Mergers and Acquisitions Essay
Mergers and Acquisitions (M&A) have been features of industrial activity since the 1920s (Cooper, and Cartwright, 1996). They tend to occur in waves, possibly indicating that it takes major time and effort to realize intended benefits. There are important benefits as well as risks in all M&A activity. This kind of corporate transaction has major effects on all classes of stake holders, especially on employees. M&A is an especially attractive option in the Fast Moving Consumer Goods (FMCG) sector because inorganic growth in stables of brands, and direct entries in to new territories, present especially profitable opportunities.
The breweries industry stands out for using M&A as a specific means of extending operations from a domestic to an international scale. The route to the ultimate benefits of M&A is strewn with obstacles. People are ubiquitous and essential components of all companies, and their joint commitment, skills, and accumulated experience, cannot be acquired or merged with the same facility as with other material resources. Some of this opposition may not be intentional, but have origins in company cultures which prevail prior to M&A.
All forms of M&A are known to result in higher employee turnover rates, especially for top executives (Walsh, 1988). The distribution
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It may not appear in statutory financial statements, but all classes of stake holders value it highly at the sub-conscious level. The importance of identity decreases in proprietary lines of enterprise which fulfill needs which are thought of as vital, but is central to consumer decision making in generic articles of daily use. This is why identity plays a key though often hidden role in the FMCG sector. Culture and identity have recurrent inter-relationships, and always influence each other. The two forces must ultimately converge in the public mind.
No category of stake holders can sustain images of a company, FMCG or otherwise, which are in contradiction of its true internal culture. Thus, reputation is an important management responsibility (Balmer, and Greyser, 2003). Further, it cannot be influenced without attending to the evolution of culture, a matter to which operational management rarely pays due attention. Companies cannot function by rules alone (Barnes, 2001). Employees imbibe norms about matters such as dress and behavior, partly through instruction, but largely by observing peers and superiors.
More deep are the enduring values: examples of this are the concepts of integrity and commitment to the organization and to its purpose. Culture is therefore an invisible but durable binding force for every organization. Culture may also fashion the development and execution of strategy (Gupta, Gollakota, and Srinivasan, 2005). Thus while some firms pursue cost leadership, others stress innovation for sustainable differentiation. There are related trade-offs between growth and profitability as well. Entrepreneurship is a significant ingredient of aggressive business growth achievement.
However, each company has its own approach to how much risk it is willing to take, and with respect to how it views uncertainties. This kind of risk-taking behavior is an important expression of company culture (Bosworth, 2005). It is also the source of cultural dissonance between the 2 entities involved in M&A activity. Corporate culture exists at the national and the internal levels, and both have deep impacts on individual performance (Cooper, and Cartwright, 1996). No corporation can be fully understood without its cultural context in view. It follows that culture has significant impacts on M&A outcomes.
Companies involved in M&A are likely to have deeply ingrained cultures which are as difficult to erase as they are to fathom fully when negotiations for M&A fist commence (Gupta, Gollakota, and Srinivasan, 2005). Differences in culture should not be viewed in a judgmental context. This is because corporate culture is actually a social environment (Johnson, and Phillips, 2003) in which people learn to function. A sudden transfer to a new culture, even if thought of by some to be a better one, may be stifling for employees from a pre-M&A situation.
The Business Compulsions of Mergers and Acquisitions M&A is a global phenomenon (Cooper, and Cartwright, 1996). It is driven by purely commercial considerations in capitalist democracies, but has political overtones in former socialist, communist, and dictatorial blocs, with erstwhile dominance of government control of business enterprises. M&A which involves transfer of control and ownership from the public to the private sector is generally driven by concerns for competitive survival and productivity. However, the cultural dimensions for work forces in such moves can be monumental.
Such cultural aspects also come to the fore when M&A occurs across national boundaries (Cooper, and Cartwright, 1996). Though not all M&A moves have the same objectives, or degrees of success, financial synergy have a common aim (Cooper, and Cartwright, 1996). The issue of success and failure in M&A is vitiated by the fact that may costs and benefits do not find expressions in statutory declarations of performance which are in the public domain. Thus many M&A transactions may encounter failure outside the knowledge of direct stake holders.
Though M&A decisions are taken by small bands of people, the cultural impact of such moves affect large numbers of people in both companies involved (Cooper, and Cartwright, 1996). Global brand strategies often dictate M&A compulsions, especially in the FMCG sector. Brand values can vary between countries (Hamel, and Prahalad, 1994). Store brands, for example, are not valued in the United States, but one of the most successful on the other side of the Atlantic, in the U. K. is that of a store chain. M&A in FMCG provides quick and effective resolution of companies which aim for dominant shares in all global segments.
Such leadership is not to be achieved by standardization across countries, but by meaningful and high responsive adaptation to local needs (Inkpen, and Ramaswamy, 2006). Distinctions of the FMCG Sector The company image and reputation may contribute to overall branding (Balmer, and Greyser, 2003). Some FMCG companies focus on specific product brands as far as markets and consumers are concerned, but other stake holders cannot fail to be influenced by the corporate brand. Financiers, employees, suppliers, distributors, competitors, and regulators, will all color their responses to an FMCG player based on its image.
The latter changes with evolution of a company, but never loses relevance, whether the FMCG company in question is a new entrant to a market segment, or whether it has forged the significant share of an established entity. Since branding of all kinds and at all levels is especially important in the FMCG sector, the new culture which stake holders think may emerge after an M&A transaction has deep seated influences on the culture of the acquired or merged entity. However, corporate branding, image, and reputation persist as key business reasons to build a new and vibrant culture after M&A in FMCG (Balmer, and Greyser, 2003).
The FMCG sector is marked by a special place for the Marketing function. Multifarious relationships with targeted customers define success in this type of enterprise (Barnes, 2001). It is common for the tangible elements of generic products to be enhanced in to brands, by striking chords with sub-conscious decision-making processes in the minds of large numbers of retail buyers. Therefore, culture has more substantial importance in an FMCG business than in another sector with more emphasis on concrete product features. Examples of M&A in FMCG
Proctor and Gamble (P&G) is an appropriate member of the global FMCG sector to study (Proctor & Gamble Co. 2007). It is a leading member of the industry, and operates in almost all the countries of the world. The company has vigorous M&A activity, first by hiving off some of its brands to the competition, as in the case of the deodorant brand Sure, and then through the acquisition of HDS Cosmetics Lab Inc with its range of skin care range of products. It is therefore clear that P&G approaches the matter of M&A through careful consideration of the needs of its customer segments.
The validity of its business logic must act as a positive input to company culture all round, since professional teams everywhere would be enthused by the possibilities of enhancing company performance. P&G has also acquired Gillette in 2005, a major company (2004 sales over $10 billion) with an integral but similar culture (Proctor & Gamble Co. 2007). Again, this acquisition enabled P&G to enter a new market segment of male grooming. The company has divested its juice business, and acquired Wella and Hutchinson to enter new territories, including the crucial one of China, at the same time (Proctor & Gamble Co. 2007).
It is evident that vigorous M&A is integral to P&G operations. Not all these moves are successful, and the company recognizes that acquisitions may not always provide projected synergies (Proctor & Gamble Co. 2007). It is significant that P&G does not, in its statutory disclosures the stock exchange make any mention of the cultural aspect of M&A moves (Proctor & Gamble Co. 2007). The brewery industry has used M&A to capture share in new territories, sometimes paying unrealistic prices in the process-SABMiller’s acquisition of the Harbin Brewery group for its China entry is an example (Inkpen, and Ramaswamy, 2006).
SABMiller has entered Poland, Slovakia, and India through acquisitions (A Great Story, 2007). Overall, the approach to M&A in the brewery industry has focused more on rapid and appropriate entries in to emerging markets, in contrast to the P&G type of approach, which has focused more on tailoring product ranges to the needs of target customer segments. Details of how SABmiller has integrated its operations with subsidiaries in Slovakia establish the company’s diligence in caring for both internal and external cultures during its M&A activity (A Great Story, 2007). SABMiller owns both Pivovar Saris and Topvar in the region.
The 2 entities have now been renamed as Pivovary Topvar. The latter has been chosen after careful research. A majority of local consumers have identified with the new name. Overall, SABMiller has a policy of marrying a leading domestic brand with the term ‘brewery’. It is noteworthy that the Group name is not foisted on local consumers of other cultures and countries. Similarly, the China Resources Snow Breweries has been allowed total functional autonomy, which has resulted in an explosive growth of the brewery in an exotic country about which SABMiller has little direct knowledge or experience (A Great Story, 2007).
The model which P&G and SABMiller follow to manage the cultural implications of their M&A activities are not the same, but both have enjoyed eminent successes in this direction. They are worthy role models for other FMCG companies. A noteworthy exception to M&A in FMCG relates to the Mars Corporation (About Us, 2006). This $18 billion world-wide corporation remains fiercely independent, secretive about its operations, and is privately owned. Though little is known about how it operates, one can tell from the outside that it must have a very strong cultural orientation.
The company is highly successful with an amazing stable of products. Specific Implications of M&A in the FMCG Sector on Corporate Culture The identity of a merged entity is a likely victim of integration. However, the acquiring company, or a merged entity, cannot escape being deeply influenced by the culture of even a minor or subsidiary partner in a corporate transaction. Identity is a key consideration in an FMCG enterprise (Balmer, and Greyser, 2003) and changes after M&A activity. It may work for the advantage of the combined entity, but it is always an issue for concerted and thoroughly devised strategy.
Thus, corporate culture must be on the agenda from the time that M&A is contemplated in FMCG, until the new organization has become a stable and effective reality. Culture is likely to be central to the distinctive strengths of an FMCG company which is acquired, or which is a party to a merger. This is because developed and nurtured strengths, without which no entity would attract acquisitive or integrative attention, is a product of the way in which business processes are conducted. Neglect of culture in FMCG may result in erosion of the underlying strengths which are coveted in every M&A transaction.
The ability to understand customer behavior is a prime example of a key FMCG strength, and it has deep roots in the culture of an organization. Organizational appreciation remains incomplete if devoid of its cultural traditions and heritage (Barnes, 2001). Most FMCG companies are driven by economies of scale, and therefore operate globally. Even the full benefits of a domestic or a regional acquisition may be leveraged in markets all over the world, in order to maximize the present value of the concerned investment. Cultures of smaller companies with spatial limitations are naturally different from those of large, global corporations.
Since company cultures have so many environmental influences, it follows that the values and norms of domestic players would be different, and even in contradiction with habits and deep seated prejudices in large corporations. Smaller enterprises are known to have cultural ties to older ways of conducting business, which induce them to resist change (Bosworth, 2005). Further, diversity issues always impact global operations and they are likely to be magnified in trans-national M&A (Barnes, 2001), or when M&A occurs in vastly different sizes of former competitors.
Cultural differences cannot be resolved quickly or without intense efforts. They may sap the energy of the merged entity, and even result in unproductive behavior on the parts of employees. Integrating cultural nuances from two different streams, and building a new ethos for the work force requires resources of time and money which may not have taken in to account when the numbers of M&A are crunched in the FMCG sector (Bosworth, 2005). Cultural integration need not be a major issue in M&A as when the 2 companies involved are similar in size, approach to business, and base country.
They could be direct competitors, fighting for the same market segments and using the same resources, in such instances. However, cultural differences may make M&A fail when the 2 companies involved have vastly different internal cultures (Nahavandi, and Malekzadeh, 1988). This is when vertical or horizontal integration across country boundaries drive M&A moves. The company’s web site shows dedication to customers, quality, and value for money, and to innovation, which are indicative of a strong internal culture.
The company has also taken a firm and independent line towards issues of environmental conservation and corporate social responsibility. Preventive and Contingent Actions M&A activity cannot be halted because of the problems of cultural integration which they pose: the competitive advantages of inorganic growth are simply overwhelming. Such compulsions will only grow as the world moves towards more liberal and frequent trade links. Therefore, the focus has to be on how to make M&A succeed, especially in the FMCG sector, keeping the importance of cultural integration in view.
A valuable starting point would be to keep cultural aspects in view from the beginning of M&A planning. M&A is not a matter of studying operations and finances alone (Raynauld, Gancel, and Rodgers, 2002). Adequate and valid research in to the working norms and styles of acquisition candidates should be integral to appraisal and the due diligence process (Raynauld, Gancel, and Rodgers, 2002). Culture will not be apparent superficially in all its hues. Therefore, understanding culture is a detailed and complex process, which requires time. The resources needed to achieve integration should be built in to the M&A proposal.
It follows that insurmountable hurdles of cultural incompatibility should be reasonable grounds for an M&A proposal to be rejected. Incorporating cultural aspects with the traditional and more popular financial considerations will help to prevent failures of M&A on cultural grounds. Overall, M&A teams should make sure that they buy reality and not their dreams and misconceptions (Ward, 1995)! Integration may be impeded by a lack of understanding about one’s own situation (Raynauld, Gancel, and Rodgers, 2002). The nuances of another company’s culture may not be evident because the other side is not conscious of its own peculiarities.
It is indeed to be entirely objective in this respect. Company culture is most often not developed consciously, and is largely based on conventions and unwritten rules. This also implies that effectively, the culture of an established company may be quite different from the original intentions of founders and senior executives. Further, influential individuals may subtly impact the culture of a corporation, without any declared or evident impacts in the short-term. There are therefore a host of reasons why a company may be unaware of the culture that has taken hold within.
Proper appreciation of another company’s culture is not possible in such circumstances. Enunciating core beliefs and values, and reinforcing assumptions in these respects with feedback from all levels of one’s hierarchy, will make important contributions to cultural success in prospective M&A. The process does not end with an appreciation of one’s own company culture and its comparison with an M&A prospect. It is beneficial to keep an open mind about which parts of whose culture should prevail in the merged or acquired entity. M&A is only very rarely between equals.
Therefore, the domination of a larger, more influential, and powerful partner, most often automatically leads to imposition of its culture on the smaller, weaker, and less influential entity. Inefficiencies and losses of value may reside in such ‘bullying’. All people involved in M&A should be committed to preserving each other’s best practices. An easy way of preserving the best parts of the cultures which prevail prior to M&A is to allow cultural autonomy. Wise executive teams will keep integration points to the minimum, allowing an acquired or merged entity to retain its old ways of conducting business as far as possible.
Indeed, the culture of an acquired or merged company should be viewed as one of the most treasured assets of deals! Financiers and senior executives should always be aware that a company is unlikely to have any M&A values if it does not have an appropriate culture. This approach has been one of the reasons for the successful acquisition of Gillette by P&G (Proctor & Gamble Co. 2007). Since Gillette had more customer intimacy with its chosen target of men, P&G would have erred in superimposing all aspects of its own culture on the acquired entity.
Executives responsible for M&A should view culture in terms of market orientation (Singh, 1994). The aim of such successful acquisitions is to enter new customer and market segments, rather than to impose any culture in an egoistic fashion. Cultural autonomy can produce the best M&A outcomes (Raynauld, Gancel, and Rodgers, 2002) The reorganization of business units is known, especially in the FMCG sector, to nullify the effects of existing culture, because novel structures induce cultures of their own (Piercy, 2002).
Culture, since it involves the thinking and actions of people, is dynamic in any event. A switch from geographic to product line or industry differentiation, forces a new focus on customers: meeting their requirements in new ways helps to introduce cultural reforms. Thus, deliberate attempts to forge a new couture, may be most efficacious in avoiding cultural pitfalls of M&A. Similarly, brand activity as in P&G, with strong business logic and customer focus, links M&A to strategy and helps to maintain the integrity of acquired units (Proctor & Gamble Co.
2007). There is the larger issue that total integration may not be desirable for the best M&A results (Raynauld, Gancel, and Rodgers, 2002). Business logic rather than authority should determine the new culture of an M&A product. Since company culture is intangible and subtle, continuous and honest communication has much to do with successful outcomes (Reed, 1998). This effort has to be directed at all stake holder groups, though employees must obviously have pride of place in the matter. Confidentiality has traditionally played an overbearing role in M&A.
Negotiations are conducted between very small bands of people from either side. This is largely to avoid surrender of proprietary information, competitive advantage, and embarrassment if the negotiations fail. Though such concerns are valid, they should be counter-balanced by compensatory efforts once the deal can be made public. Thorough discussions on cultural implications of M&A during the phase of tentative negotiations requires that teams from either side should be as well versed in these qualitative aspects as they tend to be with numbers and operating matters.
Further, the very M&A process should lay bare the points of confluence and potential conflicts with respect to culture. Proposals which do not include the cultural synergies of M&A, and how the conflicting issues will be resolved, should be viewed as incomplete and inadequate for taking final and binding decisions. An FMCG company, which is organized on regional lines, will for example, has a host of cultural issues to resolve if there is M&A with an erstwhile competitor with a structure built around lines of business.
It is also possible to conclude, in this respect, that the criticism reported earlier in this document, regarding the prices paid by SABMiller for inorganic entries in to emerging markets, is unjustified, because this highly successful brewery company has in fact found ways of valuing the cultures of domestic companies which it buys. Communication about company cultures during M&A negotiation is necessary but not adequate for success: the process is at least just as critical when news of an M&A deal first breaks. Insecurity, rumors, unfounded fears, and unrealistic expectations abound.
Incorrect and confounding opinions will gel if abundant information is not on tap from authorized and trusted sources. Therefore, a top management priority, during the days immediately following M&A, is to present all stake-holders with detailed and true pictures of how cultural issues will be managed, and the depth to which they are appreciated. Communication about company culture should not be restricted to the first M&A phases, but should be sustained throughout the life of every merged entity (Scharioth, and Huber, 2003).
Healthy debates and open forums on the nature and importance of company culture, the present status, and changes which stake holders would like to see, all help to bring the sub conscious to the surface: results can only be positive as far as business performance is concerned, even though total agreement would be utopian to pursue. Experience shows that cultural integration should be built in to executive appraisal and remuneration for the best results (Proctor & Gamble Co. 2007). Each of the preventive measures described in earlier parts of this section should become specific executive responsibilities.
This prevents small bands of people trying to impose new ways of professional behavior and inappropriate behavioral norms on large numbers of an otherwise skilled and valuable work force. It is not enough to state such roles in generalities: executives from both sides of divides prior to M&A should have specific tasks for which they are held accountable, related to how best practices will be preserved in the new entity. Pricing, promotions, distribution channels, and media strategies, are some concrete examples of policies in the FMCG sector which are strongly but indirectly influenced by company cultures.
Specific and budgeted events at which cultural matters can be discussed professionally, structured formation of teams from each of the 2 M&A entities, time frames within which integration should be achieved, and controls related to levels of morale and perceptions, are some of the best ways of making identified executives specifically responsible for ensuring that the company culture following M&A, is oriented towards productivity and success. All people do not reflect company culture in the same way. There could be unknown numbers of stake holders who think and act at variance with the stated and widely-held values of a company.
Such a situation would prevail even before M&A takes shape. Therefore, an important element of attaining M&A success is to screen employees and other groups for their cultural suitability when determining roles in the merged entity. The results of such filtering may be different from that obtained if success is only re viewed in financial and concrete terms. It is normal for employees, suppliers, and agents of the larger company to demand greater shares of the merged or acquired pie, but the best teams handling M&A will make conscious efforts to keep such distortions to the minimum.
This aspect is especially important in FMCG because this sector has better retail audit data on brand shares and ranks than other parts of the economy. Some of the most disruptive effects on company culture after M&A are due to disgruntled stake holders. Employees who are laid-off are the most vociferous, even if handsomely compensated on financial grounds for early separation. Word-of-mouth spread of criticism about the reasons and manners of their departures, while possibly factually incorrect, have drastic effects on the morale and thinking of other stake-holders, including employees who are retained.
The problems of disruptions in cultural evolution tend to be especially serious in the breweries industry. Customers who have strong emotional ties with local brands, suppliers with long company ties, wholesalers with high infrastructural costs to cover, and all categories of service providers, join employees who have lost their jobs in fighting M&A in every way they can, even after the transaction has been completed. Money is not the only consequence of retrenchment and losses of livelihoods following M&A.
The atmosphere surrounding the new entity will be more productive if sincere and publicized efforts are made to rehabilitate everyone who is adversely affected by M&A. The award of service contracts and franchises, as well as grants to help in the establishment of small enterprises, are some of the concrete steps that managements can take to assuage the feelings of adversely affected people. Such efforts help morale in general, and thus improve the culture of the new organization. No amount of rehabilitation will obliterate the negatives feelings about M&A that some quarters will harbor.
The feelings and opinions of some stake holders such as financiers, suppliers, and distributors may be stoked by the competition. It is therefore paramount from a cultural perspective that information related to M&A is explained and justified by the highest moral authority in charge of the operation (Sison, A, 2003). Delegating the work to junior personnel, or communicating through a person whose motives are suspect, will not help. Moral leadership holds the key to cultural conservation following M&A. Overall, M&A impacts culture primarily by loss of good will amongst former stake holders.
Such losses have negative brand values in all FMCG sectors, and may be very significant when a brewery company enters a new country with its own demographics. The financial dimensions of such intangible losses should be factored in to planning for M&A. Costs should also be provided towards mitigating these losses to the extent possible. It is apparent that a series of preventive and contingent actions can help to reduce if not eliminate cultural problems during and after M&A activity. This does not mean that operational aspects do not matter.
There are many functional areas which require concerted attention during the entire M&A process. Keeping budgets and plans on track, growing market shares, and improving profitability, are typical business priorities which clamor for executive attention on a daily basis. This is why some companies opt to use external consultants in order to cope with the tumultuous effects of M&A on culture. Professionals trained in industrial and behavioral psychology, and individuals with industry-specific experience of M&A, are amongst the best choices for consultants and change-agents in this regard (Warner, 1997).
Even if an internal person or a small team is selected for this specific task related to company culture, their other operational responsibilities should be shared by others, in order that adequate resources are diverted on this important task. Conclusions The obvious but superficial advantages of inorganic growth may be belied by difficulties in cultural integration following M&A, because individual managers function less well in a new internal environment (Bosworth, 2005). The FMCG sector is especially affected by this people-related element.
M&A moves do not just affect the culture of smaller partners, but of the acquirers as well (Sison, 2003). Power and authority are poor substitutes for understanding, consensus, and sensitivity in matters related to company culture. All cultural implications of M&A have roots in the disruption of internal communication networks (Street, and Meister, 2004). The process is similar to the growth phase of small enterprises. Rapid organic and inorganic growth models are similar in the cultural context.
Systematic, deliberate, and assertive management teams can take charge of company culture following M&A, and ensure that there is little if any impact on business performance. It is a matter of being conscious of the potential impact, and providing for its containment in adequate manner. Culture is not a static matter even in an isolated company. Employee turnover, changes in the external environment, and the general evolution of business, all make companies think and act differently with the passage of time.
Mars Incorporated is a striking example of a major FMCG company, which has never indulged in M&A activity (About Us), 2006, though it is evident that the company has a strong culture of its own. The company has remained family owned for more than 2 generations, proving that cultural transition can also take place in corporate isolation. Some core values, such as the ones related to customer service and integrity remain constant, but the general image and approach to the market are always in evolution.
Therefore, active management of company culture should not be limited to M&A events alone. References A Great Story, 2007, SABMiller web site, retrieved June 2007 from: http://www. sabmiller. com/sabmiller. com/en_gb/ About Us, 2006, Mars Incorporated web site, accessed June 2007 from: http://www. mars. com/global/About+us/ Balmer, J, and Greyser, S, 2003, Revealing the Corporation: Perspectives on Identity, Image, Reputation, and Corporate Branding, Routledge Barnes, D, 2001, Understanding Business: Processes, Routledge
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