Literature Review

LITERATURE REVIEW:

Mergers and acquisition are commonly identified as three types in the world market, they are

vertical integration where two companies in diferent of supply chain merge together, horizontal

integration where two same cindustry companies merge together and diversification where two

companies of two different industry merge together (The Economist, 2006) (Morrison and Floyd,

2000). Merger is nothing but the combination of two firms where one survives and the other lose

its corporate existence. The company which is acquiring will pay for all the assets and liabilities

of the acquired company (Varma, 1997).

Mergers and acquisitions are the companies mainly targeting the globalization and changing the

market environment. This is the fastest and more effective way to expand the business in to the

new market in the new country (Papadakis, 2005). According to the author, one company thinks

to develop its business globally the only way is to go for mergers and acquisition and in the case

of Tata motors, it is known as the motor company in India but after the acquisition of the Jaguar

(UK company) it is known to all over the world that Indian company first time in the history

acquired the British company. According to the auhor, throudh the Mergers and Acquisition only

one company can create an image in the world market and develop its business. According to

Ravenscraft and Scherer (1989), the profitability of target companies are decline after an

acquisition. Rovit et al. (2004) prove their argument after deep anlayses of 724 Unites States

based firms over a fifteen years of research from 1986 to 2001, that most of the successful

companies creating long term shareholders value to be frequent strong acquirers that maintain a

stable programme of transaction throughout economic busts and boom. According to the author,

the mergers and acquisitions are not always success sometimes it results in loss to both the

acquiring company and the acquired company. Many researches had proved that the opportunity

for mergers to fail is high only during the integration process (Simpson, 2000. Cited in Nguyen

and Kleiner, 2003). They argue that improper management, strategy, inefficient communication,

no clear vision about the company and the culture diffeence is the only reason for the failure of

the Mergers and Acquisitions. According to Schuler and Jackson 2001), the failure for the M&A

are isentified as poor planning, cultural clash, changing environmental conditions, out of reach

expectations, poor communication, poor management, talent loss, integration difficulties

etc.According to Flowler and Schmidt (1998), the only way to gloablize the business, to make

good profit and growth is the Mergers and Acquisition. According to Bellou (2007), most of the

mergers end up in failure in the global market. Calculations prove that 50% to 80% of the

mergers and acquisition are failure because they are performing low than the expected according

to different industry and measures. There are many example can show the history of failure of

mergers and acquisition. The Ford motors acquired Jaguar before Tata but it was not a profitable

acquisition so the Ford motors sold it to the Tata motors but now Tata motors is struggling to pay

the bridge loan taken to buy the Jaguar company (Businessweek, 2010).

According to Fraclicx and Bolster (1997), the main factor in making or breaking the merger

equation is the culture. Moreover, culture is described as a unique solution for both internal and

external problems (Schein, 1985a. Cited in Schraeder and self, 2003). The term “Culture Clash”

will descibe about the function of two companies such as values, missions, style and

philosophies. These are all the factors considered to be dangerous factors when two companies

decide to combine (Bijilsma-Frankema, 2001; Cited in Nguyen and Kleiner, 2003). According to

Beer et al 91993), the company which is going for mergers and acquisition need to change the

culture to fit the strategy. According to Drennan (1992), every organizations has got its own

culture. The Larson and Gonedes (1969) model holds that the exchange ratio will be determined

by each firm’s assessment of the post merger price / earnings multiple and postulates that each

firms requires that its equivalent price per share be at least maintained as a result of the merger.

According to the author, they developed a model to to know the price or earnings which will

show the profit and loss in that model. In order to check whether the M&A actually increases the

market value of the companies so Conn and Nielson (1997) developed the Larson and Gonedes

model.

In order to cover the share price movement, synergy and cost reductions, most of the firms

including the banks are announcing for immediate pre merger strateigies (Lowe, 1998). The

recent studies argued that there is a differnce between the acquired and acquiring employees. The

research proves that the acquired employees are the most affected people in the mergers and

acquisition (Panchal and Cartwright, 2001). The shareholders value not only depends on the

market valuation of the target firm but also depends on the actual acquisition price that the

acquiring company pays compared with the selling company’s cash flow contribution to the

combined company (Rappaport, 1979).

In the 1960’s most of the acquisitions will be made on the package of securities but now most of

the acquisitions are completed with the cash (Rappaport, 1979). According to Gupta and Roos

(2001), in the Mergers and Acquisition process only the intangible assets are assumed as the key

elements that perform behind the merger and acquisition. Furthermore, this is a good opportunity

to make some process involving the transfer of knowledge, technology introduction, strategic

implementation and this is a unique experience to study about the outside global market.

According to Fishbrook (2007), cross border merger and acquisition activities are increased in

today’s global world.

According to Granlund (2003), the Mergers and Acquisition is specially focused on the study of

understanding the human and social aspects and it is rarely been analysed from the management

accounting point of view. According to Camara and Renjen (2004), if only the senior manager

knows about the goal of the Mergers and Acquisition will not make the Merger and Acquisition

process success, it’s need to be communicated to the lower level managers and also it needs to be

communicated to the lower levels as well because successful merger is starting with a clear

understanding of the merger purpose. According to Camara and Renien (2004), the successful

merger needs to motivate how the merged company is going to perform differently than the

individual company work on its own. According to the author, the goal of the Merger and

Acquisition needs to be communicated to all levels of management because poor communication

is the main reason for the failure of Merger and Acquisition. According to the author, the main

reason for the merger is to make some changes. By making changes only the new merged

company can give better service good price so the resources being well used and changing to

new systems from the fundamental systems (Hackett, 1996). According to the author, as it is

been discussed in the previous paragraph that the main reasons for the Merger and Acquisition

are to increase the market value of the share and increase shareholder value by cutting costs and

improve the servies (Nguyen and Kleiner, 2003). According to Nguyen and Kleiner (2003), both

the companies shareholder will enjoy the “merger of equal” where strength and capabilities will

be share qually between the company’s shareholders. According to the mergerstat.com (Cited in

Nguyen and Kleiner, 2003) for the date of 2002, there were 4363 Merger and Acquisition woth

of $291.7 billion taken in to account and the as a result the industry was broken in to five

different categories such as healthcare, telecommunications, internet, semiconductors, and

banking.

2.1 WHY MERGERS AND ACQUISITIONS IS NEEDED?

For the organizational growth the Merger and Acquisition activity is considered as the chief

method for the last twenty years. The goal of Merger and Acquisition activity is to improve the

margins and to increase the market share.according to Lynch and Lind (2002), the merger

success rate is very low but also the companies have turned increasingly to mergers and

acquisitions. According to Appelbaum (2000), Merger and Acquisition are a formidable

challenge for change management. According to Demers et al 92003), the joined organizations

are often radically transformed and major reorganizations including streamlining and lay-offs

can occur. Legitimisation is particularly needed in that context to explain and justify change, to

entice employees to contribute to its implementation, and give them a new version of the

organization with which they can identify. According to Lubatkin (1983), improving the overall

performance is the only motive for Merger and Acquisition process. According to Cartwright and

Cooper (1993), by achieving synergy in the Merger and Acquisition process only will increase

the competitive advantage between two business units. According to Cartwright and Cooper

(1993), generally the Merger and Acquisition process have the negative impact on the economic

performance. According to Testa and Morosini (2001), recent research shows that the merger

goes beyond the bounds of the company performance, showing that success or failure can often

be bound up with strategic fit, pre and post merger inter firm relations.

According to Early (2004), the mergers and acquisition can be categorise into four basic types,

1. Acquisition of new skills or products

2. Market roll-up, as in the banking case with a series of geographic expansions.

3. Consolidating a mature industry. For example: BP acquisition of Amoco.

4. Transformation acquisition. For example: AOL’s acquisition of time warner.

2.2 TERMINOLOGIES IN RELATION TO MERGER AND ACQUISITION:

According to Dyer (2005), there are some coomon terminologies which is used very frequently in today’s

business world and it is very important to know.

5. Mergers create a new organization out of two or more organizations of more or less equal

stature, pooling all resources.

6. Acquisitions are very risky and it usually aims to enter into the new market to increase the sales,

shareholder value and mainly aims to decrease the costs. Acquisitions add a small firm onto the

existing structure of a larger organization.

7. Alliances are entirely diffeent from acquisitions because it is very less risky and it is negotiable,

co-operative and easier to walk away from. Alliances bring the two firms together with mutual

interest but different strengths to work on particular projects that offer benefit to both.

8. Conglomerates bring large firms together but each maintains its seperate identity. They might

share some resources, but benefit from decentralization and don not aim to combine strategy.

2.3 MERGERS ANDS ACQUISITION AND STRATEGIC THINKING:

The mergers and acquisition effects produced by the MNE (Multi National Enterprise) are

ambiguous since they depend upon the nature of the post merger organization. According to

Williams (1999), the joint venture effect is very difficult to judge since their organizational

manifestation may take a range of forms from equity sharing to some form of loose collaborative

arrangement. According to William (1999), the licensing and franchising are considered as the

contractual entry modes and it is unlikely to produce such pronounced effects since they do not

involve the transfer of productive capability. According to the author, nowadays the companies

started to see that the Merger and Acquisition as a strategic tool and they try to expect benefit

from synergies – customer value, improvements in competitiveness, product innovation this can

be achieved by integrating two entities. According to the author, successful buyers are the people

who deal the approach proactively and are driven by the strategic indent. According to the

author, the successful buyers needs to develop an understating as early as possible of about what

value the acquisition will add and how it will do so and they are able to explain this to the

investors. According to Gadiesh et al (2001), successful buyers also understand the perspectives

of competing bidders and the negotiating stance of all players involved.

2.4 MERGER AND ACQUISITION AND ITS EFFECT ON TOTAL VALUE

CREATION:

All the most of the Mergers and Acquisitions will go well and if it is done so badly it can be enormous. A

shareholder will loose hundreds of millions fo dollars value when there is a one percent loss in the

return on investment. According to Chanmugam (2005), a new way of thinking about the most of the

Mergers and Acquisitions process is needed because which will result in synergy, valuations, planning

and estimation that are specific and unique to the acquirer and that will result in a increase on the

return on invetment which will result in good shareholder value. According to Chanmugam (2005), many

companies organize their post merger integration activities on a functional basis rather than the value

added basis.

According to Donnelly (2005), in the total value of cross border mergers, there are some technical

problems which need to be taken into consideration in order to make it success such as taxation,

differences in market conditions, accounting systems, and stakeholder and shareholder expectations as

well as cultural differences. According to the author, among these problems cultural difference is the

biggest problems in the Mergers and Acquisitions process.

As per McNish research indicate that acquirers who are relatively strong performers compared to their

targets do better than average in the acquisition game. However, acquirers rarely succeed when their

intention in pursuing a well performing acquisition is to fix their own, poorly performing business.

Research also suggests that industry-relatedness seem to matter. Acquirers who buy companies in their

own industry do appear to receive more market approval, at least initially, than those that reach far

outside of their existing industry. This reflects the market’s estimation of the ability of the management

team to understand that acquisition and also of the steepness of the learning curve necessary to drive

the integration (Early’2004).

2.5 MERGER AND ACQUIITION A STRATEGIC INDENT: IMPLICATION AND

IMPLEMENTATION:

According to Dyer (2005), any company before they start their Merger and Acquisition activity

needs to focus on the internal factors and the external factors of the company because internally

the organization needs to focus on the resources that are to be combined and the extend of

redundant resources and the type of synergy the firms seek to create and in the external factors

that the company should be taken into question are the degree of market uncertainty and level of

competition. According to the author, one common questions are faced by today’s executives is

what kind of acquisition policy makes sense in an environment so that the shareholders will get

their money back without any loss and the investors claim that major diversifying acquisitions

have little credibility. According to the Mamdani and Noah (2005), different people will see the

acquisition in the different angle like the organization may see the acquisitions as a way of

spreading risks and shareholders may see the acquisitions differently and different people may

see the acquisitions will see in the different angle.

According to Mamdani and Noah (2005), for accomplishing major corporate objective Merger

and Acquisition is the effective tool and it can be calssified into five different categories:

1. Rolling up competitors in geographically fragmented markets;

2. Removing overcapacity in mature industries;

3. Purchasing research and development and new technology platforms;

4. Exploiting eroding industry boundaries through industry convergence;

5. Extending into new products of markets;

According to Nguyen and Kleiner (2003), the success of the merger is solely related to the level

and quality of planning involved and if the company is not spending enough time in anlayzing

and anticipating the current and future market trends as well as the integration issues and it will

result in failure only.

According to Dyer (2005), Epstein suggests five key drivers for success are listed below:

1. Communication between senior management on both sides, as well as a

constant supply of information to customers and staff.

2. Coherent integration strategy with decisions based on a neutral, objective

ground be they about staff, resources or technologies.

3. Strong integration team with a strong leader, which works to integrate

company cultures.

4. Aligned measurements, which relate closely to merger strategy and can be used as targets for

customer satisfaction, employee retention, risk management and so on.

5. Speed in implementation, whereby the post-merger integration is planned

from the outset and initiated at the first available opportunity.

The reasons for the success of the merger of British Petroleum (BP) and US based Amoco

(Sala,a et al, 2004):

1. Team merges the operating divisions such as computing systems, accounting and human

resource management.

2. The team called integration team was set up between two companies and it has been led

by the senior line manager who report to the chief executive of the company.

3. Culture assessment helps the two companies to identify the major differences and

similarities between the values, attitudes, beliefs and the management style between the

two companies.

4. Top executives strong commitment leads to the new entities into the future which helped

to minimize uncertainity.

5. Integration strategies – which helped to overcome culture diversity and avoided clashes

which is simply called “Cultural Clash”.

6. Employees are motivated to come with new ideas and the opportunities by the proper

training and support which increased the individual satisfaction and organizational

effectiveness.

7. The integration team checking regularly by surveying the staff every four weeks for the

first eighteen months to see how people felt about this merger process. And the feedback

of these surveys helped the top management to target their communication more

effectively.

According to the Nguyen and Kleiner (2003), KPMG has developed the best practice guidelines

to help managers successfully deliver value from mergers. These golden rules include the

following main keys to successful integration.

Directors must get out of the boardroom;

Set direction for the new business;

Understand the emotional political and rational issues;

Maximize involvement;

Focus on communication

Provide clarity around roles and decision lines;

Continue to focus on customers; and

Be flexible

According to Cartwright and Cooper (1998), the mergers and acquisition result in success because if the

Japanese company decides to take over an organization it will usually learn about its culture through

working with them in some sort of temporary partnering arrangement like a joint venture. This will

increase the level of trust about the organizations before making decision to merge eith other

organizations.

2.6 MERGER AND ACQUISITION AND FINANCIAL BENEFITS:

Increasing cash flow in the form of increased share holder value is considered as the Mergers and

Acquisitions success. According to the author, that is not the real success because in the recent survey of

senior executives about how they measure Mergers and Acquisitions success, in that only nine percent

of them defined success as the increase in the share holder value. Nearly forty percent defined that

Mergers and Acquisitions success is in non financial terms such as market share or portfolio expansion.

According to Chanmugam (2005), these are importan goals but even if the company was successful on

these measures but still the deal can destroy value. These non-financial strategic definitions are only

valid if they have a financial basis and can be clearly translated into financial outcomes.

According to Appellbaum et al (2000), one company needs to manage both the implication positive and

negative of the integration process by maximizing the cost efficency while minimising organizational

disruptions, for this they require managerial improvisation as well as experience.

Harris and Winston (1983) provided analysis of the erger benefits in the rail sector; Tremblay and

tremblay (1988) attempt to establish the determinants of horizontal acquisitions in the US brewing

industry; and Knapp (1990) undertook an event analysis of the air carrier mergers. Rhoades and Yeats

(1974) studied the impact of Mergers and Acquisitions activity on shareholder calue in banking; The

findings of these sector-contained studies were often contradictory (eg. Consolidations in the brewing

industry were found as not being driven by the motive to gain market share whereas such motive

featured as the primary factor in the air carrier mergers), although findings consistent across the sectors

were also observed(eg. Consolidation is principally driven by large companies). On the whole, the

studies generally showed that sector specifics played an important role in determining the financial

outcome of the consolidation (Dragun & Howard,2003). The number of researchers

(Hirschey,1986;Morck etal., 1990;Hanson and Song,1996)has investigated the agency problem in Merger

& Acquisition process and concluded that management of consolidation companies may have incentives

divergent from those required to pursue the task of shareholder wealth maximisation. The effect of

consolidation on concentration and market share was studied by Muller(1985) , George and

Jacquemin(1992); the results confirmed that companies acquired in conglomerate mergers experienced

substantial losses in market shares relative to control group companies.

According to Shelton (2003), Mergers and acquisitions are extremely risky when they try to involve in

the other organizations in the other countries. According to the author, most of the Mergers and

Acquisitions fails to deliver their intended benefits. According to Shelton (2003), research shows that

less than a fifth of international most of the Mergers and Acquisitions add value to shareholder value.

According to Galpin and Herndon (2000), after the mergers and acquisitions process many organizations

face very lower sales and the increased number of customer complaints about the products and service.

When there is a increased number of complaints on sales and service it is easy for the custome to look

for the same product in other company. According to author, it is the managers responsibility to ensure

and maintain the specific standard for the sales and service provided to the customer according to their

expectation. According to Galpin and Herndon (2000), in order to increase the sale and service the

company needs to plan and execute within the short period of time.

Acording to Early (2004), whenever the company is trying to merge or trying to acquire other company it

needs to have an integration program heading towards a particular goal. According to Early (2004), for

the organization the average return on shareholders is much greater than the market overall. Their

returns are much greater than companies that lack the discipline of a formal program or that are just

making occasional acquisition.

According to Cartwright and Cooper (1998), for a organization revenue synergies is the hardest part for

them to estimate because most of the times the organizations can think that it is doing better post

merger in terms of volume and price but they forget to estimate that how their customers and

competitors will react. According to Cartwright and cooper (1998), for the organization the one of the

main causes of miscalculating the revenue synergy is underestimating the negative impact that mergers

can have on the combined volume of the two companies.

TIME DIMENSIONS IN MERGER AND ACQUISITION PROCESS:

Business needs speed or in other words speed is very important for the business. Some people used to

say that in the integration process needs to move slowly in order to minimise mistakes and in practical

world that is wrong even though it sounds like logical. In today’s competitive and technology driven

world the organizations needs to act and respond quickly. A timely Merger and Acquisition is the most

important development response to market based change. According to the author, if the companies

are not faster then they will loose their opportunity with the competitors. Feldman has said,

“Companies that win are those that learn faster, act quicker and adapt sooner” (Huang and Kleiner,

2004). A slow mergers and acquisition process can decrease the profit and cash flow and increases the

cost.

2.7 EFFECT ON COST:

In the mergers and acquisitions process the management only pursue the shor term objectives like cost

reduction, overhead consolidation or disinvestment on non-core business units. According to Gadiesh

(2003), cost reductions can provide funding for longer-term strategic objectives.

According to Raymond (1996), studies showing that between sixty percent and eighty percent of all the

mergers are not successful because of the pre merger predictions of cost savings are incorrect for most

mergers. According to Raymond (1996), the main reasons are the overestimation of benefits and

underestimation of difficulties in integrating the merged firms.

“You must act fast”, says Tony Johnston, Regional Director of British American Tobacco (BAT) Asia Pacific

if you are trying to merger to capture the benefits of scale. According to Gadiesh (2003), “The longer

you take to make decisions, the more risk you take”.

The one explanation of the cost savings are not materialize as expected is the lack of competitive

pressure when merger produce companies with greater market power and monopoly like stature.

Businesses begin to tolerate “x-inefficiency” or costs that are higher than necessary because a firm is

operating inefficiently, when there are no competitive pressures. As Adam Smith noted, “monopoly... is

a great enemy to good management” (American Public power Association, 2005).

According to Cartwright and Cooper (1998), whenever the companies are doing transactions they talk

about the cost based synergies as hear dollar synergies and the revenue base synergies as the soft dollar

synergies. The cost based synergies tend to keep the things under control and the cost based synergies

are relatively easier using the information to the acquirer during the deal. The cost based synergies gives

good information to the acquirer about the target’s cost structure and with that it is easy for the

acquirer to compare it to the cost structure of similar business inside your company. This gives the

acquirer some rough estimates of the potential for improvement.

2.8 CORPORATE CULTURE:

According to Ernst and Young (1994), culture incompatibility is the largest cause for the lack of projected

performance, departure of key executives and time consuming conflicts in the consolidation of the

business. According to Denison (1996), “culture refers to the deep structure of organizations which is

rooted in the beliefs, values, and assumptions held by the organizational members”. According to Schein

(1985), organizational culture is a stable notion. According to Hatch (1993), culture is a pattern of basic

assumptions that given a group has invented, discovered, or developed in learning to cope with its

problems of external adaptation and internal integration and that have worked well enough to be

considered valid and therefore to be taught to new members as the correct way to perceive, think, and

fell in relation to these problems. According to Weber 91996), the greater number of cultural differences

in the organizations in combining top management teams the lower the effectiveness and the lower the

financial performance of the finalized merger.

According to Gill (Head of Organizational Development at ASDA) Never let the people in the organization

to get offside is the most important element of the successful change.

According to Pollit (2004), it needs five to seven years for the employees to feel truly assimilated into a

merger entity because the merger can change the nature, oreientation and character of one or both of

the merger partners. According to Mirvis and Marks (1992), due to theh multitude of these changes the

post merger period witnesses many problems of adjustments. The failure of Chrysler and Daimler-Benz

merger is because of the difference in culture because the operations and management were not

successful integrated as “equals” because of the different ways in which Germans and Americans

operated. The Daimler-Benz’s stressed a more formal and structures management style but whereas

Chrysler operated a more relaxed and freewheeling style. The two companies have different views on

different matters and mostly on the important matter like pay scales and travel expenses. As a result of

these differences and the Germans units increasing dominance, performance and employee satisfaction

at Chrysler took downturn (Nguyen and Kleiner, 2003).

2.9 IMPORTANCE OF COMMUNICATION IN MERGER AND ACQUISITION PROCESS:

According to Bastien (1987), a research shows that 21 managers been interviewed from three different

organization involved in Merger and Acquisition process and though that it has been concluded that

communication will increase the performance and reduce uncertainity. According to Pollitt (2004), a

business will be successful if there is a employee commitment and motivation. According to the author,

the business will not be successful if the employees are not committed to the organizations and also the

business will not be successful if the employees are not properly motivated by the top management.

According to Pollitt (2004), people must be kept informed of fundamental changes throughout the

process. According to the author, top level management needs to communicate small fundamental

changes in the process to the employees. Clear and open communication is very important for the

business and it is the essential part of any change take place in the organization. According to pollitt

(2004), without the communication there is a higher risk that people will not embrace change.

According to porter (1980), the top management needs to communicate the inter country factor cost

differences, specific environmental threats and opportunities and the motives and the moves of the

competitors to the employees in order to make profit and it is very important for the corporations which

is operating in the real time communication environment.

Information is very important and it plays a major role in the formation of organizational alignments,

transition strategies and the discernment of threats. According to Toffler and Toffler (1993), it is now

possible to do anything and it is possible to get any information. It is possible to track global sales via

designed software and to monitor foreign radio and television broadcasts. Database for everthing is

available and especially to identify locations where particular groups or individuals congregate, with

accompanying investigate background profiles on suspected individuals.

If there is no good communication and it can result in severe loss because poor communication can

result from understandable desires to delay public announcement of mergers in order to retain

customer confidence and maintain stock values. According to the author, this can definitely lead to an

atmosphere with full of rumours and suspicious with severe internal and external consequences.

According to Nguyen and Kleiner (2003), the frequent and honest dissemination of essential information

will give employees ownership of the process. It will help them to feel that they have contributed

significantly to make it a success.

According to Rifkin (1997), the top level management has to tell the information to the employees as

early as possible so it does not betray their trust later. “Communication early, often, and, honestly” is

one of the principles of Cisco’s Successful integration. According to Wyatt (1999), the failure of the

Mergers and Acquisition could have been easily avoided if more attention had been paid to elements

defined in the literature as “soft issues”. These so called soft issues comprise, amongst othe things, the

communication of information to the various stakeholders in the company.

2.9.1 FINANCIAL COMMUNICATION:

According to Heldenbergh etal (2006), for the good comapany’s identity among the public there are

events which the company’s needs to go for that is Mergers, Acquisitions and the restructuring. The

customers, shareholders and the suppliers may wonder whether these changes will effect on the

company’s mission, quality of the product, the company’s commitments, corporate results and the

climate of confidence surrounding its operations. According to Heldenbergh et al (2006), in today’s

world there is a lot Mergers and Acquisitions is taking place and for these kind of Mergers and

Acquisitions the financial communication has become a very important strategic tool directed at all

stakeholders. So before and after the Mergers or Acquisitions, the ins and outs of the company

operation need to be communicated to the stakeholders as a whole. According to Balmer and Dinnie

(1999), there are seven categories of actors identified who would constitute the most important target

audiences to whom financial communication has to be intensified. The seven categories are the

investors, the staff, the government, the suppliers, the clients, the local authorities. According to the

author, as we seen earlier that most of the Mergers and Acquisitions will not give the expected profits

because of this reason the various stakeholders in the organizations begins to worry before going for the

Mergers and Acquisitions

Among these stakeholders, Balmer and Dinnie (1999) identify seven categories of actors who would

constitute the most important target audiences to whom financial communication has to be intensified.

These seven main categories are: the staff, the investors (shareholders + bankers + bondholders), the

clients, the suppliers, the local authorities, the media and the government. As stated earlier, mergers

and acquisitions operations do not invariably produce the expected profits. For this reason, it is not

surprising that the various stakeholders in companies planning to undertake a merger begin to worry

about the outcome of the deal. Of course, this anxiety is mainly felt by those such as investors and

employees, who could incur financial losses because of the transaction and it is necessary to

communicate about the risky initiative (Heldenbergh etal,2006).

2.10 CAUSES FOR FAILURE OF MERGER AND ACQUISITION:

To all the organizations whoever is doing Mergers and Acquisitions needs to consist of the multiple

steps and the mistakes that are made in the integration process both in the pre-deal planning and

the post deal. According to Lynch and Lind (2002), the mistake will happen in three areas during the

pre-deal planning period.

1. Lack of Compelling Strategy: an organization is doing more than one merger in order to increase

the shareholder value. The other motives that drives the Mergers and Acquisitions activity is the

pressure in the environment or organization stagnation ic the clearly understandable but

questionable motive.

2. Overly optimistic expectations of synergies: There is a desire in the Mergers and Acquisitions

process. The desire for the mergers is to acquire one particular business of the target. The lack

of synergies and the negative impact of the integration process are the other pieces of the

business may be overlooked as a result.

3. Inadequate due diligence on the part of buyer and/or seller: only few organizations going for the

Mergers and Acquisitions activity will do a comprehensive risk assessment and the management

profile. According to the author, by doing this one organization will come to know about the risk

factors involved in the Mergers and Acquisition process.

According to Marks (1997), lack of experience of the acquirer’s management time with the mergers in

the major cause for the failure of the merger. According to the author, it is true all the organizations

needs to have a good experience in the merging process or else it will results in failure. According to

Lawrence (2002), the main objective of the successful acquisition is the value creation but the empirical

and the other studies still indicating the lower success rate for the acquisitions. According to Salama et

al (2003), value will not be created until the capabilities are transferred, and the people from both

organizations collaborate in order to create the ecpected benefits and the unpredicted opportunities.

.

2.11 MERGER AND ACQUISITION AND ITS EFFECTS ON EMPLOYEES:

According to Davy et al. (1989), whenever the organization is merges with the other other organization

the employees feel that they lost the control over the important aspects of their lives which actually

results in employee been stressed as a result lower productivity and reduced job satisfaction. According

to Marks and Mirvis (1985), rhe combination of uncertainity and the likelihood of change, both

favourable and unfavourable, produces stress and ultimately affects perceptions and jedgements,

interpersonal relationships and the dynamics of the business combination itself.

According to Schweiger et al (1987), there are five major issues regarding reactions by employees

involved in an acquisition.

1. Loss of talent;

2. Loss of identity;

3. Lack of information and anxiety;

4. Family repercussions; and

5. Survival becomes an obsession;

According to Marks (1999), if employees no longer see the potential for future growth within the

organization will result in loss in production. According to the author, if the employees no longer see

the potential for future growth like job advancement, progressive culture within the organization

the employee will feel stress and which results in the loss of production so it is the top management

duty to keep the employees happy in order to make profit. According to Levinson (1972), the chief

executive officer of the target firm will be most affected by the merger process. These people are

often the most innovative and creative people in their company. The resultant loss of control and

autonomy during a merger could be devastating to these individuals.

In an organization during the integration process sometimes the poor management and the

strategic planning will happen because once the merger deal is signed and sealed the top level

managers will remove from the equation. According to Nguyen and Kleiner (2003), a leadership

vacuum then results at the precise moment when the employees will be feeling uncertain about

their future and looking for the reassurance from powerful figure.

According to Yunker (1983), managers tend to ignore the most sensitive area frequently during the

Mergers and Acquisition process because if a company has a good environment to work by

employees, as reasonable in relations with labour unions, are critical attributes in attracting good

workers.

2.12 MERGER AND ACQUISITION AND ITS EFFECTS ON CUSTOMERS:

Communication delays with the customers about the Mergers and Acquisitions also results in failure.

The organization will get a negative outcome if it delays to communicate with the customers about the

Mergers and Acquisitions. According to the author, the organization can think why they need to

communicate the Mergers and Acquisitions process to the customers but in practical without customer

there is no business and the customer will feel unsure about their purchasing decisions because they

think which product is going to survive in the market and which product is going to discontinue. The

customers also feel afraid that the support personnel that they are dealing with will not be at the new

company after the merger. According to the author, the customer has got the shifting power so they can

easily shift to the other company product if they are not satisfied with the current product. In order to

avoid and also to retain the customer confidence the new company has to share the future product

roadmaps with the customers as soon as possible this will make them to feel secure about their

purchasing decisions. According to Nguyen and Kleiner (2003), the companys communication with the

customer is very important and also it is very important for the organization to assure its customers that

the service, support personnel and the sale people will continue to serve without any interruption.

2.13 MERGER AND ACQUISITION AND ORGANIZATIONAL CULTURE:

The Mergers and Acquisitions are generally driven by the financial and strategic consideration but still

many of the organizations alliances fail to meet the expectations because of the difficulties in the

acculturation process which would compromise the knowledge transfer and the learning to occur.

According to Salama et al (2003), the difficulties in the acculturation process could be a function of

either or both of the integration strategies or the incompatibility of the partner’s cultures.

The main source for the merger failure is because of the culture differences. According to Nguyen and

Kleiner (2003), a company can acquire a small or informally run company if it has a strict hierarchy and

rigid reporting and decision making process. According to Nguyen and Kleiner (2003), culture difference

is the only problem for the acquired staff and this can create a dissatisfaction and a insecure feeling

which will result in loss of productivity.

2.14 KNOWLEDGE CREATION:

According to Simpson (2000), IBM merger professionals says that looking after employees from both

sides of the merger can help mitigate losses of intellectual capital that creates exposure, of loss of talent

that flee to the competition, or even become the competition.

2.15 MERGERS & ACQUISITIONS IN AUTOMOBILE INDUSTRY:

International mergers are by no means unique in the automotive industry (Capron, 1999). According to

Donnelly (2005), the relationship between the Nissan and Renault needs to be contextualised within the

expansion of international markets, regional market integration, the internsification of competition and

the reduction in tariff barriers to the extent that Mergers and Acquisitions have become the most widely

used method of achieving growth particularly in ologopolistically structured industries. According to

Capron (2999), the horizontal mergers success rate is good when compare to the other classification of

mergers because in the horizontal type where two company which produce same goods will merger

together.

According to Capron (1999), merger rationale entails the potentialities in future market development

and access to a range of technologies. The success story of Renault and Nissan merger when the merger

took place between these two companies Nissan enjoyed strong market presence in the United States

and Asia whereas Renault was buoyant in Europe and Mercosur markets. They merger was undoubtedly

be of mutual benefit. Nissan’s main strength lay in its engineering technology whereas Renault offered

condiserable expertise in research and development. Additionally Renault’s product range was

complemented by Nissan’s reputation in pickups and off-road vehicles as well as in top of the range

models (Schweitzer, 1999).

Fifty to eighty percent of the mergers will fail not for strategic reasons but because of the poor

management of the integration process.

1. Conflicting corporate culture: The culture that makes one company great may be at direct odds

with the core values of the acquired business. New understanding by the acquirers and the

acquires, new relationship and new ways of working are all necessary, but not easy to achieve.

2. No risk management strategies in place: organization must prepare for multiple “what if”

scenarios. For changing conditions and the players the integration process needs to incorporate

back-up plans in order to achieve it.

3. Slow post-merger integration: what happen in the first 100 days after the close of deal is critical;

it sets the tone for the integration process. Moving too slowly allows natural inertia to set in.

The example of Chrysler corporation and Daimler-Benz merger. Their aim is to create 421,000

employees with a market value of $92 billion and the revenues of $130 billion. In the first year of the

post merger operation their revenues grew by 12% and the operating profits increased by 33%, their net

income rose by 30% and 19000 new jobs were created because of the good profit (Shelton, 2003).

The primary reason for any Mergers and Acquisition is to increase the market share and also to increase

the shareholder market value by cutting costs and initiating new, expanded and improved services.

According to the author, in most of the case it is happening totally opposite because most of the

Mergers and Acquisition results in failure. For example, initially the Daimler- and the Chrysler merger

were performing quite well and the people in both the organizations expected that their “merger of

equal” would allow each unit to benefit the other’s strengths and capabilities. In both the organizations

the shareholders overwhelmingly approved the merger and the stock prices and analyst predictions

reflected the optimism. But after the merger the Chrysler divisions performance was entirely different

and as a result the stock price fell by one half since the immediate post-merger high. Since then the

Chrysler division began to lose money and there were a significant layoffs in the Chrysler division after

the merger(Nguyen and Kleiner, 2003).

2.16 EFFECTS ON BRANDS IN AUTOMOBILE INDUSTRY:

According to Kim and Lavack (1996), brand extensions is needed for all new car models, capitalizing on

current consumer perceptions and positioning the new model within the brand family. According to the

author, in some cases the established model names have been continued for essentially new products

like Toyota Corolla, Ford Mustang and Volkswagen Golf which have been marked for more than two

decades with substantial changes. According to Chen and Chen (2000), brand dilution caused by

overextension of models and production quantities which have been observed in more prestigious

brands including automobiles. according to Leong (1997), although the same effect was not confirmed in

the case of master brands. The focus group and the market have researched the experiments of

negative impact of the extensions on brand dilution in the FMCG (fast-moving consumer goods) (Glynn

and Brodie, 1998).

The fragmentation of the market is increasing is the major dynamic in the merger activity. Accorfing to

Donnelly & Morris (2003), the emergence of a growing market for premium brands at the luxury end of

the trade has encouraged the big firms to bys the small and high quality companies to add to their brand

portfolio and so gain a presence in areas where they had been previously absent. According to Tully and

Donnelly (2001), the brand acquisition is more cheaper than the organiza growth and is financially less

risky and it saves the development costs.

According to Johnson et al (2005), it is impossible for the competitor to obtain the intangible assets of

the company such as brand, image and reputation. For example, if the competitor acquires the company

to use the brand but the reputation of the brand may not readily transfer to the new company.