3. Research on Mergers and Acquisition
3.5 Contribution of Chapter 3
a collaboration. This is bynature more of a neutral merger than an acquisition. The objective is to reach a fair deal for both companies, but some of the problems that arise are related to the way in which the combination is communicated to personnel and the inability to follow up on hasty promises (Buono and Bowditch, 1989). In contested combinations only one of the companies wants the deal, or the companies would prefer completely different arrangements (Buono and Bowditch, 1989). In this scenario, some of the main problems involve a high level of hostility, adversarial interactions between the companies, and profound opposition during the integration stage (Buono and Bowditch, 1989). Finally, raids are the most hostile type of M&As (Buono and Bowditch, 1989). During raids, one company takes over another by bypassing management and directly asking shareholders to sell their shares (Buono and Bowditch, 1989). The problem raids include dealing with the highest level of employee resistance and the greatest amount of uncertainty for the target company (Buono and Bowditch, 1989).
potential synergies, and the leverage of positive synergies of combining company X with company Y is inhibited by dysfunctions and barriers, stemming from lack of organizational fit or failures in the management of the M&A process. The combination potential is defined as “the combination of strategic and organizational fit at the closure of the deal, time = 0”. Strategic fit determines which degree of integration is needed, and organizational fit sets the premises for it being reached.
These are the preconditions. However, the actual leveraging of synergies is not only dependent on the precondition but also on how the post-M&A integration process is managed.
This chapter has presented theories that seek to explain key aspects of M&A. An aspect to consider in the later parts of this thesis is the complementarity of the three strands, how they explain different aspects of getting from an initially promising setup to a final outcome of realized synergies. Based on what has been presented in this chapter, a full account of the relation between IS integration and the general M&A process must incorporate: a) the synergetic potential, b) attributes of the desired organizational integration, and c) the general integration process as context of the IS integration. Table 3.2 summarizes the key concepts in the three areas and Table 3.3
Figure 3.7 An integrative model for the M&A literature.
Positive Synergies
Company X Company Y
Integration barriers
Time = 0
Post-M&A: Integration process Combination
potential
Actually leveraged synergies
Pre-M&A: Due Dilligence Time
Degree of Integration
Organizational fit Strategic fit
summarizes relations among the key concepts which are graphically presented in Figure 3.8.
Table 3.2 Classification concepts in Chapter 3
Key concept Description Classification Indicative references Synergetic Potential
Technical economies
Scale economies that occur when the physical processes inside the firm are altered so that the same amounts of inputs produce a higher quantity of output, or the same quantity of output is produced using fever resources.
Marketing, Production, Experience, Scheduling, Banking, Compensation
(Howell, 1970;
Shepherd, 1979)
Pecuniary economies
Correspond to the firm’s capability to dictate market prices by making use of market power achieved primarily by size.
Monopoly, Monopsy
(Porter, 1980;
Shepherd, 1979) Diversification
economies
Diversification economies are achieved by improving the firm’s performance relative to its risk attributes, meaning to spread risk among unrelated markets and products through a strategic product portfolio
Portfolio management, Risk reduction
(Higgens &
Schall, 1975;
Lewellen, 1971)
Organizational Integration Degree of
integration
The aspired level of integration is not always complete absorption, but can rather be of different degrees
Holding, Preservation, Symbiosis, Absorption
(Haspeslagh &
Jemison, 1991)
Intentions & Reactions Friendliness/Hostilit
y
The continuum depicts different levels of “hostility” based on the acquired units state before the M&A and the purpose of the takeover.
Rescue, Collaboration, Combination, Takeover
(Pritchett, 1985)
Reaction Humans are considered key components of modern organization and an M&A can trigger extensive resistance and employee turnover
Turnover rate, Level of distrust
(Napier, 1989;
Buono &
Bowditch, 1989) Phase-models Phase models of 2-8 phases depict a
pre-M&A phase where organizations are preparing and planning for the act. After the deal is closed, the work of making the two units function together begins.
pre-M&A, post-M&A
(Aiello &
Watkins, 2000;
Haspeslagh &
Jemison, 1991)
The synergetic potential was suitably summarized by Lubatkin (1988) into technical, pecuniary, and diversification economies. Based on the expected synergies, different degrees of integration were needed. The scale ranges from holding, via preservation and symbiosis to complete absorption (Haspeslagh & Jemison, 1991). Not only are the resources needed to achieve the required degree of integration dependent on the type of relation (see Chapter 2; pooled, sequential, reciprocal), but in
international M&As, cultural differences frequently act as barriers to integration. Finally, three concepts that focus on the M&A process have been discussed. Prior research has variously differentiated the M&A process into different phases. Although several phase models exist dividing the process into 3, 4, 5, 6, 7, and even 8 phases, they build on much the same logical progression and basic structure of one pre- and one post-M&A part. The relation between the two companies previous to the M&A has shown great significance for the final outcome.
Whether the deal is a hostile takeover, contested combination, collaboration, or also possibly an organizational rescue is correlated to the way people react to the initiative.
Table 3.3 Relational concepts in Chapter 3
Relation Concept Description Indicative references Synergetic potential – Organizational integration
Integration mode
The degree and mode of integration should be dependent on synergies expected as higher levels of integration are resource demanding. In chapter three it was explained how different kinds of synergies were leveraged by different levels of integration.
Leveraging monopoly synergies do not demand integration to the same extent as production or scheduling synergies.
(Haspeslagh &
Jemison, 1991)
Organizational integration – Intention and reactions
Resistance Resistance among employees may cause integration problems. Giving it a thought, it makes a lot of sense.
If one strives for higher degrees of integration, it is not a good idea to have workforce opposing you.
What Buono and Bowditch contributed was insight that helps understand when and why people are opposing the integration in order to avoid such situations.
(Buono &
Bowditch, 1989)
Organizational Integration
Intentions and reactions
Figure 3.8 Relations between key constructs in Chapter 3
Synergetic potential
Chapter 2 gave an account for key concepts in the first theoretical fundament of this study – IS and IS integration. This third chapter has introduced the second theoretical fundament, theories of M&A. Thus far the fields have been pursued largely in isolation from each other.
The next, Chapter 4, will focus on research on the intersection of the two fields: IS integration in M&A.