This blog is written by Mr. Sachal Aftab, Associate Taxation Services. Sachal Sahib is one of the more talented and bright Associate of our Firm. This is a well crafted and brilliantly explained blog. Please read this blog and provide your valued comments.
Since 1980’s Mergers & Acquisitions have become a routine phenomenon for the companies to grow in size and expand their revenues and explore new product markets. Today the largest of the organizations, whether in Tech, Financial Services, Energy, Real Estate, Retail, Consumer Discretionary, FMCG, Health Care and so on are the result of only two magical words, “ M & A”.
These organizations have become larger than countries. In fact they boast so much power that by controlling the markets they maneuver individual life at every scale. They lobby for their candidates to hold power in politics. They wage wars. They shape attitudes, behaviors, routines, rituals, perceptions and even experiences.
Such organizations have so strong financial muscles that most of them are simply larger than countries. Their cash stacks sometimes surpasses reserves held in national treasuries. These organizations are the largest employers and influencers.
All that my friend is the result of two sweet sugar coated words, M&A, but believe me they create monsters that scare the hell out of you….
How come this came to happen? What is so mystical about M&A? Why it is important?
In the first half of the 20th century businesses and companies used to grow by merely capitalizing profits, commissioning large scale CAPEX, floating IPO’s and other similar techniques. But then there were many associated problems with such methods. Such as commissioning the whole new project had issues like, whether will it reap expected returns, cost of training and development of the workforce, no experience with new business line etc etc .
Then came in cunning and edgy investment bankers tossing an idea which will drown them in **** loads of money, fat bonuses, beckoning bonanza of corporate hegemony, sky high ambitions and god knows what . . .
The idea was so simple that it gives a laud laughter. They told fat & lousy businessmen, instead of commissioning and erecting new businesses, just acquire them or get merged with the already established names, find your targets who are like minded and simply wed both businesses. Who gets into the hassle of building again from the scratch!
Executives undertake M&A as a means to create value, acquire technology, products, market access, creating economies of scale and establishing global brand values. It is usually understood that most markets provide revenue to usually only three large businesses and if more than three exist, M&A becomes irresistible.
First such corporate behemoth was created in 1982 by merging Thomas Edison’s Edison General Electric Company with Thomas Houston Electric Company, and the new company is known as General Electric.
Before merger, the earlier was making lamps and the later was making electric motors. After the merger they became the largest enterprise and held that title for 121 years. Producing Aircrafts, Engines, Electrical distribution. Electric motors, Energy, Finance, Oil & Gas, Healthcare, Lighting Equipment, Locomotives, Software, Water, Weapons and Wind turbines.
Similarly, others followed and subsequently started reigning this planet.
So to put it in simple words, M&A is about combining two separate and distinct entities so that the new entity, which emerges as a result, obtains the synergies, expertise and efficiencies of both entities. The new bigger entity has competitive advantage over its rivals and competitors and more clear strategies to serve its long term objectives.
One of the most important factor for a successful Merger or Acquisition is the distinct culture of each entity that is being merged, into one entity. This is so crucial that, it is often said that one in three mergers or acquisition fail to harness desired value because of failure in integrating cultures.
Culture consists of long established and implicit values, beliefs and assumptions that are shared by everyone in a company or society. It influences how people behave and interact with insiders and outsiders.
Learning about the culture is important but often overlooked in the process because of the heat of the deal and both the parties are usually in a hurry to close it ASAP. And on the contrary it will look very funny if a potential deal, no matter how lucrative is called off merely because of the mismatch of cultures.
Integrating cultures comes from top down decision making tranche of the organization. From executives down to workers. It is workers who actually build, carry and nurture culture for an organization. Usually they are made first to adopt to soft factors first, which prevail in the acquirer, such as dress code, communication style , using of similar systems and procedures or even use of specific jargons.
Small teams, consisting of same hierarchical level, from both parties are given critical tasks with tight deadlines to be delivered. In this way they began to know each other and develop work relationship which helps ease the friction of the whole process and make each other acceptable.
Positive and motivating tales are told about the other party to encourage the workforce to not only accept the new reality but to have enthusiastic willingness for embracing it. Any uncertainty and fear should be removed. Doubts must be cleared and a new successful story be told about work methods, learning, cost savings, systems, skills and targets. Communication skills must be enhanced and encouraged. Dead weights must be removed and in the end grim and risk averse must be dealt with to avoid slacks.