WHAT IS THE SECRET RECIPE FOR SUCCESSFUL MERGERS AND

ACQUISITIONS?
Like most things in life there is no secret recipe for successful mergers. A
well-etched strategy, astute management team and an eye for details is what
encapsulates the essence of the successful merger. While the strategy is
important for most mergers, cultural compatibility is the soul of the merged
entities.

Boost Team Productivity

Most of these mergers gather immense media attention, while some just
happen in a hush-hush way. But that’s not what is important. What actually
matters is how many of these stand the test of time and how many remain a
memory at best. Before finding out more on this let us first try to comprehend
as to why mergers happen in the first place. Why do two independent entities
come together to forge a new relation when they can make way on their own?
Sounds akin to marriage isn’t it? Well, yes. Mergers, just like marriages, have
a lot at stake. It is a make or break situation at the end of the day! One
miscalculation can cascade into trillions of losses, and well who wants that?

WHY MERGER AND ACQUISITIONS?

Primarily value creation or value enhancement is the goal of any merger.
These are business combinations and the reasons are based on pecuniary
elements.
Let’s take a quick look at some of the reasons behind mergers.
#1 – CAPABILITY AUGMENTATION:
One of the most common causes of merger is capability augmentation
through combined forces. Usually companies target such a move to leverage
expensive manufacturing operations. However, capability might not just
pertain to manufacturing operations; it may emanate from procuring a unique
technology platform instead of building it all over again. Capability
augmentation usually is the driving force in mergers in biopharmaceutical and
automobile companies.
#2 – ACHIEVING COMPETITIVE EDGE
Let’s face it. Competition is cut-throat these days. Without adequate strategies
in its pool, companies will not survive this wave of innovations. Many
companies take the merger route to expand their footprints in a new market
where the partnering company already has a strong presence. In other
situations, attractive brand portfolio lures companies into mergers.
#3 – SURVIVING TOUGH TIMES
Global economy is going through a phase of uncertainty and combined
strength is always better in tough times. When survival becomes a challenge,
combining is the best option. In the crisis period, 2008-2011, many banks took
this path to cushion themselves from balance sheet risks.
#4 – DIVERSIFICATION
Sensible companies just do not believe in keeping all eggs in one basket.
Diversification is the key. By combining their products and services, they may
gain a competitive edge over others. Diversification is simply adding products
in the portfolio.
#5 – COST CUTTING
When two companies are in the same line of business or produce similar
goods and services, it makes perfect sense for them to combine locations or
reduce operating costs by integrating and streamlining support functions.
This becomes a large opportunity to lower costs. The math is simple here.
When the total cost of production is lowered with increasing volume, total
profits are maximized.

Out of the many mergers that grace the headlines every day, let us pick two
examples and study their cases. Let us delve and find out whether they were
successful or met with a harsh fate.

ADIDAS-REEBOK CASE STUDY

Adidas-Salomon AGÂ in 2005 announced its plan to acquire Reebok North
America in 2005 at an estimated value $ 3.78 billion. Adidas offered to pay
over 34% premium over last closing price for Reebok. This was a mouth-
watering deal for Reebok, as it was also facing a tough competition from Nike,
Adidas and Puma.
The footwear market in North America was mainly dominated by Nike with a
36% share. Increased market share and cost cutting through synergies were
clear-cut strategies for both Adidas and Reebok. Adidas with its quality
products and Reebok with its stylized quotient, planned to capture the scene.
Combined core competencies formed a revamped portfolio which had:
- Adidas sports with Reebok’s womens’offerings
- Adidas footwear with Reebok apparel
- Adidas globalpresence & Reebok’s US strength

Revenue from footwear segment of Nike, Adidas and Puma from 2010 to 2015 (in billion $)

Sales revenue increases by 52% in 2006, representing the highest organic

growth of the Adidas group within last eight years. It was the first time in the
group’s history that it crossed the benchmark of EUR 10 billion.

WHAT LED TO THE SUCCESSFUL MERGER OF ADIDAS REEBOK?

#1 – CULTURAL BLEND
The culture of Adidas and Reebok effortlessly merged and gave a new
identity to the organization. Distinguishing factors were many. Adidas is
originally a German company and Reebok an American entity; Adidas was all
about sports, while Reebok redefined lifestyle. However, proper
communication, clear strategies and effective implementation did the job.
#2 – A PERFECT BLEND OF INDIVIDUALITY AND UNION
Maintaining both brands (keeping established market share). Adidas-Reebok
is one such merger where both the companies managed to create a portfolio
of new offerings while keeping their individuality intact. There exists a threat
of cannibalization where one brand eats into the others’ consumer spread.
However, Adidas Chairman and CEO Herbert Hainer clearly stated “it is
important that each of these brands must retain their own identity.” While
Reebok capitalized on its strong presence with the youth, Adidas focused on
its international presence and high-end technology.
#3 – ECONOMIES OF SCALE:
Adidas benefitted from enhanced distribution in North America, where Reebok
already has a strong foothold. Increased operations naturally translated into
reduced cost across each front of the value chain such as manufacturing,
supply, distribution and marketing.

There are many mergers that however meet with an adverse future. They fail
to do a pre and post-merger analysis and both companies end in shambles.
One such case in the recent past has been Microsoft-Nokia merger.

MICROSOFT-NOKIA MERGER CASE STUDY

When Microsoft was getting stifled by Apple and Android devices, it decided
to merger with Nokia as a last ditch attempt in 2013. Joining hands with an
already existing device manufacturer seemed to be more convenient than
creating the business organically.
However, the deal proved to be a sour one. Microsoft has shifted much of its
$7.5 billion acquisition into other divisions of the company, announced mass
layoff for Nokia employees, cut down its output of smartphones per year, and
eventually wrote off the entire acquisition price in a $7.6 billion impairment
charge.
Meanwhile, Nokia’s market share declined from a peak of 41% to its current
level of 3% despite Microsoft support.
WHAT ACTUALLY LED TO THE FAILURE OF MICROSOFT NOKIA
MERGER?

DESPERATION DOESN’T LEAD ANYWHERE

Rather than growing through a shared vision or common passion, both Nokia
and Microsoft were shoved into a corner and considered the other as their
Knight in shining armour.
FAILURE TO UNDERSTAND MARKET TRENDS AND DYNAMICS:
Even after two years of Windows Phone-powered Nokia handsets, Microsoft’s
operating system captured a mere 3.5% of the smartphone market. This was
a strong indication that developers are unwilling to invest resources into
creating applications for Windows-based phone. The mobile phone industry is
not just about hardware and software. Applications, e-commerce, advertising,
social media applications, location-based services, and many other things
matter today. The software on the phone wasn’t compatible or appealing
enough for the entire ecosystem.
So it’s pretty evident that mergers are fraught with complications. Without
thorough due diligence and careful executions, these big-ticket mergers are
sure to be doomed. It’s a phase of transition and any transition in business is
not easy. customer integration, leadership change, product portfolio revamp,
is a lot to deal with.
It is commonly believed that the failure rate among mergers and acquisitions
is a whopping 83%. A merger is considered to be successful, if it increases
the combined firm’s value. But an important aspect to consider is that to
sustain the positive benefits of any merger is ensuring the post-merger
integration is successful. To begin with let us understand what the key
ingredients of a successful merger are:
IDENTIFYING RIGHT REASONS FOR MERGER
Like every long term relationship, it’s imperative that mergers also happen for
right reasons. When two companies hold a strong position in their respective
arenas, a merger targeted to enhance their position in the market or capture a
larger share makes perfect sense.
However, companies fail to realize this. Many consider mergers as last ditch
effort to save their flagging position. We just read what happened in the
Microsoft-Nokia case. Both these giants where facing severe threats from
Android and Apple, so the merger was more out of desperation. So the result
is a failed attempt. But if we see the case of Adidas-Reebok, we can
understand that these were two brands that had strong presence in their own
field. The combined forces augmented their footing in the market and led to a
successful merger.
#1 – HAVE AN EYE FOR RISKS
Merger is an extremely significant move for each company involved. It’s a
tight ropewalk and even a small slip can lead millions down a drain. Timely
identification of weaknesses, risks and threats whether internal or external,
can save huge M&A costs and efforts. Internal risks can be cultural frictions,
layoffs, low productivity or power struggle at the helm, while external risks are
low acceptance of products through combined synergies, sudden change in
market dynamics, regulatory changes etc. Yes it’s not possible to be so
impeccably far-sighted, but precision in dealing with things is a must.
#2 – CULTURAL COMPATIBILITY
While absolute cultural congruency is not always possible, it is always
advisable to find the closest fit while planning a merger. Both companies must
recognise their similarities and more importantly acknowledge their
differences. Then can they strive to create a new culture, which reflects the
corporate beliefs to the core. The creation of a brand new identity with
employee support leads to a sense of belongingness and persevered efforts
towards a shared goal. So for employees its new culture, new goals and a
new future.
#3 – MAINTAINING KEY LEADERSHIP
As much as it is required to identify the correct reasons for merger, it is
required to retain the correct people after merger. The success of a merger
hinges on seamless transition and effective implementation. Many companies
take too long to set the key leadership in place, thus creating confusion and
apprehension. Choosing whom to retain and whom to let go is a dicey game.
But this is where judgdement skill has to play a role. If the pillars of each
company are retained judiciously, the path becomes easier. However, if
employees feel out of place since beginning, they may drift apart leaving a big
vacuum in the newly merged company.
#4 – COMMUNICATION IS THE BASE
Studies by McKinsey proved that “management of the human side of the
merger is the real key to maximizing the value of the deal.” Effective
employee communication and culture integration are most difficult to achieve,
but have maximum importance in merger success. The International
Association of Business Communicators (IABC) indicated that most of the
merger communication budgets globally have been spent on external
communication rather than internal communication. Conveying the decision to
merge at the appropriate time helps to reduce a lot of uncertainties both in the
pre and post-merger stage. Uncertainties lead to speculation and weaken
trust. Grapevine only results in loss of productivity. The more open the
communication, the better it is.
CONCLUSION: SUCCESSFUL INTEGRATION IS CRITICAL
Actually it is the post-merger implementation that decides the fate. It is how
the newly formed relationship is nurtured. There is stress of performance in
core-business areas amid changed circumstances. The time pressure is
tremendous. Unlocking synergies quickly and support from key personnel is
critical at this juncture.
Mergers must take place for strategic reasons, such as improving competitive
capabilities, expanding footprints, achieving economies of scale, boosting
customer base, testing new geographies, enhancing brand equity etc, rather
than superficial reasons such as tax benefits or saving oneself from market
risks. Mergers, must be considered as means to fulfill far greater strategic
outcomes rather than mere ends in themselves.
https://www.wallstreetmojo.com/successful-mergers-and-acquisitions/