Failure, Reasons and Values

Ways to Measure the Success of Merger and Acquisition

The ways to measure the success of merger and acquisition are as follow:-

• Achieving Strategic Goals and Objectives:- The first measure of success is the degree to which the merger has moved the combined firm towards achieving its strategic goals and objectives. It is important to understand that merger is not a strategy, but a means of implementing strategy. This difference is critical. A firm's strategy must be driven by clients and practices. The likelihood of a successful merger is higher when firms have identified and agreed upon their long-range business goals and the steps necessary to achieve them. Each firm should be able to articulate why merger will help them to achieve their long-term vision and improve on their ability to serve clients.

• Economic Factors:- The second type of merger success measures are economic ones, which are the most difficult to define. The corporate Return on Investment (ROI) measure really does not apply to law firm mergers. First, it is hard to quantify the investment, because law firms are not purchased. The investment might be the merger integration costs (e.g., technology), professional services relating to finding and negotiating the merger, opportunity costs for lawyer time spent on merger discussions and implementation, or some combination of these three things. It is also difficult to measure return because law firms do not show profits in the corporate sense. A law firm's profits are distributions to its partners, and it is hard to distinguish between the compensation portion and true profit. Finally, even if the partner compensation and profits were clearly delineated, or if assumptions were made regarding "notional salaries” for the partners, it would still be difficult to distinguish merger-related performance from either market factors or internal factors unrelated to the merger.

• Measure Change:- The third measure of success is the degree to which the combined firm has changed. There must be a change within the firm in order for a merger to be successful. If the merged firms maintain the status quo, then the combined firm has probably not moved forward. Firms that take advantage of their merger will make both internal changes (e.g., changing compensation structure, changing the practice management structure) and external changes (realigning practice groups, evaluating client relationships). It is important for lawyers from both predecessor firms to work together, which requires flexibility and willingness to change.

• Client Base:- The fourth measure of success is the additional clients or matters that the combined firm can attract These are clients or matters that neither firm would have been able to attract independent of the merger This is an external affirmation of the firm's strength and position in the market. It may be related to increased depth and the ability to handle larger matters, or increased breadth and the ability to provide additional services. One way to measure this is to look at the increase of work from existing clients. Of course, consideration should be given to market factors, such as a big case, which might skew the numbers.

Value Creation in Mergers and Acquisitions

The merger should be attractive to the shareholders of the companies involved if it increases the value Value creation may result from a number of factors such as economies of scale in production, distribution and management, a technology that can be best deployed by the surviving company, the acquisition Allow what distribution, and cross-selling of each other's products. However, experience shows that merger synergies de difficult to attain and their size can be disappointing. Acquisitions are sometimes made to re-deploy excess corporate cash and avoid double taxation of dividends to shareholders, but the tax argument may lead the acquirer to overreach into areas beyond its competency. Changes in technology and the globalization of markets have led to many recent mergers. These factors have created opportunities for mergers activities. The value of the merged firms appears to be greater than the sum of the components. This implies that value is created and increased by mergers, reflecting underlying economics and efficiencies of corporate fusion

→Shareholders of acquired firms during the period just before the announcement date of a merger or tender offer gain by about 15 per cent in mergers and about 30 per cent in tender offers. However, in earlier periods, the abnormal returns of acquired firms are negative, indicating that their managements were not performing-up to their potentials.

→Shareholders of acquiring firms for the period before the announcement dates realize modest positive  returns, but these are not always statistically significant in earlier periods, however, their shareholders' abnormal returns are positive, indicating that, acquiring firms previously had a record of successfully managing asset growth.

→Target residuals do not decline after the merger. This further indicates that the mergers, on average, are based on valid economic or business reasons. 

Value Creation in Horizontal Mergers

"Usually, conjunctions are called horizontal if the partnering firms produce the same or similar products". Similarly, "Horizontal conjunctions of firms are done by companies that are operating with the same products within the same markets meaning they are competing directly".

Horizontal conjunction reinforces the market position, i.e., the market share of the integrated firm. A strong market the position has advantages in negotiating with suppliers as well as with buyers. In addition to these synergy effects based on external scale economies, horizontal mergers can lead to a better cost structure based on an internal scale economy. The better cost structure is the result of a number of synergies effects such as:

→Specialization advantages, which result from possibilities of the division of labour in larger organizational units.

→Construction technology-related effects, according to which investment costs increase sub-proportionally with increases of capacities.

→Advantages, which the result from a reduction of spare part volumes for production facilities thanks to central warehousing

→The principle of least common multiples, according to which consecutive production steps reach the lowest Å level of cost at their least common capacity multiple.

→Economies due to lot sizes, as larger lots, can be produced and set-up costs can be lowered. In a nutshell, horizontal acquisitions can generate synergy effects based on economic synergy mechanisms as well as on resource-based synergy mechanisms.

Value Creation in Vertical Mergers

Vertical mergers increase the vertical integration of a firm by taking over a customer or a supplier. Similarly, “The merger is vertical if there has been a kind of buyer-seller relationship between the partnering firms and they thus seek integration along with the value chain", Value creation in a vertical merger can be done as:

→Vertical mergers and acquisitions mainly reduce market uncertainties, which results in lower transaction costs. These transaction cost savings include search and information cost to gather prices and product characteristics of suppliers, the cost for contract conclusion, as well as the cost for quality control, and other costs such as administration and taxation. At the same time, vertical mergers can reduce warehousing costs and increase capital turnover as stocks can be reduced.

→In a vertical merger or acquisition, a firm acquires a supplier or distributor, and the acquirer modifies and improves the value chain through calibration of various value drivers. For example, in the pharmaceutical industry, the manufacturer has the tendency to acquire the drug distributor to create more value by owning its own distribution source.

→Sometimes, vertical acquisitions lead to alienate some of the customers, even though there are chances of increasing the firm's performance. For example, PepsiCo discovered this effect after acquiring Pizza Hut, Taco Bell, and KFC. One objective of these acquisitions was to use the three restaurant chains as distribution channels to sell Pepsi's drinks. Soon, Coca-Cola convinced Wendy's and other fast-food chains that selling Pepsi in their stores indirectly benefited those of its competitor that PepsiCo owned. Later, PepsiCo spun-off its three food units to form Tricon, a separate entity. Thus, many firms balance the anticipated benefits of a vertical merger and acquisition having potential risks.

Value Creation in Conglomerate Mergers

M&A-transactions leading to diversification are conjunctions of firms that do neither operate in the same markets nor in the same industry. In the literature, authors often refer to this type of M&A transaction as a conglomerate. “In conglomerate conjunctions, partnering firms do not have any relatedness between their products and/or their markets.”

→Some conglomerate mergers and acquisitions might profit from better management. This corresponds to a transfer of scarce resources, i.e., management capabilities from one firm to the other firm.

→Synergy effect in conglomerate mergers is based on specific risk reduction, which lowers the cost of capital. “In unrelated acquisitions, where such efficiencies (internal synergy effects) are not expected to be present, value creation occurs nevertheless, and is associated with the co-insurance effect.” This synergy effect is based on external economics of scope.

→The co-insurance effect has been subjecting of an ongoing debate, in which opponents of conglomerate mergers and acquisitions argue that shareholders can achieve co-insurance effects better by diversifying their share portfolio and that diversified companies create less value than a portfolio of focused companies.

Reasons for Failure of Merger and Acquisitions

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• Limited or no Involvement from the Owners:- Appointing M&A advisors at high costs for various services is almost mandatory for any mid to large size deal. But leaving everything to them just because they get a high fee is a clear sign leading to failure. Advisors usually have a limited role, until the deal is done. Following that, the new entity is the onus of the owner. Owners should be involved right from the start and rather drive and structure the deal on their own, letting advisors take the assistance role. Among others, the inherent benefit will be a tremendous knowledge-gaining experience for the owner, which will be a lifelong benefit.

• Cultural Difference:- One of the major reasons behind the failure of mergers and acquisitions is the cultural difference between the organisations. It often becomes very tough to integrate the cultures of two different companies, who often have been the competitors. The mismatch of culture leads to deterring working environment, which in turn ensure the downturn of the organisation.

• Flawed Intention:- Flawed intentions often become the main reason behind the failure of mergers and acquisitions. Companies often go for mergers and acquisitions getting influenced by the booming stock market. Sometimes, organisations also go for mergers just to imitate others. In all these cases, the outcome can be too encouraging

• .Integration Difficulties:- Companies very often face integration difficulties, i.e., the combined entity has to adopt a new set of challenges in the changed circumstances. To do this, the company should prepare plans to integrate the operations of the combined entity. If the information available on related issues is inadequate or inaccurate, integration becomes difficult.

• Overestimated Synergies:- Mergers and acquisitions are looked upon as an important instrument of creating synergies through increased revenues, reduction in net working capital and improvement in the investment intensity. It is important to know the required capacity potential versus the current bandwidth of the merger.