In general, a merger can be defined as the integration of an acquired company into the existing, acquiring company. In terms of finance, an acquiring company purchases the majority of shares from the acquired company, thus merging both assets into one expanding share. A merger tends to be a permanent arrangement and usually the company who acquires the shares retains its namesake. The International Competition Network identifies three major types of merger transactions: Share Acquisitions, Asset Acquisitions, and Joint Ventures. A share acquisition is defined by obtaining a controlling equity interest in the target such that it can exercise ‘decisive influence’ over the target’s business operations. On the other hand, an asset acquisition is defined as a “buyout strategy” in which valuable elements – rather than shares – of a financially unstable company are purchased. Furthermore, the acquiring company can choose which specific assets or liabilities it wants to purchase. Finally, a joint venture is defined as a partnership between two companies which participate in a transaction of shared risks and assets for mutual benefit. Joint ventures are commonly proposed to domestic companies of a designated region by foreign companies who wish to expand their markets. In this transaction, the foreign company usually provides an advantage in technology and materials while the domestic company provides established contacts, brand recognition, and fulfillment of required government procedures.
Synergy: Main Reason for Mergers
Synergy is the belief that current productivity levels and overall value of two separate companies will be greater following the integration of both. The four elements which comprise synergy: cost, revenue, market power, and intangibles. A cost synergy implies reducing overall organizational costs of administration and sales, as well as promoting functional consolidation and optimizing sales force and distribution, among others. Revenue synergies are associated with increasing volume of sales by selling products throughout a variety of markets with the intention of reducing fixed production costs. Market power is related to the acquisition of a competing market in order to maintain or increase product prices. Finally, intangibles refer to the ability to successfully transfer expertise and brand-name power to the acquired company. Synergies provide a company with the motivation necessary to pursue a merger.
Supported by the various synergies are various strategic reasons for pursuing a merger. Five particular objectives to be fulfilled by mergers: geographic market consolidation, extension of technology, services or products, and geographic market expansion, among entering a new business and vertical integration – which is the process of becoming a supplier or distributor in order to increase company value.
Once a company has been acquired and the merger fulfilled, it is important to fulfill certain variables in order to achieve a smooth transition of company management. The level and speed of integration are crucial to organizational adaptation and will vary in success depending on applied integration strategy, organizational culture, and employed acculturation strategies. Acculturation refers to the process in which the acquired company adopts the acquiring company’s organizational culture as its own. It is argued that a successful integration of company values is a greater predictor of overall company progress than financial or strategic factors. An acquired company which retains a high degree of autonomy and cultural identity is indicative of a successful integration. However, a company which abandons its cultural identity and structure in favor of the acquiring company’s identity suggests previous failure and distrust of proper capacities to succeed. Quality of communication is also a fundamental factor in achieving post-merger success. Poor communication between organizations can lead to a perceived lack of trust and caring by the acquired company, as well as a decrease in commitment and satisfaction. In addition, the degree of retained autonomy displayed by the acquired company directly relates to the level of integration achieved by the company: A higher level of autonomy is suggestive of a low level of integration, and vice versa. Although a certain level of autonomy can be beneficial for the acquired company, it can prove to be counterproductive if it does not correspond to the defining terms of the merger acquisition.
Mergers and Importance of Organizational Change
Change provides a company with the opportunity to develop, expand, and progress. Future-oriented theories define organizational change as the process of setting, executing, and renewing company goals in order to achieve an ideal state of relevance and innovation. Similarly, life-cycle theories explain change as an externally-dependent process which evolves through various stages: birth (or emergence), growth (or development), maturation, and decline. Finally, dialectical theory compares organizations to multicultural societies with clashing values which generate change. In any case, an organization which embraces change demonstrates its capability to adapt and thrive on an ever-evolving marketplace. Similarly, employees who adapt to implemented organizational changes experience enhanced satisfaction in their performance, additional to as a greater sense of involvement in their work environment. If embraced properly, positively-promoted change can create a stimulating environment ripe for innovation, as well as a renewed sense of commitment to the company. Thus, effective leadership during transitional states of implemented change is crucial to decreasing employee stress while increasing overall productivity.