Essay: Acquisition Integration Matrix

1. Introduction – Luis
The present project corresponds to an academic research developed as part of the Macromedia University of applied sciences master’s class “Strategy and Innovation Processes”. The study addresses the Acquisition Integration Matrix as a research topic and explores its implications on how a company adopts its various integration approaches over a given period. The study explores in depth the applications of each approach from the Acquisition Integration Matrix and intertwines them with real cases that have had great impact in an organization.
The study finds its relevance when understanding the importance of concepts that the authors of this project found were not well defined from previous studies. In addition, the group illustrates the definitions by doing comparisons and by giving examples to clarify the concepts.
The project is designed for academics, students, researchers and interested parties that seek comprehension related to the main implications of the Acquisition Integration Matrix in conjunction with the Acquisition Process.
1.1 Project Objectives – Luis
Considering the relevance of the Acquisition Integration Matrix in matters of a strategic method that a company should implement, the project clarifies core concepts and utilizes real examples to give a better understanding of the research topic. In other words, the study aims to give a clear structure to define the concepts related to mergers and acquisitions and deepen the strategic method of the Acquisition Integration Matrix.
1.2 Project Overview Luis
In order to achieve a good understanding and formulation of the project objectives, the current project presents an efficient structure, with a logical evolution of concepts and connected ideas. The present study is divided in four main chapters, which mainly aims to clarify concepts and analyze important contents. The first chapter corresponds to an overview which provides a clarification of main concepts that have been misused in previous studies. Here, it is developed a complete understanding about Organic Development, Strategic Alliances, and Mergers and Acquisitions. This section compares definitions and sets differences between these strategic methods.
The next chapter explores the motives or reasons why companies are applying Mergers and Acquisitions as an overall strategy. In that matter, the applicability of Mergers and Acquisitions are presented. This stage is important to understand the relationship of Mergers and Acquisitions with the Acquisition Process and the Acquisition Integration Matrix.
The third chapter corresponds to the description of the Acquisition Process. In this chapter, the project presents two stages: the beforesale stage and the aftersale stage. Here, the project defines the steps that an acquiring company takes while taking over a target company.
The fourth chapter explains in depth all the five strategies regarding the Acquisition Integration Matrix. In this section, each approach from the matrix will be explained in conjunction with a real case example from wellknown companies worldwide.
At the end of this project paper, the authors present the main limitations found from the various case examples. In addition, the key learnings of the understanding from the complete study are presented.
2. Research Topic Overview Felix
This section explores the overall strategic methods companies consider when looking for an improvement in competitive advantage and strategic growth. This part describes the concept of Organic Development and Strategic Alliances. Nevertheless, the focus of this study is on Mergers and Acquisitions as a strategic method. This stage is important to give a primary understanding of core concepts.
2.1 Organic Development – Felix
Organic development is the implementation of a strategy to develop a company’s own capabilities by relying on its own resources. In the process of developing these capabilities, companies have the option to optimize sales and marketing capabilities in order to improve their commercial activities. In addition, they can enhance their services by creating new products. Another option is to invest in existing highly productive activities to reach an economy of scale. (Johnson et al., 2017).
Applying organic development offers five main benefits. (Johnson et al., 2017).
The first benefit is knowledge and learning. It is defined by the ability to improve knowledge while applying existing capabilities to implement a new strategy. Exploring new technologies is likely to deepen the already acquired knowledge of the organization and increase learning ability.
The second benefit is the ability of spreading investment over time. For instance, when implementing organic development as a strategic method, the investment activities do not have to be immediate, but instead it is extended over the duration of the development stage. This flexibility makes it easier to adjust or reverse the choice of strategy when the framework conditions change.
The next benefit is illustrated as no availability constraints. Organic development does not depend on potential alliances or suitable opportunities to initiate an acquisition. For example, in the Japanese market where there are rarely suitable acquisition possibilities, organic development is more likely to succeed as a strategic option.
The fourth benefit is strategic independence. The independence offered by organic development means that there is no adjustment to make as it may be for an acquisition. The organization does not need to adapt or align their strategy plan with another organization’s plan.
The last benefit is culture management. To illustrate it, the organic development facilitates the creation of additional activities on top of the existing culture. The creation of new activities reduces the chances of cultural clash.
2.2 Strategic Alliances – Felix
A strategic alliance is an association between an independent entity and an economically selfsufficient entity while each of them remain independent as an organization. (Chernesky, Heyman & Kress P.L.L, 19962006). It refers to the creation of a network for a specific type of business. It also consists on managing the network and making it competitive on the market by combining the resources and capabilities of the members. (Johnson et al., 2017). A strategic alliance is primarily based on a contract and does not have a thirdparty entity creation out of the association. (Oliver T. Hellriegel, 2018). In other words, strategic alliance can be explained as a partnership in order to cocreate or corepresent a specific product or service.
The strategic alliance differentiates itself from an organic development in two ways.
First, the practitioners of alliance strategy must plan the collective success of their network along with the success of their individual organizations. For that matter, a collective strategy is created. A collective strategy refers to the way a network of alliance competes against rival network of alliances. For example, Microsoft with Xbox games network compete with Nintendo and Sony by relying on the collective strength of the independent developers such as Bungie Studio and Rockstar North that are part of its network. (Johnson et al., 2017).
Second, the alliances rely on a collaborative advantage. A collaborative advantage refers to a better management of the alliance than the competitors. For example, having a healthier network than Sony is not enough for Microsoft, but insuring that the network keeps producing better games by closely working with the member of Xbox game network is better. (Johnson et al., 2017).
Majors motives for which companies choose strategic alliances is to enhance research and development through the combination of resources of the alliance. (Emanuela T., David Knoke, 2005). These motives are categorized by resourcebased motivation and institutional motivations. (Haiying L, Nicole D, 2015).
A resourcebased motivation is when the partner organizations looking to form a strategic alliance come together looking to develop their idiosyncratic resources and expertise. (Barney 1991). For this matter, there are three types of resources to consider namely, tangible resources, intangible resources, and humanbased resources. Tangible resources are described as physical and financial resources whereas intangible resources are organizational resources and status such as reputation, for example. A humanbased resource is defined as culture, expertise of the employees and training. (Grant 1991). Combining these idiosyncratic resources help to increase organizational competencies. (Grant 1991). The idiosyncratic resources well applied allows to gain competitive advantage. (Das and Teng 2000; Prahalad and Hamel 1990).
Institutional motivation is when firms are forced by the norms and rules to align their practice. (DiMaggio and Powell 1983). Businesses from an identical industry looking to be approved by the competitors as a valuable and successful business need to follow professional established norms. (DiMaggio and Powell 1983).
2.3 Mergers and Acquisitions Felix
M&A can simply be defined as a fusion of two or more companies into one corporation. In the case of a merger, when two companies A and B merge, both disappear to create a new company C. For example, when DaimlerBenz and Chrysler merged, a new company called DaimlerChrysler was created. (Daimler, 1998). In contrast, in case of an acquisition, when a company A acquires a company B, company B will become part of A, and therefore will stop existing as a company on its own. For example, after Microsoft acquired Skype in 2011, it simply became part of Microsoft’s product line. The company originally called Skype Corporation S.A.R.L became a division of Microsoft.
An acquisition is also referred to as a takeover. The dominant is called acquirer and the other the acquired or target company. (Johnson et al., 2017). There are two types of acquisitions namely friendly and hostile acquisition. In the case of a friendly acquisition, the target’s management is willing to work together with the acquirer to integrate both companies. In the case of a hostile acquisition, the target’s management creates problems during the integration process by making it difficult to obtain valuable information, as it for example policies, terms, or prices. (Johnson et al., 2017).
M&A is not only for business but it is also applied in the public sector. Another sector that applies M&A is the nonprofit sector like universities specialized in different fields looking to offer new type of courses. For example, in 2010, the Helsinki school of economics, the Helsinki University of Technology and the Helsinki University of Art and Design merged together to become the new Aalto University. The institutions owned by the government have their own system. The difference in the type of organization acquiring or merging does not change the scale of managerial issues they have to deal with while changing ownership. Merger is the perfect option for Public owned organizations to deal with changes at organizational level. (Johnson et al., 2017).
Companies prefer acquisition over organic development for the fact that acquisition is faster, often cheaper and more importantly it drives less risk. One of the advantage of choosing an acquisition is that, while looking to enter a new market and avoid the existing fierce competition from the market, companies simply acquire one of the dominant company from the target market and therefore reduce time and resource needed to build their business from scratch. Another advantage is that acquiring a surviving company at a low share value is profitable due to assets stripping, where the acquirer can make considerable financial gain in a shortterm period. A third benefit of the acquisition over the other strategic methods is that top management can meet stakeholder expectations quickly. While not all shareholders are in favor of an acquisition, they all expect a return on investment, so given that an investment on acquisition pays off quickly, the shareholders find their objectives met. (Investment Bank, 2018).
Unrelated diversifications are a downside to M&A. When a merger brings in diverse product line, the difficulty to manage the diversity to manage the diversity with existing resources and competencies arise. Another issue is that the return on investment generated from the merger or the acquisition does not always meet the estimated value from the shareholder. (Johnson et al., 2017).
3. Motives for Mergers and Acquisitions Luis
The next chapter explores the motives or reasons why companies are applying Mergers and Acquisitions as an overall strategy. This stage is important to then link the definition of Mergers and Acquisitions with the Acquisition Process and the Acquisition Integration Matrix.
According to Johnson et al. (2017), the motives for M&A can be of three types: strategic, financial and managerial.
3.1 Strategic Motives – Luis
Strategic motives for M&A concern the improvement of the competitive advantage of the Organisation. (Johnson, Whittington, Scholes, Angwin, & Regnér, 2011). The competitive advantage of a company is what makes its products superior to all the other choices that the consumers have. (Porter & Advantage, 1985). In other words, Strategic motives involve improving a differential factor between a company and its competitors. According to Johnson et al. (2017), strategic motives can be separated in to three categories:
3.1.1 Extension
M&A can be used to amplify the scope of a firm in terms of geography, products or markets. As an example, Facebook closed the historic acquisition of WhatsApp for a total of US$19 billion in 2014. Facebook is now the owner of the world’s largest mobile messaging service. With this purchase, Facebook captured more than 600 million active users monthly from Europe to South America and Asia. In addition, Facebook already had new plans for its recent acquisition, such as including the transfer of money or direct debit through this application. (Olson, n.d.)
3.1.2 Consolidation
M&A can consolidate the competitors in an industry. Joining two competitors can have at least three essential benefits for the company. First, competition would be reduced, which would allow the newly consolidated company to increase prices to the market. Second, the consolidation of two competitors could allow a more efficient management of resources, avoiding having production shortages or, failing that, overproduction. Finally, by combining two competitors, the consolidated company can increase the bargaining power with the suppliers, which could result in a reduction in prices by the latter. For example, the Swiss company Holcim merged in 2015 with its French counterpart Lafarge to form the world’s largest cement manufacturer. With US$44 billion in annual sales, this agreement was made primarily to overcome antitrust barriers. Among the main benefits of this merger are cost reduction, debt reduction, better support for rising energy prices, and increased competitiveness in the market. (“Holcim, Lafarge agree to merger to create cement giant,” 2014)
3.1.3 Capabilities
M&A can increase the capabilities of a company. This motive refers mainly to the advantage of the rapid growth of small businesses. In other words, companies with ample purchasing power wait for small startups to invest resources in new technologies research to then acquire them and quickly benefit from the technological knowledge of these latter. This benefits the big companies due to the short time in which this process takes place. To illustrate, in November 2009, Google acquired AdMob, one of the world’s largest mobile advertising platforms, for US$750 million. Google had analyzed AdMob’s advantages and rapid growth in the mobile advertising business. With this acquisition, Google gained revenue from more than 15,000 mobile websites and applications that make up AdMob’s publisher network. Thus, Google quickly benefited from AdMob’s technological capacity and innovation. (“Google Acquires AdMob For $750 Million,” n.d.)
3.2 Financial Motives – Luis
Financial motives for M&A refer to the optimal use of financial resources. (Johnson et al., 2011). Financial resources are the resources from which companies obtain the necessary funds to finance their various business activities. The resources by which a company obtains the funds it needs are Financial Entities, Capital Markets, Owners Equity. (Akkucuk, 2001). According to Johnson et al. (2017), there are three main financial motives:
3.2.1 Financial efficiency
A wealthy acquiring company can help a highly indebted target company. The objective of this financial motive is to acquire a target company, which can use the money received to pay its debt. In this matter, the acquiring company would be the owner of a financially healthy target company. In addition, acquirers with a high price per share can buy targets by offering to pay their shareholders with their own shares instead of paying with cash in advance. For instance, Dish Network, a U.S. satellite television provider, bought Blockbuster in 2011 for US$228 million. Dish, instead of liquidating or reselling Blockbuster, decided to keep the business and integrate its current streaming service into Dish’s satellite TV broadcasting service. In this way, Dish benefited from the acquisition of a company in bankruptcy, paying a price below the actual value. Dish incorporated some Blockbuster business units into his own business to increase demand for his low turnover content. (“Dish Network to close all Blockbuster stores, lay off 2,800,” 2013).
3.2.2 Tax efficiency
A company could benefit from different tax regimes by transferring profits or tax losses from one industry or country to another. For instance, an organization sets its headquarters in another country to be affected by lower tax rates than in its country of origin. To give an example, the leading American pharmaceutical company Pfizer merged with Allergan, a company headquartered in Ireland, in a deal worth around US$155 billion. This investment resulted in significant tax savings for Pfizer, as it relocated its headquarters from the United States to Ireland. It should be noted that Ireland is a taxfree country. Pfizer, the company behind Viagra and Xanax, agreed to this multimilliondollar merger with Allergan because the former indicated that this would reduce its tax rate to only 17% instead of the 25% it was paying in the United States. (Davies & Rushe, 2015).
3.2.3 Asset stripping
This occurs when an acquirer company efficiently chooses a target company. The efficiency lies in the fact that the acquiring company identified that the total value of the company’s assets is worth more than its total price. Thus, the acquiring company “disaggregates” or “unbundles” the business units of the target company to subsequently sell them in different markets. After the “unbundled” sale, the total gain obtained by the acquirer could be quite above what would initially have been obtained by the total sale of the acquired company. To illustrate, Google bought Motorola for US$12.5 billion, sold it for US$2.9 billion, and called the deal ‘a success’. There are few situations where a company invests 12.5 billion dollars and receives a profit of 3 billion dollars. However, this is what happened when Google sold Motorola to Lenovo in 2014. The main reason is that the sale of Motorola’s domestic business, the cash delivered, the latent assets and the $2.91 billion Google received from Lenovo mean that after all, Google paid less than $3.5 billion for Motorola’s patent portfolio. Thus, Google benefited primarily from Motorola’s acquisition of intellectual property. (Epstein, 2014).
3.3 Managerial Motives Luis
Managerial motives for M&A respond sometimes to the personal interests of the managers. Therefore, they may serve managers’ own objectives rather than the overall efficiency of the company. (Johnson et al., 2011). To get to know why so many organizations are sinking into chaos, one must keep in mind what their leaders say. Leadership is not easy, but the imprecise and confusing pronouncements of many managers make their work more difficult than it should be. (Hamm, 2006). According to Johnson et al. (2017), there are two reasons for managerial motives:
3.3.1 Personal ambition
There are three approaches that must be considered within this reason. First, senior managers must fulfill the objectives given by the company. The accomplishment of these objectives is linked with financial incentives to the managers. Thus, to complete the objectives in a shortterm, managers opt to large acquisitions rather than for small ones. Second, large acquisitions give senior managers the opportunity to appear in media. Senior managers in this situation would have the socalled ´managerial hubris´ together with plenty of media interviews and appearances. Finally, senior managers would have the chance to place their own group of colleagues in new and higherlevel positions. Thus, senior managers could give greater responsibility to them.
3.3.2 Bandwagon effects
It refers to the pressure that senior managers have when to decide whether they should take a wave of acquisitions. In this situation, the financial team could criticize senior managers that are not acquiring when there are other companies completing acquisitions in the market. Furthermore, shareholders could be worried if they feel that their company is being left behind. That is, if they see that the competitors are taking the advantage of the opportunities in the market. In addition, senior managers may worry that if their company is not acquiring, they would become the prey rather than the hunter.
4. The Acquisition Process Luis
This section corresponds to the description of the Acquisition Process. In this chapter, the project presents two stages: the beforesale stage and the aftersales stage. Here, the project defines the steps that a company takes while acquiring another company.
Acquisitions need time. This is a process that must be considered as an inversion over time. The following section will explain how the development of the acquisition takes place. (Johnson et al., 2011).
Figure 1: The acquisition Process
Source: Johnson et al. (2017).
As mentioned before, the Acquisition Process has two stages. The Beforesale Stage includes the selection of the target company (or company that will be acquired) and the negotiations that would be taken in place. In the Aftersale Stage, the integration of the target company and the results from the purchase are detailed.
4.1 Beforesale Stage – Luis
This stage concerns the set of activities that take place before the purchase of a target company from the acquirer.
4.1.1 Target Choice – Luis
According to Johnson et al. (2017), there are two important criteria: strategic adjustment and organizational adjustment.
Strategic adjustment indicates to what extent the target company adjusts or is consistent with the strategy of the acquiring company. It is very important for the top management of the company to evaluate and execute the strategic adjustment with great precision. Otherwise, the acquiring company could suffer a “contagion” on the part of the target company. This contagion occurs when the objectives of both companies are not congruent, but they try to satisfy in any way.
Organizational adjustment refers to the extent to which the acquiring company and the target company match in terms of cultural and managerial practices. If there are no similarities between the organizational culture of both companies, important problems may arise. Some international acquisitions may present a cultural clash due to the differences in language and differences in the culture of the countries involved. It is necessary to evaluate how much the acquiring company wants to integrate the target company.
The strategic and organizational adjustment will determine the potential for the acquirer to add value. When the organizational fit is high, but the strategic fit is not, it is likely that there would be a destruction of value. In the same way, it will happen if there is a high strategic fit but low organizational fit. Both criteria must work in a synchronized manner.
4.1.2 Negotiations – Luis
The negotiation stage at Mergers and Acquisitions (M&A) is essential to subsequently finalize the acquisition process amicably. If the top management of both the acquiring company and the target company fail to agree on the terms of purchase and sale, the agreement cannot be finalized. In terms of price, paying very little reduces the success of the process and paying too much can damage the acquiring company because it could have significant difficulties in recovering its investment in the short term. In addition, the negative effects can be increased if the buyer tries to justify overpayment by reducing essential investments to improve immediate profits. This is known as the vicious circle of overvaluation. (Johnson, Scholes, & Whittington, 2008)
4.2 Aftersale Stage – Luis
This stage concerns the set of activities that take place after the purchase of a target company from the acquirer.
4.1.3 Integration – Luis
The level of value obtained by the acquiring company through the acquisition process will be subject to how well the target company is integrated. Adaptation problems may occur during the integration process. These may be due to cultural or technological differences, for example.
There exist two important criteria within the integration process. (Haspeslagh & Jemison, 1991).
The first criterion is the scope of strategic interdependence. It refers to the need to deliver or exchange capabilities (e.g. technology) or resources (e.g. factories). In other words, this criterion indicates the extent to which the acquiring company wants to integrate the target company.
The second criterion is the need for organizational autonomy. It explains that there are cases where the target company requires a high level of organizational autonomy. This is because some target companies have very good business management and differentiated culture. In many cases, this is what ultimately generates value for the acquiring company. If this is the case, it is better to learn gradually from the differentiated culture, rather than to damage the process by forcing a fast integration. In other words, this criterion indicates the extent to which the acquiring company can integrate the target company.
4.1.4 Results Luis
The results stage evaluates whether the acquisition was a success or a failure.
According to PWC (2016), successful integration of a target company is the only way to evaluate the outcome of the acquisition process. However, several integrations may not be successful. Thus, it is possible that the integration process could be positive, but the final agreement a failure.
The failure of the integration is usually related to the lack of previous preparation, the absence of a structured integration plan, the scarcity of resources dedicated to the integration process, and the lack of attention from senior executives, to name a few. Incompatibility of organizational culture is also an important reason. (PWC, 2016). Poor integration can have irreversible results for a company, such as weakening the company’s competitive position. (Ghauri & Hassan, 2014).
5. Acquisition Integration Matrix Felix and Luis
This chapter explains in depth all the five strategies regarding the Acquisition Integration Matrix. In this section, each strategy from the matrix will be explained in linkage with a real case from wellknown companies worldwide.
Postacquisition integration is the most challenging phase in which value creation should be involved. This phase may also involve numerous integration problems that can interfere with the creation of value and synergies between the acquiring and acquired company. These problems may be due to differences in organizational culture or problems in employee adaptation. Additionally, there may be cases of personnel reductions and dismissals with the aim of reducing costs. This can contribute to create an atmosphere of uncertainty for both companies. (“Merge Ahead,” n.d.).
Philippe Haspeslagh & David Jemison (1991), developed a model that provides senior managers in charge of the acquisition process with a simplified approach to use in order to achieve an optimal integration approach. The model is presented graphically from a fourquadrant matrix based on two axes: the horizontal axis which represents the need of organizational autonomy, and the vertical axis that represents the extent of strategic interdependence. (Johnson et al., 2011).
Figure 2: Postacquisition integration matrix.
Source: Johnson et al. (2017)
As in Figure 2, there are five integration approaches, which affect the period of integration between the acquirer and the target company.
5.1 Absorption
Absorption is chosen when there is a necessity for the acquired company to fit quickly to the structure and strategy of the new proprietor and harmonize to its existing culture. In absorption, an organizational autonomy is not required but it is essential for the new boss to establish a strong strategic interdependence. As absorption requires a new way of managing the acquired company for avoiding partiality, it is recommended to change the top management. (Johnson et al., 2017). Given that this approach involves multiple levels of changes. An example of absorption is the acquisition of the U.K based software company Autonomy by HewlettPackard in 2011. To avoid partiality and create an adequate process of integration, Robert Yougjohns became the new top manager of HP Autonomy over the formal CEO of Autonomy named Mike Lynch. (McFarlane, 2013)
5.2 Preservation
Preservation is suitable when the acquired company is stable, and its business activities are not related to the business activities of the acquirer. It is therefore advisable to operate a minimum change to the acquired company and adjust financial reporting methodology for control. (Investopedia, 2018). In other words, preservation is indicated when there is a need of autonomy and a little necessity to integrate the acquired company. When applying preservation as an integrated approach, the top manager should remain unchanged. (Johnson et al., 2017). For example, Microsoft acquired LinkedIn although both organizations do not have identical business activity, nevertheless, the acquisition allowed Microsoft to access a new pool of customer base and expand its market. (Forbes, 2016). Moreover, to keep LinkedIn stable and well run, the top manager of LinkedIn remained unchanged. (Microsoft, 2016).
5.3 Symbiosis
Symbiosis is the most complex of the integration approaches. This occurs when the acquiring company wishes to integrate the target company to a large extent, but there is also a great requirement for autonomy on the part of the acquired company. Symbiosis involves mutual learning between the two companies by merging to some extent similar and managerial aspects. The symbiosis process usually requires a lot of integration time, so it is advisable not to change top management in the initial period. (Johnson et al., 2011). For example, in 2014, Google acquired Nest Labs, a manufacturer of smart home products, for US$3.2 million. The deal is the second largest in the history of Google after the US$12.5 million acquisition of Motorola. Despite having acquired it, Google decided not to intervene in the organizational culture of Nest Labs, as this company was very well managed, and a hasty integration could harm Google. In this way, Google began a slow integration process, preserving the level of autonomy of Nest Labs. (“Google’s Strategy Behind The $3.2 Billion Acquisition Of Nest Labs,” n.d.).
5.4 Intensive care
Intensive care exists where integration will not grant greater benefit to the acquiring company. This type of acquisition occurs when the target company is in a very compromised financial situation. The essential idea is that the acquiring company buys a target and then resells it in a short period. It should be noted that the acquirer would not integrate the acquired company to prevent “contamination” by the latter. (Johnson et al., 2011). As an example, in 2012, Google acquired Motorola for US$12.5 billion. Less than 3 years later, Google sold Motorola to the Chinese multinational Lenovo for US$2.91 billion. Google’s main objective was to benefit from specific Motorola business units. Google took over Android, the world most used smartphone operating system, the patents of Motorola, and its cable television receiver business. Google did not intend to complete a full integration with Motorola, so the sale to Lenovo was economically beneficial. (Mims, n.d.).
5.5 Reorientation
This is the case when the target company is financially healthy and has a strong organizational culture, but the acquiring company wishes to integrate essential areas such as sales, marketing, and administrative areas. However, it is the different resources that add value to the acquirer. For this reason, senior managers should define the extent to which they can integrate the acquired company without destroying the created value. (Johnson et al., 2008).
6. Limitations and Further Studies – Felix and Luis
This section of the project corresponds to the development of the limitations and further studies. At this stage, the authors identify and explore the main challenges found during the formulation of the project.
The first limitation found during the research is related to time and adjustment. The duration of an M&A process cannot be predicted with complete certainty because the integration phase could take longer than expected. The time needed to complete integration can only be estimated through planning and analysis.
The second limitation is connected to investment. Mergers and Acquisitions require a considerable amount of money up front to complete the negotiations. The study did not take into consideration the approach of startups or small companies looking to implement an acquisition or a merger. The acquirer is always referred to as a big and established company. M&A involves high risk for the acquirer because, whatever is the outcome of the acquisition, the money spent upfront is irretrievable. Given the amount of money that must be invested to implement M&A, startups cannot afford it. Small companies simply do not have the required financial resources, therefore, looking for growth, the small companies must choose a different strategic method that does not involve M&A. From the studies, without strong finance, M&A is not an option to consider when looking for growth and it is a substantial limitation to the approach.
As a third limitation, M&A result in a decrease of flexibility for the acquiring companies in case a better opportunity arises from the market during an integration process. The acquisition is a longterm process that involves the investment of important resources, especially financial resources. This reduces the response capacity of the acquirer. M&A reduce the flexibility of the acquirer to operate according to the market opportunity. It is impossible for the acquiring company to dedicate its resources to a better deal because it is already focused on an ongoing integration case. This is a big limitation for the study, nevertheless, companies need M&A if they are looking for competitive advantage and especially when the market is saturated.
The fourth limitation is about the need from the top management to adjust the objectives of the acquiring company with the objectives of the target company in order to avoid disruption of values. When it occurs, both companies involved have different objectives to achieve, and it is important for the success of the acquisition to meet both objectives. The challenge here is how to synchronize the objectives of the acquirer and the ones of the acquired to create value. This limitation is related to the complexity of the responsibility senior managers have to run their own company and simultaneously manage to adapt to another company that could be from a different industry or sector.
7. Key Learnings from the Study – Felix and Luis
The last section of the project corresponds to the presentation of the Key Learnings from the Study. Here, the authors analyze and formulate the main ideas from the overall project paper.
The first key learning indicates that the main factor for failure to integrate a target company is mainly due to culture shock. As in any process, the integration process presents challenges and complexities when one company acquires another. For example, problems related to finances, communication problems between different levels, or changes in the geographical location of the company’s headquarters can be solved by taking corrective measures. However, one point that escapes the capacity of action of the acquiring company is the adaptation of the own organizational culture with that of the acquired company. This adaptation, in case of a culture shock, can take many years and in many cases, is never fully implemented. Thus, culture shock is the main reason for failure in the process of adaptation to an acquisition, even when all other factors have been successfully aligned.
The second key learning that the authors have managed to identify proposes that there are other, mainly external, forces that can affect and/or modify the final outcome of an acquisition. It is very important to recognize that the success of an acquisition is not only limited to the integration process, which focuses only on factors internal to the organization. However, it is also necessary to include other factors such as government intervention (e.g.: change in taxes), technological innovations (e.g.: simplification of complex processes), changes in the economy (e.g.: inflation). These external factors must be taken into account in order to make the process of acquisition and integration more precise.
A third key learning relates to the variability in time that different approaches to the procurement matrix may have. Each of the 5 approaches presented in the procurement matrix are not static, meaning that these approaches can be adjusted over time depending on the needs of the acquiring company. In other words, the acquiring company does not need to use just one approach during the whole integration process but can change focus according to what the organization needs in a given period of time. In addition, acquisition matrix approaches can be combined to extract as much value as possible. Thus, the organization could merge absorption and symbiosis approaches or symbiosis and preservation approaches to obtain a mix of options that can best fit the integration process being implemented.