profits. Therefore, increasing the marketpower of a firm enables it to attract the best staff in the market, to move into strategicalliances and to make A & M from a position of power. Also, we can claim that isbetter positioned in the industry and it increases its power in relation with thesuppliers, the customers and competitors. It is also able to stop the entrance of newcompetitors and face replacement products (within the 5 Forces of Porter).

2.5 Overcoming Barriers to Entry

Obstacles (for example, heavily investing for equipment, facilities, advertising andpromotion of products) can come up when a new company enters the market. Theposition becomes ever tougher. Increased competition already exists in the market.An A & M with a domestic business provides not only knowledge of the market, butalso an established distribution network and possibly a secure consumer credit in thename of the target company (brand loyalty). As the barriers to entry a marketincrease, even through state intervention, the A&M will be an outlet for the company.

2.6 Increased Market Dynamics

The acquisition of a business is a much better way to dynamically expand it, ratherthan developing a new product line. In addition, one company can, throughredemption, quicker and as a leader, appoint a new activity or conquer a market thebounbaries of which are not yet formed (Bower, 2001).


2.7 Reduction of the Cost and the Time to Develop New Products

It is known that an innovation or a diversification of the production needs importanttime to be fuctional and give essential profits. It therefore poses a high risk. For thisreason, executives often prefer to pay a high price to buy a business, avoiding the riskto create a new product. It is possible to be claimed that the A&M could substitute theneed of a company to be innovative, because usually the company has limitedresourses, which it does not risk to develop a new product.

2.8 Increase of Diversification

When a company wants to be differentiated when incoming into unknown for itmarkets, it faces difficulties, mainly because the managers are unaware of thesemarkets. The acquisition of a company, already enstablished in the new market, is thesafest way to diversify either if it relates to these new industries or not. The access toexisting knowledge of the staff, and also in the productive procedure of the targetcompany, is an additional advantage for the buyer company. Also, through thisprocedure a company can: (a) reduse the seasonality of its sales and therefore thesensitivity of its incomes in market conditions and (b)achive greater commitment(brand loyalty) from its customers.

An important step towards diversification of its products was made by theJapanese company SONY with its vertical integration, by buying the americancompanies CBS Records and Columbia Pictures, thus expanding its distributionnetwork and overcoming the significant obstacles for its entry in the U.S. market.

2.9 Avoiding Excessive Competition

The expantion of a business in relevant or not markets, can reduse its dependance onthe market in which previously addressed and the competition could be fierce. The GM,in the 80’s owned 50% of the american car market. The increasing presence of German,Japanese and South Korean companies in the early 90’s, has reduse its market share to30%. Trying to avoid the increased competition, moved in aquisition of non-directlyassociated companies like Electronic Data System and Hughes Aerospace.

2.10 Elimination of Reduced Efficiency of Target-Company

Many times the buyer company may have administrative and other skills, enough todramatically increase the performance of the target company. Gillete, boughtDuracell believing that it had the ability to increace its sales and its profitability.Indeed, using its extensive network for selling personal care products, it managed tosell Duracell products in 25 new markets in the first year after its acquisition,increasing significantly battery sales in well-established markets (Eccles, 1999).

2.11 Reduction of the Excessive Liquidity Between Company and Buyer

In this case, the company will be bought, if it is considered that it will increase itsprofitability.


2.12 Hybris or Administrative Arrogance

Often managers display arrogant behavior by believing that they can manage thetarget business better. Indeed, arrogance is the main reason of engagement in A&M(Barney, 1997) as in the case of the aquisition of Kraft by Philip Morris (Wikipedia).

3. WHY IS A LARGE AMOUNT OF A&M CHARACTERISED BY FAILURE?

The A&M are often driven to failure (relevant researches mention that the percentagesof failure touch 75%). Following, the basic reasons which lead an A&M to a failure areanalysed.

3.1 Inadequate Evaluation – Overevaluation of Anticipated Co-operation

When a company examines an A & M, it usually enters a procedure of screening thetarget company. Often, though, the procedure is proved inadequate, since a largenumber of companies discover, after the A & M, that they overestimated the profitsthat would result , or it undervalued the cost that would surface.

One of the most basic reasons for which a company decides to apply a strategy ofdevelopment through an A&M, is the possibility for one or more competitiveadvantages to be achieved. In order for this to happen, the company has to secure theexistence of a co-operation. The co-operation concerns the achievement of aperformance bigger than that which the two companies would have if they functionedseparately.

Yet, the evaluation of the profits of an A&M can be proven wrong. The predictedincrease of incomings appears to present extreme difficulty in calculation, because itdepends on external parameters, which are often beyond management’s control. Theclients of the company acquired, for example, might react differently to differentprices and products’ characteristics. Similarly, the competitors might reduce theirprices, or they too might move to an A&M, so as to respond to the new conditions ofcompetition.

On the other hand, there is the danger for an A&M to be conducted exclusively onthe criteria of expanding and with lack of a strategic vision. Many companies, mainlyin the banking domain, have the tendency to buy out others because this is the markettrend, or for fear of their small size making them vulnerable to acquisitions (Viscio,2002). Often, the unreasonable acquisition and the insufficient evaluation of theacquired companies, not only does not bring along co-operation but it puts in risk theperspective of the whole enterprise.

In addition, there is the possibility to have a potential co-operation, but which theexecutives cannot perceive so they are not in a position to direct the activity of thecompanies, and thus achieve it. So, the A&M are particularly hard, time-consumingand require careful study so as to be accomplished (Petrakis, 2007).


There are examples of large companies which failed to evaluate successfully thebenefits that a buy-out would bring them. Coca-Cola, with an established success inthe beverage domain, decided in 1975 to try its abilities in the wine domain by buying3 companies which produced wine. The thought behind this move of diversificationwas that it could take advantage of the success it already had in marketing, in order todominate the wine market as well. But it was concluded that, after marginal profits of7 years, the difference of the two products stood not only in their content but also inthe audience to which they were directed, in their price policy and, of course, in theirdistribution network. After 8 years it was forced to sell the companies (Hill, 2007).

3.2 Difficulties in Unification – The Human Factor

The second basic reason for the failure of an A&M is the inability of a fast andsuccessful unification of the companies (Baroncelli, 1998), that is of the unison of twodifferent kinds of company culture, financing systems and screening systems, as wellas the attempt of the creation of an effective co-operation between the administrationexecutives of the companies. This is a time-consuming procedure with doubtfulresults.

Besides the case in which businesses prove non-compatible, in terms of thestrategy they apply, emphasis is given to the case in which the human factor is the onethat is responsible for the failure (Schuler, 2001). When we mention the human factor,we refer to the human dynamic of the businesses and the company culture thatdistinguishes it. By the term company culture, we mean the total of symbols, values,ideology and cases which function, often unconsciously, so as to guide and form theindividual and company behaviour (Cartwright, 1993).

Even though the compatibility of the company culture is a defining factor for thesuccess of an A & M, it is also the factor often ignored. The unpleasant consequencesare met during the transitional period after the confirmation of the deal, and arepossible to lead an otherwise wmuch-promising A&M to failure.

Among the employees of the acquired company there is insecurity, since they areunaware of whether they will keep their jobs or be dismissed. For example, in 1986,the $ 500 –million buy-out of the British Wedgwood China from the also BritishWaterford Crystal was considered the “ perfect marriage” by both sides. But, withinthree years, the price of the share declined by 60% and the share-holders demanded a“divorce”. The reason was the incompatibility of the two companies, which wascaused by differences in management, in the organisational systems and in problemswith the workforce of Waterford (Cartwright, 1993). This insecurity leads to lack ofmorale, stress, increased absenses from work and reduced productivity. Thishappens mainly when the mergered companies are hard and often betrayed ones,and also when those companies are not aware of their role in the new company, towhom they will give account and, how their personal and proffesional targets willmatch the culture of the new organism.


As concerns the high executives, their sense of duty and their willingness for co-operation with the executives of the buyer company are reduced because they arefound in confrontation with the change of their functioning ways up to that moment,and they are uncertain as to what responsibilities they will have from there-on, in faceof the oncoming restructure of the functions of the target company. Sometimes thoseexecutives, as well as the employees of the acquired company are afraid that theirprevious achievements will be crossed out and that they will have to prove theirworth all over again (Appelbaum, 2000).

Moreover, the employees of the target company are often prejudiced against thebuyer company and tend to misinterprete and reject its beliefs regarding its targetsand the A & M’s intention. The vagueness and the insecurity that prevail trigger aconflict of the two kinds of culture and disagreements as to which company willprevail. The conflict mostly derives from the different way of thinking thatcharacterizes each company and in its difficulty in finding another company whichshares the same way of thinking.

The much – promising merger of Price Club and Costco Wholesale had to dealwith many problems, mostly of culture. The executives of Price Club had the attitudeof Harvard graduates, while those of Costco Wholesale had the attitude of peoplewho had started low and managed to climb high. As it is natural, there was nopotential of a successful co-operation and the merger was dissolved within a year(Holland, 1995).

Finally, in international A&M, the problem of differences in national culturesarises. Differences are spotted in the way of conducting business, in administration,the position of simple employees, the work rules, the clients’ and the suppliers’power. Consequently, the incompatibility of national culture can be one more reasonfor the failure of an A&M. For example, the sale of the Bank of Athens to the Koreangroup Hanwa, during denationalizations in the period of 1991-1993, not only did notlead to the development of the bank, but, in contrast, it deteriorated its innateweaknesses. Specifically, the administration and generally the business philosophythat the Korean group applied might have been proven effective for the Asianmarkets but did not go well within the Greek reality (Ziotis, 1998).

3.3 Negative Consequences of a Delayed Merger

For the aforementioned reasons, the interval between the annoncement of an A&Mand its completion is extended more than that predicted. This turn of things has arather negative impact on the effective completion of the merger due to its influenceon five crucial fronts (Fritzson, 2000; Selden, 2003):

• Increase of the cost of capital. The slower the new organisation is created, theslower the co-operation will be achieved. For the A&M, though, capitals thathave to start paying off within the planned interval have been tied-up. Anydelays during the completion of co-operation mean decrease of their truevalue since the capital has opportunity cost.


• Cost of reduced productivity of the employees. The period of time until themerger is for the employees an interval of stress and fear that their earnedachievements might be lost. Under this pressure it is possible for the key-employees to seek work elsewhere and withdraw.

• Loss of significant suppliers and clients. The suppliers wonder if they willcontinue doing business with the new company and if the terms will remainthe same. They examine the possibility of co-operation with other clients so asnot to deal with unpleasant surprises if the new company asks them tointerrupt their co-operation. Similarly, the clients wonder if the neworganisation that will arise will continue doing business with them on thesame terms of co-operation. The competitors may take advantage of theirclients’ anxiety and try to allure them. For example, when Arvin Meritorbought from Volvo the unit of production of axles for heavy vehicles,theattitude of the new company which opposed its client – now Volvo-changed.While previously it was interested in the manufacture of parts with theprecise technical features that Volvo desired, after the buy-out it startedtaking seriously into consideration the cost of provision for specialised partsas well as the desires of other clients it acquired and which would probably bedissatisfied by the mechanical changes that Volvo wanted to imposeAshkenas, 2000).

• Risk of competitors to finally strengthen their own position. The morehardnesses have to be dealt with during unification,the longer is the intervalthat the buyer company spends part of its resources and devotes its attentionto the procedure of the negotiations and the incorporation of the acquiredcompany afterwards. Not only that, but it also deprives those valuableresources from its basic activity, giving the competitors the uniqueopportunity to dispose of it and strengthen their own presence in the field.

• Insecurity of the share-holders. The extension of the unification periodconsists evidence of incapability of the buyer company to act according to theschedule.

3.4 Excessive Debt

A business that decides to buy out another one, is determined to pay a lot in order toachieve it. But, usually, either because of lack of analysis and thorough screening ofthe target businesss’ financial situation, or because of excessive self-confidence of itsmembers, for their decision,before the closure of the dael, the company is in a positionin which it doesn’t know the exact worth of the target business.

If the stocks of a target business move in the stock market during negotiations,their price raises. In order to secure the target business, the buyer business is willingto invest a high premium to its share-holders, which brings on big expenses (Sirower,1997). For the ready-money that is required, it turns to another kind of financing,


usually bank loans and junks bonds (bonds of high intrest, because it involves anuncertain investment, since it depends on the buy-out’s course). Also it is possiblethat it will follow unorthodox ways of financing from the stock market, for exampleusing the same money sources that were originally destined for other activities.

If the performance of the target business was mirrored on the value of its stocks, tobring profit, after its buy-out, its performance should increase at least in accordance tothe percentage of its surplus value that the business paid to buy it. Additionally, thedebt that has been created by the loaning has to be paid off. In order for this to befullfilled, resources that would be otherwise used for long-termed investments aresacrificed. And if the buyer company is going through a period of reduced profit, it willhave difficulty in paying off the debt and it might even be led to bankruptcy.

Generally, the paying of high surplus value for buying a target business, has morepossibilities to lead the buyer business to the accumulation of debt than to theincrease of its profits, even if we examine the issue in the long term.

3.5 Members’ Role

Problems could be created during the course of negotiations for A&M. At thenegotiations, the members of the buyer business and a number of other people ofdifferent specialities, either from the company itself or independent of it are present.Those people, have usually never co-operated before and are called to analyse,process and present in co-operation their opinion of the impending decision thatneeds to be taken, in a very short time and often without success.

This is because each member studies the appeal of A & M from his/her own pointof view and does not view it in its total. This way, there are often many opinions thatconcern different sectors of the business and there is no spherical analysis, as wouldbe necessary. Moreover, the analysers are ignorant of certain issues, since they counton those in charge to solve them, after the A&M, but which could be of vitalimportance for the new step of the business, as for example, whether the businessesare compatible in organisation and the difficulties that will probably appear duringthe consolidation process.

During the negotiations, the counterparts are in a situation of uncertainty. Theymight agree on most issues of the daily agenda, and disagree or postpone for latersome issues that pose difficulties,which, when the time comes to deal with, mightbecome the reason for the failure of the agreement.

What hastens the procedure of the negotiations and possibly leads to mistakenconsiderations, which might prove disastrous for the business being bought-out:

• The leak of information for the A&M. The work force of the companies iswound-up and the competitors in the market proceed to various moves todeal with the coming danger. The result is for the members to try to end theissue as soon as possible, with the finalization of the agreement.


• The executives of the buyer business, who have suggested or have particularlyworked on the adoption of this agreement, are naturally identified with it andwish for it to be completed, even if the predictions are not so promising. Inorder to avoid objections, they hasten the procedure and seal the deal.

• Finally, in a A&M procedure, there are many who will have benefit if it isfinally fullfilled, independently of it being profitable or not.

The buyer business executives often start the negotiations with the self-confidenceof one who is successful, considering the executives of the target business inferior invalue, since their business has reached the point of being sold out. Thereafter, afterthe closure of a deal, a question rises; who is the one most suitable to take over theadministration of the target business’ departments: the members of the companybuying or the members of the one bought? The result is the outbreak of a conflictbetween the members and the magnification of the alreday existing tension.

The horizontal merger of the British pharmaceutical industries Glaxo PLC andSmithKline Beecham (Saterlee, 1998), in 1995, was led to a failure before the deal wasfullfilled and despite the expected benefits, due to disagreements concerning the newadministration board. Of course, the companies, realising what large profits theycould get from the deal, renegotiated 5 years later and, putting aside theirdisagreements, agreed to move to the merger (Harbrecht, 2000).

Undoubtedly, the size of a company is directly related to the status and thepositon of its executive members: the biggest the company, the more powerful a highexecutive is considered and the more negotiating power they have in the market.Consequently, an A&M. contributes to the invigoration of its members’ position and,for this reason they are its most ardent supporters, often ignoring the share-holders’oppositions.

Additionally, according to a research of the University of Columbia (Holland &Zuckerman, 1995) the biggest the arrogance of the Managing Director, the highest isthe surplus value that the company is possible to pay; that is, we ascertain howpowerful the superior members of a company are, since they agree to pay highsurplus value that is not logical, in order to carry out the deal they wish for. Often, intheir attempt to develop the business, the members destroy instead of building itsworth (Campell, 1990). The current work of the business is neglected due to theconcentration of interest on the target business. For example, in the end of 2003, theBank of America announced the buy-out of FleetBoston Financial Corporation just towatch its stock losing 10% of its value the same day (while FleeBoston’s stockincreased by 24% within 4 days). That does not that A&M would not occur anymore.The same day of this particular announcement, two more big buy-outs took place inthe international market. It means though, that the executives do not only have tojustify convincingly their moves, but also keep their promises (Henry, 2003).

As concerns the members of the target business, they also have their share ofresponsibility since they avoid making important decisions, leading the target


business to a periodof impassivity, for fear of not bringing the desired result by someof their decisions, and, thus, becoming the reason for hastening the termination oftheir liaison with the company.

4. HOW IS THE SUCCESS OF STRATEGIC DEVELOPMENT VIAACQUISITIONS OR MERGERS SECURED?

Following, we will examine what a company has to do in order to avoid the problemsthat emerge during the planning and applying of an A&M.

4.1 Screening of the Target Company

When a company decides to go ahead with an A&M, it comes into screeningprocedure of the target company : it assesses the benefits and the costs of the A&M. Ithas to concentrate on this exact procedure so as to avoid problems and note success inits try (Financial Times, 2003).

The procedure of screening has to start the moment the businees lays on the tablethe need for development -expansion. This is very useful, because it contributes to theincrease of its knowledge of the possible targets. Also, it leads to a more realisticappreciation of the A&M problems, especially as concerns the unification of companies.Finally, it reduces the risk of an A&M with problematic companies.

The company has to follow three steps, during the screening:

• Evaluation of the reasons for which it is driven to an A&M and assessment ofthe necessity of this strategy. In parallel, defininition of the characteristics ofthe notional target company.

This way, it goes deep into the reasons that lead it to develop via an A&Mand, is in position to reconsider its decision, if it confirms that it is not in itsbest interest or it is not the most advisable development strategy.

• Compilation of a list of the probable candidate companies and classification ofthese depending on:

1. their financial status,

2. their place in the product market,

3. their competitive environment,

4. their administrative abilities and

5. their company culture.

The study of those characteristics leads to the finding of the strong and weakpoints of each candidate company, the size of a potential working together,the probable problems in unification and the compatibility of the culture ofthe two companies.


• Finally, choosing the candidate company which responds to the buyer’sneeds, after having considered the opinion of the specialists that are involvedin the procedure.

4.2 Adequate Evaluation of Target’s Performance

One of the main reasons of failing an A&M, the over-estimation of potential profits,can be eradicated, if the procedure of the companies’ screening is performed correctly(Cullinan, 2004).

Through the adequate initial evaluation, the competitive advantages that willcome up from the merging of the companies are traced, as well as the benefits thatalso come along (Chaudhuri, 1999). The more meticulous the screening process is, theeasier are the necessary clues gathered, that prove if there will be or not competitiveadvantages from the merger of the activities of the two companies.

4.3 Avoidance of Accumulation of Debt

The careful choice of target companies and the effective evaluation provide thecompany with useful information relevant to the price that will have to be paid for anacquisition, since it is important for an excessively high price not to be paid.

4.4 Facilitation of the Procedure of Unification

(A) Culture’s role: A company that chooses to do an A&M, confronts some problemsduring its unification with the target company, which stem from the lack ofcompatibility of the kind of their company culture, “it is essential that wecomprehend the company culture before we try to alter it” (Cartwright, 1993).

The recognition of the company culture before an A&M can be achieved throughobservation of its way of functioning, its hierarchical structure and the workrelationships that exist (Carey, 2000). Also, a more detailed research would beheld through interviews of its executives, as well as with the use of questionnairesso as to form an opinion of their way of thinking and dealing with the new workenvironment that may be inflicted on them.

Furthermore, a culture audit for the concentration of information would beuseful. This is an objective way of comparison of the two kinds of companyculture, a discussion of their similarities and differences, and a recognition of thekind of “marriage” which is more preferable. This screening contributes to theeffective approach of human resources and to the evaluation of differences to theways and the systems of values throughout time. This way, the trustworthyjudgement in relation to success or failure that any plan for unification may have,is secured.

(B) Kinds of Mergers: Surely the success of a unification depends on the kind of theA&M that is about to be completed and on its consequences on the culture of the


target business. We usually meet three kinds of mergers – “marriages” ofcompanies (Ettenson & Knowles, 2006).

• Extension mergers: the buyer company does not intend to alter the way offunctioning of the target company and therefore its culture.

• Collaborative mergers: the buyer company aims at the exchange of informationwith the target business, concerning the way of functioning and also theirculture, so that the best elements of both will be adapted. It is referred to as“modern merger” as well.

• Redesign mergers: the buyer company wishes to restructure the functioningand in consequence the culture of the target company so as to adapt it to itsreality and demands. This is a “ traditional merger”.

(C) How we unite different cultures: Some of the factors that are kept in mind whendefining the extent of the unification of two companies are connected to the typesof businesses, the feelings of their employees and the acquired company’stowards them and the buyer company. If the companies are active in relevantfields, the buyer has to demonstarte significant achievements in A&M in the pastand its company culture is dominating that of the acquired company, and, ispreferable in the context of the new organisation, then a larger extent of mergerfollows. In contrast, if the companies are active in non directly - related fields, theacquisition is held because of the different way of thinking and of the differentprocedures that the target company applies, and, which the buyer companywants to exploit; the employees of the company either feel pride for its name andstandards or are aggressive towards the buyer; a high degree of autonomy ismore preferable (Appelbaum, 2000).

(D) Dealing with the employees of the target company: This is a fundamentalparameter for the success of the A&M. Every attempt will have to be made so thatthe personnel of the target company will remain pleased with the A&M. It is ofvital importance what initial actions will be taken after the announcement of theA&M since they create the first signals and can raise the morale of the targetcompany’s personnel (Perry, 1986).

A second point that has to be carefully dealt with is the contact with the “new”employees.The contact should not be based merely on typical communicationchannels ( like posters or pamphlets), but on non-typical ways such as phone contactor face-to-face discussion and the existence of a council who will answer theemployees’ queries. The great usefullness of the non-typical ways lies in the fact thatthey will secure the instant feedback and, in result, the two-sided update both of theemployees for the administration’s intentions and its attitude towards them, and theadministrative members who handle the process of unification for the real concernsof the employees and their fears of losing their habits and gains (loss of partners,change of work conditions, tranfer to another city/ town, even loss of job). Even in the


case of dismissals, the company can stand to the side of the employees, while the wayit treats those dismissed is an indication to the remaining employees of if and to whatextent the company shows real interest for its human resources. The provision of helpto the recently dismissed to find a new job, as through the conduction of seminars andtraining for the boosting of their skills is being held to that direction (Appelbaum,et al., 2000). In this context, Novartis (Fisher, 1998) created a register, with capitals theheight of $ 71 million, with the purpose of financing the business activities of theemployees it would fire.

5. THE TWELVE STEPS OF SUCCESS IN A&M

The twelve steps of success in A&M (Aiello et al., 2000; Hitt et al., 2005; Gaylin et al.,2002) are:

1. Do not focus on only one probable purchase: Research every possible target. It isbetter to have alternative solutions so that you will not be “trapped”.

2. Friendly procedures: It would be good for the A&M to be completed in afriendly climate from the start in order to fullfill the procedure as much moresuccessfully and less painstakingly as possible. The acquisitions that startedas a conquest of the target companies had almost always have reducedefficiency due to the bad climate that existed and the failure in accomplishingthe co-operation.

3. Have really comprehended the reasons for the buy-out: It is absolutely necessaryfor the buyer company to know why it wants this deal to be made, and to havearguments to support this decision, in order to convince the acquiredcompany, its own staff and , of course, those who will invest into it. Often, thebusinesses do not hesitate to overturn their strategy in front of a big chance.

4. Careful financial analysis and self-control: It is very important for theadministration members during the preparation and the process of the buy-out of a company to know the highest price they can pay for it. Many times,the members get carried away by their desire to complete the buy-out andoffer more money, whereas they should remain calm and not exceed themaximum price limit they have set.

5. Have a clear vision and strategy: Because of the concern that usuallycharacterizes the staff of companies which are mergered or become the objectof acquisition, it is important that the higher executives of the two companiesand their staff share the vision and the mission of the new company, so thatthe employees perceive in all levels their role in the new reality of thebusiness, and start feeling more comfortable in it (as much as possible), slowlyacquiring their old dedication and trust. Unfortunately, around 78% of theacquisitions start from the expectations of co-operation and not by a sharedvision.


6. Leadership – Leading Team: The crucial factor. Establish it quickly. Around4 to 10 businesses face a leadership gap after the A&M. As a result, they faceimportant problems especially in securing the acceptance of their subordinatesand in giving a clear sense of orientation.

7. Speed of materialization: It is significant that some procedures are held fast andin a short space of time since the closure of the deal so as to normalise thesituation, without this meaning, of course that it will solve the abovementioned problems with the human factor.

8. Development: The A&M has aim at shared development. Do not focus only oncutting down on the expenses but on the additive value as well. The reality isthat the cutting down on expenses is often the center of all tries. Subsequently,the chances for development are often ignored. Around 3 to 10 businessespractically ignore attractive potentials for development (e.g., cruciform sales).

9. Quick successes: Act fast, produce results and communicate them. Show yourpeople that “ there is light in the tunnel”.

10. Share-holders: It is good for the main share-holders of the business to supportits move towards a buy - out, provided that they have been convinced that it isto their interest. Practice shows that the majority of acquisitions and mergersdo not bring in anything more for the share-holders of the buyer company;sometimes they even have negative results.

11. Emphasize on culture: It is necessary that the buyer companies are familiar withthe culture of the candidate company so as to avoid painful surprises. If thispart of the procedure is neglected then there will surely be tensions andproblems, from the diversification, obvious or not, between the twocompanies. If two companies want to merger with success they will have tocreate a shared culture which will rely on mutual respect and shared values.

12. Communication: The true power behind acceptance from the employees andthe minimising of frictions. Most companies admit when it is too late that theyhad inadequate communication, Around 4 to 10 consider the “inability tosecure the acceptance of the employees” as the main obstacle of overcomingproblems.

6. BANK MERGERS AND ACQUISITIONS

Banking organizations today are faced with a variety of challenges. All countries arefaced with challenging economic conditions with some geographic areas impactedmore than others. In addition, the regulatory landscape is creating more obstacles andcompetition is becoming more intense (Focarelli, et al., 2010).

One of the most important trends affecting the financial service industry isconsolidation. The USA market saw a merger boom in 1996; in Europe too, the same


process culminated in 1997, with the merger between the Swiss banks UBS and SBCwhich has let to the creating of one of the largest banks in the world. The first monthsof 1998 saw the creation of the world’s largest financial group- itigroup-formed by themerger between Citibank and Travelers (Siam, 2010).

Bank consolidations take place due to the following reasons:

• To take advantage of economies of scale.

• To have access to distribution channels.

• To widen the range of products that the bank can offer both actual andpotential clients.

• To enter a new geographic market (Siam, 2010).

Mergers and acquisitions in banking sector have become familiar in the majorityof all the countries in the world. A large number of international and domestic banksall over the world are engaged in merger and acquisition activities. One of theprincipal objectives behind the mergers and acquisitions in the banking sector is toreap the benefits of economies of scale. With the help of mergers and acquisitions inthe banking sector, the banks can (Soubeniotis, 2010):

• Achieve significant growth in their operations.

• Minimize their expenses to a considerable extent.

• Reduce competition because merger eliminates competitors from the bankingindustry.

• Enhance their customer base.

• Ensure efficiency, profitability and synergy

• Form and grow shareholder value

Other reasons, for which banks are going for mergers, around the world are:

• Drastic increase in market competition, as merger has the capability to generateeconomies of scale. These Economies of scale can help the banks in loweringtheir servicing cost and in this way can provide a competitive edge to them.

• Innovation of new financial products

• Consolidation of regional financial systems and national financial systems

• Transfer of Skills between the two banking organizations and this transfer ofskills lead to higher efficiency on the part of the merged bank.

In the Banking Sector of any economy, the most crucial concern is the RiskManagement. Banks of every country are supposed to make a proper risk analysis inorder to balance the deposit and credit portfolios. Mergers can diversify these risks toa significant extent (Sherter, 2009).


Several types of transactions are available in today’s market including:(1) distressed banks seeking additional capital or those hoping to partner with astronger entity; (2) healthy banks that are in sound financial shape, but wish toexpand their market reach; and (3) portfolio or department purchases with banks thathave decided to exit a product or service line (Berry, 2010).

Among customers of financial institutions that have fully consummated mergersduring the past three years – including Regions Bank/AmSouth; Bank of America/LaSalle Bank; Capital One/North Fork Bank; TD Bank/Commerce Bank; andHuntington National Bank/Sky Bank – post-merger dissatisfaction is primarilydriven by three factors:

• Magnitude and number of changes made to customer banking activities.

• Types of changes made to routine customer banking activities, such aschanges in bank hours, fees or automatic payment or debit functions.

• Communication about impending changes to customer banking activities.

Among customers of banks that are currently undergoing an acquisition, fewerthan one-half report that they are receiving a sufficient amount of information fromtheir financial institution about the merger. Furthermore, when customers find outabout the merger from a source other than their financial institution – such as themedia or a friend or family member – they are twice as likely switch banks, comparedwith customers who report receiving merger or acquisition communications directlyfrom their bank. Approximately 75 per cent of customers of these merging banks statethat they received information about the mergers from a third party, rather than theirbank. This figure is twice that of customers of banks that have fully consummatedmergers (Power et al., 2010).

Traditional Views of the Value of Mergers and Acquisitions about cost economies,cost economies or marketing efficiency:

• Merger and acquisition activity results in overall benefits to shareholderswhen the consolidated post-merger firm is more valuable than the simplesum of the two separate pre-merger firms

• Increased cost efficiency. Many mergers have been motivated by a belief thata significant quantity of redundant operating costs could be eliminatedthrough the consolidation of activities

• Costs may be lowered if one bank can offer several products at a lower costthan separate banks each providing individual products. Cost efficiency mayalso be improved through merger activity if the management of the acquiringinstitution is more skilled at holding down expenses for any level of activitythan that of the target.

• Encourage improved revenue efficiency in a manner analogous to costefficiency.


• Additionally, acquiring management may raise revenues by implementingsuperior pricing strategies, offering more lucrative product mixes, orincorporating sophisticated sales and marketing programs

• Banks may also generate gr eater revenue by cross-selling various products ofeach merger partner to customers of the other partner

• Deals among banks with substantial geographic overlap reduce the numberof firms in markets in which both organizations compete (increased marketpower)

• Enhance value by raising the level of bank diversification by eitherbroadening the geographic reach of an institution or increasing the breadth ofthe products and services offered

• Moreover, the simple addition of newly acquired assets and depositsfacilitates diversification by increasing the number of bank customers (Piloffet al., 2010).

The number of acquisitions during the first half of 2008 slowed significantly to 24,compared to 84 deals during the same period in 2007. The average price-to-bookpremium was 1.96 in the first half of 2008, which was a significant drop from the 2.46average from 2002 to 2007. The slowing economy, weak housing market, decliningstock market, and uncertainty in financial stocks have depressed bank valuations(Lenney, 2010).

6.1 Examples of Bank Mergers and Acquisitions

Bank of America Mergers are quite important in the evolution of the bank over theyears. Most important among all the mergers and acquisitions were the mergerbetween Nations Bank and Bank America (1998) and the acquisition of ABN NorthAmerica and LaSalle Bank by Bank of America (Sherter, 2009).

Citigroup Merger (in 1998) refers to the merger between Citicorp and TravelersGroup, which created one of the world’s largest financial services company, theCitigroup. This $140 billion dollar merger took place in the year 1998. The mergerdeal was done with the objective of making this American joint financial corporation,the largest in the world, ahead of the Deutsche Bank of Germany and UBS ofSwitzerland (Sherter, 2009).

Centurion Bank Merger created the Centurion Bank of Punjab bringing togethertwo separate banks, named Centurion Bank and Bank of Punjab. This merger, whichtook place in the year 2005, increased market share for the merged bank, raised its’book value and gave it a rank among the top ten private banks of India (Sherter, 2009).

European Bank Mergers took place in maximum numbers in the period 1985 to2000. Then, in 1997-98 there were significant mergers. Among the European BankMergers, the domestic mergers created more value compared to the cross-border


mergers. European Bank Mergers had a great impact on the financial sector ofEurope. Specially, in the period, 1985-2000, significant number of bank mergers tookplace in Europe. These bank mergers resulted in drastic and immediate increase in thebanking assets and, generally in banking profit (Sherter, 2009). Lord Krishna BankMerger (Japan) took place in the year 2006, between Lord Krishna Bank and CenturionBank of Punjab. This merger helped the combined entity to establish a strong marketpresence in Kerala and Punjab. After the merger, the combined entity of CenturionBank of Punjab and Lord Krishna Bank started operating through 361 branches and12 extension counters. RBI also approved the proposal of Centurion Bank of Punjabfor opening another 30 branches (Sherter, 2009). In 2000, the top five U.S. banks held11 percent of all deposits, according to consulting firm Celent. By last year that figurehad grown to 37 per cent. While the biggest U.S. bank in 1995 had 2.7 per cent ofdeposits, today three banks – Bank of America, JPMorgan Chase and Wells Fargo –exceed the FDIC’s national deposit cap of 10 per cent. The top 10 banking companieshave more than 40 per cent of all deposits, according to the FDIC. The top four playerscontrol fully half of all bank assets, such as the capital used to make and provide loans(Sherter, 2009). Chinese and Japanese companies may be the most active buyers in2009, bankers said. Japanese companies will use their cash and take advantage of thestrong yen to make purchases abroad. Tokyo-based Mitsubishi UFJ Financial GroupInc., Japan’s biggest bank, invested $9 billion in Morgan Stanley, the largest outlaymade by a Japanese company outside the country this year, according to Bloombergdata (Choudhury et al., 2010).

7. ACQUISITIONS AND MERGERS OF GREEK BANKS

In the context of the analysis that preceded, which concerned the Acquisitions andMergers, we decided to research the Greek banking system. Drawing informationfrom five (5) banks that did or did not accomplish an A&M, we present the followingresults of our research.

A. Research Sample

This particular research was based on a sample of five (5) companies which are activein the banking domain. The criteria for the choice of those companies were the A&Mthat they had fulfilled in the last decade, and those banks are the largest in the Greekmarket. From the A&M some that were successful were chosen as well as some thatwere not, so as to have the most objective and representative sample. Finally, in casethat a bank had proceeded to more than one A&M, we chose the most important ofthem. The collection of information was conducted via the method of a questionnaire,which is presented below.

B. Research Results

Question 3: Which were the reasons of an A&M fullifillment?


According to the diagram, we observe that the most important reasons forproceeding to an A&M were:

• Increase of Market Share

• Increased market dynamics

• Increase of Diversification

On the other hand, the less important reasons were:

• Overcoming barriers to entry

• Reduction of the cost and the time to develop new products

Question 4: Was the A&M finally accomplished?

From the chosen sample, we noted that, from the A&M that were in negotiations,a percentage of 80% were accomplished.


When a business decides, for reasons of strategic development, to act viaAcquisitions and Mergers, then it should seriously take into consideration theinformation which will secure, up to a great extent, the success of this move.

The most important, thus, information according to the sample was:

• Careful financial analysis

• Agreement of the share-holdres after the A&M

• Communication

In contrast, information which was considered less important was:

• Choice of many alternative suggestions of A&M

• Emphasize on culture

7. CONCLUSIONS

One size doesn’t fit all. Many companies find that the best way to get ahead isto expand ownership boundaries through mergers and acquisitions. For others,separating the public ownership of a subsidiary or business segment offers more

Question 5: If the A&M was not accomplished, which were the reasons for its failure?

The only case we met where there was no final agreement for an A&M, was thatin which the counter parties were the National Bank of Greece and Alpha Bank, inOctober 2001. The reason for not finalizing it was basically that of the role of theexecutives. Yet, the difficulties of unification (differences in culture) and theoverestimation of the anticipated co-operation also played an important role.

Question 6: Which elements of the “twelve steps to success” do you considermost important for the accomplishment of an A&M?


advantages. At least in theory, mergers create synergies and economies of scale,expanding operations and cutting costs. Investors can take comfort in the idea that amerger will deliver enhanced market power. By contrast, de-merged companies oftenenjoy improved operating performance thanks to redesigned management incentives.Additional capital can fund growth organically or through acquisition. Meanwhile,investors benefit from the improved information flow from de-merged companies.

M&A comes in all shapes and sizes, and investors need to consider the complexissues involved in M&A. The most beneficial form of equity structure involves acomplete analysis of the costs and benefits associated with the deals. As HarryTruman once said, “A pessimist is one who makes difficulties of his opportunities,and an optimist is one who makes opportunities of his difficulties.” Although thesetimes are challenging, there may be great opportunities for acquiring institutions.

In good times and in bad, mergers and acquisitions can lead to increasedshareholder value. While we may all agree with this premise, care must be taken toanalyze strategic objectives and find transaction candidates that are a good fit forlong-term organizational goals.

Finally, mergers and acquisitions represent the ultimate in change for a business.No other event is more difficult, challenging, or chaotic as a merger and acquisition. Itis imperative that everyone involved are now a normal way of life within the businessworld. In today’s global, competitive environment, mergers are sometimes the onlymeans for long-term survival.

Mergers and acquisitions in banking sector have become familiar in the majorityof all the countries in the world. A in the process has a clear understanding of how theprocess works. Mergers and acquisitions large number of international and domesticbanks all over the world are engaged in merger and acquisition activities. One of theprincipal objectives behind the mergers and acquisitions in the banking sector is toreap the benefits of economies of scaleThe financial industry is consolidating at anaccelerating pace.

In conclusion, we found that the bank field has a fertile ground for the transactionof A&M. Enough A&M have been noted in the recent years and even more areexpected to be conducted, since the markets have “opened” and the technological andsocial data demand new banks which will be able to reach up to the demands of theconsumer society. So, the acquisitions and mergers will continue to be an importantpart of the companies’ strategy.

APPENDIXQUESTIONNAIRE PRESENTATION

QUESTIONNAIRE

Question 1: Business Name. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _


Question 2: Please report the A&M that was to be done._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Question 3: Which were the reasons of an A & M fullifillment ? (write an X)

1. Economies of scale

2. Economies of scope

3. Combination and integration resources

4. Increase of Market Share

5. Overcoming barriers to entry

6. Increased market dynamics

7. Reduction of the cost and the time to develop new products

8. Increase of Diversification

9. Avoiding Excessive Competition

10. Elimination of target-company with Reducing Efficiency

11. Reduction of the Excessive Liquidity Between Company andBuyer

12. Hybris or Administrative Arrogance

Question 4: Was the A & M finally accomplished?

NO YES

Question 5: If the A&M was not accomplished, which were the reasons for itsfailure? (write an X)

1. Inadequate Evaluation – Overevaluation of AnticipatedCo-operation

2. Difficulties in Unification – The Human Factor

3. Excessive Debt

4. Members’ Role

Question 6: Which elements of the “twelve steps to success” do you considermost important for the accomplishment of an A&M?

1. Choice of many alternative suggestions of A&M

2. Friendly procedures and not agressive A&M

3. Realization of the reason of the completion of the A&M


4. Careful financial analysis

5. The existence of a vision and a strategy

6. Established leadership for the new company

7. Speed of materilization of the A&M

8. Development of both companies

9. Quick successes after the A&M

10. Agreement of the share-holdres after the A&M

11. Emphasize on culture

12. Communication

Companies that Participated in the Research

National Bank of Grece

ETBA

Labour Bank

Alpha Bank

Eurobank

Jubank

Finanshbank

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