Introduction
Mergers and acquisition have recently gained popularity, after 2015. There were almost 3600 deals related to mergers and acquisitions, worth more than $310 billion. Just to mark the growth of mergers.[1] In the year 2015-16, the growth doubled to $23 billion and similarly, in the year 2017-18, the growth doubled to $56 billion[2]. There was almost 70% growth in the sector, led by distressed deals that initiated the corporate insolvency resolution process under the bankruptcy code[3]. There were various deals in mergers that took place in the technology and energy sector, which massively change the situation of mergers in India. There were various mergers like the Airtel‘s acquisition of Tata teleservices in the year 2019 or the acquisition of Jaypee cement by ultra Tech cement and The merger of Idea and Vodafone, in the year 2018, ONGC-imperial energy merger or few of the best and most successful mergers and acquisitions till date.
A merger is an agreement that unites two existing entities into a new company. The main motive of merger and acquisition is to expand the company, by either getting its market shares or by expanding new segments of the company. A merger and acquisition automatically increase shareholders value. As per Sherman and Hart, a Merger as “a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity.”[4] Whereas an acquisition as per Krishnamurti and Vishwanath “is the purchase of by one company (the acquirer) of a substantial part of the assets or the securities of another (target company). The purchase may be a division of the target company or a large part (or all) of the target company’s voting shares.”[5]
REASONS FOR MERGER FAILURES
When we think about mergers like Disney and Pixar, Mickey and Nemo, SIRIUS and XM radio, Exxon and Mobil etc. are all extremely successful mergers all around the globe. There are always two sides to a coin, if we have successful mergers there are quite many unsuccessful mergers. People always tend to appreciate successful mergers but never identify the reasons for merger failures. This research paper deems to focus upon various reasons for merger failure all around the globe and the ways to cope up from these figures. There can be various reasons for merger failures. These as listed as follows
1. Unrealistic expectations– Having unrealistic expectations can create a chaotic situation, during the time of the merger. In simple words, setting up logical or insensible Goals Leads to unrealistic expectations. Many times, employees are being demotivated, the executives make bad decisions, a firm faces huge losses. Companies instead of changing their strategies, try to convince employees that things will be better in future. This is also an unrealistic expectation when a company is not changing its strategy and following the bad strategy in hope of gains in future
2. Hidden secrets– Every company has black and white sites. While breaking a deal, the company puts forward the white side easily whereas the black side takes time to come out. There are chances that the acquiring company or the merging company has hidden secrets like hidden debts or any financial instability. Most of the times, to stay good in the eyes of the opposite party some essentials and crucial aspects are kept secret. These points are even not produced during the due diligence process. It is always advised to paint a picture of your company so that there are no future difficulties.
3. Inaccurate financial status- This is a very common issue, faced by various modules and acquisitions all over the globe. Many companies, published inaccurate financials so that the buyer company can easily get convinced. Most of the times, the seller records future projects and earnings, in the present time resulting in Inaccurate financials. Generally, if the data is incorrect, the company will continue working with the incorrect data. Strategies would be made in respect of the data provided. When the base of the merger is itself week, the merger ought to fail.
4. Limited Owner Involvement– Limited owner involvement or limited role played by the owner can be a reason for merger failure. In general situations, and owner of the company should be an active member and should participate in all the decision making. It is the work of the owner to strategise, structure and advises The members regarding the working of a company. When the owner does not actively participate, he loses partial control over the company and its activities. He does not know what sort of activities are going on within the company. For instance, a company is going into losses because of the working process. If the owner Is unaware such process would continue leading to extensive loss
5. Lack of proper communication- Proper communication is one of the most essential features, in every agreement or contract. If the purpose behind making the deal is unclear, the intention of the buyers and sellers is unclear then there is poor communication. If there is a lack of synergies and the buyers and sellers are unable to express the required results, all of this identifies poor communication. Not only this, but poor communication can also include a lack of communication between top-level Key managers and the employees. Whenever a company enters into a merger or acquisition, there should be an honest and clear publication of motive and intention. All the doubts should be clarified at the initial stage. All the levels of a company should be given a chance to put forward their point. Messages should be interpreted in the general sense and as per common sense.
6. No due diligence– Due diligence process is very necessary when going for a merger and acquisition. Most of the companies, especially though buyers prefer going for a due diligence process to know the seller company inside out. There are certain situations in which the due diligence process is ignored and the deal is cracked. There are long-term consequences, at various times The buyer company is unaware about the working structure, legal structure, human resource management, internal management etc. of the opposite company which may create consequences and chaos after the deal is done. This is one of the greatest reasons for merger failure.
7. Mismatch of culture– Mismatch of culture is another big factor due to which a merger failure occurs. If The companies have different cultural aspects then there are chances of low productivity of employees, leading to fewer profits. Culture involves the willingness of employees to collaborate, share, support and team together with a single motive. The culture of a company is Shaped by the founders of the company whereas it is influenced by the managers and the working staff of the company.
8. External factors- External factors may include the market position, competition, funding situation, loans in lending is of the company. If all of these are against the company, there are chances of merger failures.
9. Negotiation errors– In various mergers and acquisition deals, there are cases of overpaying to break a deal. Acquiring a company, on the basis of money without knowing the Working format, procedure, structure of the company, without going for a due diligence process will lead to a merger failure
10. Integration difficulties– Integration difficulties mostly faced by companies when the newly formed company has to follow or adopt a new set of challenges and regulations to place their position in the market. It is very difficult for the company to adjust as per the new circumstances. Various plans are made in form of strategies to help the company adapt to a new environment. This integration sometimes becomes a reason for merger failure, when there are inadequate efforts and inaccurate planning.
11. Geographical constraints– Graphical barriers cannot be overlooked. These play a significant role when it comes to cross-border mergers. Generally, when there is a cross-border merger, there is a need for double-layered articulations because of two different corporate’s merging into different nations with a different set of rules and regulations prevailing in the respective countries.
12. Ego clashes– Ego clashes remain one of the most prominent issues in any merger or Acquisition. It is very essential to check the compatibility of directors and the top-level management before entering into a merger deal. There can be clashes between the two executive members of both the companies or the same level members of any organization that enters into a merger. To avoid such difficulty or ego clashes, problems need to be resolved with a reasonable mind
13. Human Resource issues– Human resource issues also pose a threat to a merger. There are uncertainties, insecurity by the company because people tend to leave their jobs due to sudden change in the course of working or due to cultural or identity issues
14. Regulatory issues- It is very essential to bind a merger towards the regulatory framework manifested within the nation. A legal framework needs to be followed, to enter into a merger. If there is any carelessness the entire process stands invalid. There are chances that the Shareholders of the organization may create legal trouble to slow down the working of the company. This would create a loss for the company and increase the chaos.
The Story of Unsuccessful Mergers
- AOL and Time Warner
Whenever we talk about merger failures, AOL and Time Warner was a merger failure of $164 billion[6] can never be ignored. The merger took place during the dot-com bubble. Both of these companies were media companies, converted into a potential powerhouse. This was a major flop; the merger had faced $45 billion write-downs in 2003 and then a loss of $100 billion every year. The main reason for the merger failure here was the decline in the trend of using dial of internet access due to the dot com bubble. The CEO of Time Warner, Jeff Bewkes announced the demerger of Time Warner and AOL embarrassingly. There were unrealistic expectations, Agency problems, the new strategy could not be implemented efficiently due to the changing trends. Moreover, there were financial issues faced by the company hence they were unable to generate a higher bandwidth connection to on revenue from the internet search based advertisement.
- Quicker oats and Snapple
This merger failure is an example of overpaying. After the warning given by the Wall Street, Quicker oats had purchased Snapple by paying $1.7 billion[7]. Wall Street had warned saying that the amount is excessive, to acquire a company. There was bad management, the company did not know how to bring in skillsets and utilize the experience to initiate operations in the company. Within 27 months, quicker oats sold Snapple for just $300 million to a holding company. Quicker oats suffered a loss of $1.6 million every day. Quicker oats are one of the most desirable companies in today’s time, with a good brand reputation. It was able to survive as it had the ability to offset capital gains with losses generated from such merger failure.
- Sears and Kmart
This was an utter merger failure. Sears was in a dilemma as it was unable to grow because of the large companies prevailing like Walmart and target. Sears and Kmart were purchased by Eddie Lampert, a hedge fund investors in 2005[8]. Both of these companies merged to become holding companies to earn profits in the future. After a certain period also, Sears showed a degraded position where they were not able to earn profits. Sears stated the reason that they focus on soft good rather than hard goods hence there unable to compete with the giants. In the year 2017, Lampert was considered as the worst CEO in America whereas sears and its holdings are to be considered as the utter failure is of the merger.
- New York Central and Pennsylvania Railroad
The merger of these two companies took place in the year 1968. The merger was considered as one of the sixth largest mergers in American history. Later on in the year 1970, the company filed for a bankruptcy proceeding. In American history, this was the largest corporate bankruptcy to date. Both the companies were highly vulnerable. While coming into a merger, there was a change in trend from railways to planes and superhighways. The company had faced leadership conflicts and rigid regulations due to which the company had to file for bankruptcy procedure. Hence, this merger failure is proof that leadership conflicts can create a big mess within a company[9].
- eBay and Skype
This was also a huge merger failure. eBay had obtained Skype for $2.6 billion believing that communication technology would enhance communication and from the better connection[10]. eBay did not have a proper communication system; they only had one way of communication, through emails. After the merger, the Skype management team was changed almost 4 times in four years. After all these conditions, eBay sold 65% of the company shares to the Silver Lake, Canadian pension plan investment board and Andreessen Horowitz for almost $1.9 billion. This merger failure is an example of bad communication within the companies
- Google and Motorola
Google and Motorola are some of the most dominating market players today. Google is itself a mark of excellence. In the year 2012 android operating system had a good market share. It had obtained Motorola for around $12.5 billion to build top quality mobile devices to sell in the market[11]. Later on, Google figured out that the devices made by Motorola were of poor quality, they also promised that they would update their phones with the latest android versions. On the other hand, Google also had mergers with Samsung, LG and other business tycoons. Later on, Moto X gained some popularity but it was a failure. Hence this merger is an example of the bad functioning of the company, from the side of Motorola. The products were bad, the quality was degraded and it did not match Google’s grade.
- HDFC and Max life
HDFC and Max life, is an example of an Indian merger with Max life is the fourth-largest private insurance company. It is in form of a joint venture between Max financial services along with Mitsui insurance company. Mitsui insurance company holds 26% of the ownership. It is a Japanese company. On the other hand, HDFC is a joint venture between HDFC and standard life Aberdeen PLC and Standard life. This merger failed to qualify the sectorial authorities, IRBD under section 35 of the insurance act[12]. This section can prohibit any merger of the insurance company with a non-insurance company. The main motive to enter into the merger was to cut cost and avoid the difficulties in raising an IPO. This example is perfectly suitable for regulation failures.
- Cross-border Apollo Cooper merger
This is an example of a cross-border merger fair Apollo is an Indian listed company whereas Cooper tire and rubber Co. is a US-listed company. Cooper tire and rubber Co. is the second-largest tire company in the US and ranks 11th globally. It has a huge turnover of $4.2 billion. Apollo wanted to acquire Cooper tire which was almost 3 times larger than Apollo. Apollo was ready to pay all amounts in cash. Later on, after various failed attempts, Apollo purchased all the common shares in the company with a premium of 40%. Now this merger failed because of various reasons. Firstly the Cooper tire company did not provide its subsidiary with the latest financial statement in China. Due to which the management and workers stopped working consequently, there was less revenue generated there was a difference between the Chinese and Indian work culture, due to which there were cultural conflicts[13]. It created the impression that Cooper tire did not have any control over its subsidiary. The second reason for the failure was the steelworkers union who had the power to approve any change in ownership. The Steelworker Union lodged a lawsuit against Cooper when they attempted to settle it for their benefit. Apollo refused to sign a collective deal with the Union but refused that the price it paid for Cooper would be changed in the same way. This was opposed by the subsequent assertion that Apollo was aware of the deal between the Union and Copper and that no price change was justified.
- Flipkart Snapdeal merger
Flipkart and Snapdeal are one of the largest shopping platforms in India. Snapdeal had various mergers with Softbank telecom Corp, Alibaba, Nexus venture partners, Kalkari capital etc. All the stakeholder companies had a view that they should practise mismanagement even if they have only 6.5% shares of the company apart from making decisions. Before the Flipkart Snapdeal merger, Snapdeal had various mergers including one with free charge. But Snapdeal did not revive any merger and later on sold the companies. Flipkart was a private limited company, with key investors like eBay, Naspers, Softbank vision fund, Steadview capital. Softbank and was of the view that the company should adopt different strategic options. The major reason for the failure of this merger war that Snapdeal had a huge tax liability because of a very complex structure. Secondly, employees did not have unity; they always had negative thought or disappointment amongst themselves. Moreover, there was no consensus because there were so many shareholders[14]; the issue of differential payout arises to the investors. Moreover, the non-solicit clause of Flipkart of five years would create conflicts in the future as it was an e-commerce company. Hence the merger was called off with Flipkart.
Conclusion- It’s Time To Buck-Up
This was all about the merger failures, all around the globe and in India. All the reasons highlighted above can be considered as the major reasons for merger failures in India. Generally, it is a growing field there are various upcoming mergers but then these mergers instantly fail. All of the considerations need to be kept in mind. Every buying company needs to go through a strict due diligence process; the companies must understand the motive and intent of entering into a merger or acquisition. Moreover, there should be a cultural balance maintained within the company formed. Strategies and planning should be done by top-level management reasonably, keeping ego clashes aside. The cultural difference remains a major reason for merger failure. Generally, this happens in a cross-border merger where two different cultures have to merge together, to make the company work. If a company positively handles the Difference in culture, by showing unity and acceptance, that could be fewer failures. This will indirectly help the employees to adapt themselves to the changing environment, which in turn will save the jobs and people will not leave this merger company. Apart from this proper communication should be done between the buying and selling parties, so that there is no confusion at a later stage. No company should hide secrets, especially financial secrets that may cause uncertainties in the future. There are conflicting situations and hurdles in every merger, do you know the difference of opinion or changing environment. Such a need to be handled critically, by setting up different goals. A merger should be entered after due consideration from the stakeholders. If all of these processes work perfectly with a systematic legal regulation, mergers would no more be a failure.
[1] 5 Biggest Mergers and Acquisitions in India!, Trade Brains (2020), https://tradebrains.in/biggest-mergers-acquisition-india/ (last visited Oct 15, 2020).
[2] Our Bureau, Mergers and Acquisitions activity records 70% growth in 2018: Study @businessline (2019), https://www.thehindubusinessline.com/companies/mergers-and-acquisitions-activity-records-70-growth-in-2018-study/article29520189.ece (last visited Oct 15, 2020).
[3] ibid
[4] Krati Rajoria, Mergers & Acquisitions in Banking Sector: An analysis of the current position in India, 2 International Journal of Scientific Development and Research, https://www.ijsdr.org/papers/IJSDR1711002.pdf
[5] Krati Rajoria, Mergers & Acquisitions in Banking Sector: An analysis of the current position in India, 2 International Journal of Scientific Development and Research, https://www.ijsdr.org/papers/IJSDR1711002.pdf.
[6] Mathew Ingram, Here’s Why AT&T and Time Warner Is Worse Than the AOL-Time Warner Deal Fortune (2016), https://fortune.com/2016/10/24/att-time-warner-aol/ (last visited Oct 15, 2020).
[7] Margaret Webb Pressler, QUAKER OATS AGREES TO BUY SNAPPLE The Washington Post (1994), https://www.washingtonpost.com/archive/business/1994/11/03/quaker-oats-agrees-to-buy-snapple/0e801539-940b-40b8-af64-a8e3407c9ddd/ (last visited Oct 15, 2020).
[8] Michelle Celarier, Eddie Lampert Shattered Sears, Sullied His Reputation, and Lost Billions of Dollars. Or Did He? Institutional Investor (2018), https://www.institutionalinvestor.com/article/b1c33fqdnhf21s/Eddie-Lampert-Shattered-Sears-Sullied-His-Reputation-and-Lost-Billions-of-Dollars-Or-Did-He (last visited Oct 15, 2020).
[9] Top 10 Best (and Worst) Mergers of All Time, CNBC (2014), https://www.cnbc.com/2009/12/29/Top-10-Best-(and-Worst)-Mergers-of-All-Time.html (last visited Oct 15, 2020).
[10] Ken Belson, EBay to Buy Skype, Internet Phone Service, for $2.6 Billion The New York Times (2005), https://www.nytimes.com/2005/09/13/technology/ebay-to-buy-skype-internet-phone-service-for-26-billion.html#:~:text=EBay said yesterday that it,on its online auction site. (last visited Oct 15, 2020).
[11] Christopher Mims, Why Google just sold Motorola to Lenovo for $3 billion Quartz (2014), https://qz.com/172207/why-google-just-sold-motorola-to-lenovo-for-3-billion/ (last visited Oct 15, 2020).
[12] Section 35 in The Insurance Act, 1938
[13] Sumeet Chatterjee, Apollo’s failed Cooper deal sows doubt on future India M&A mint (2013), https://www.livemint.com/Companies/F9YpTuzQXhwMw6PbWHqUUN/Apollos-failed-Cooper-deal-sows-doubt-on-future-India-MA.html (last visited Oct 15, 2020).
[14] Pti, Complexity of deal derailed Flipkart-Snapdeal talks: Sources The Economic Times (2017), https://economictimes.indiatimes.com/small-biz/startups/complexity-of-deal-derailed-flipkart-snapdeal-talks-sources/articleshow/60023152.cms?from=mdr (last visited Oct 15, 2020).
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