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MERGRERS & ACQUISITION

INTRODUCTION

A merger takes place when two companies decide to combine into a single entity. An

acquisition involves one company essentially taking over another company. While the

motivations may differ, the essential feature of both mergers and acquisitions involves

one firm emerging where once there existed two firms. Another term frequently

employed within discussions on this topic istakeover.Essentially, the difference rests

in the attitude of the incumbent management of firms that are targeted. A so-called

friendly takeover is often a euphemism for a merger. A hostile takeover refers tounwanted advances by outsiders. Thus, the reaction of management to the overtures

from another firm tends to be the main influence on whether the resulting activities

are labeled friendly or hostile.

Merger

A combination of two or more companies into one company. Here one

company survives and others loose their corporate existence. All assets

and liabilities are transferred to the transferee (Survivor Company) in

consideration of payment in the form of equity shares of the transferee

company or debentures or cash or a mix of all of them. It may involve

absorption or consolidation. In Absorption one company acquires another

company E.g.: Ashok Leyland absorbed Ductron Castings Ltd whereas in

Consolidation two or more companies combine to form a new company.

Type of Mergers

Mergers can be classified into four types:

Horizontal Mergers: It refers to merger of firms engaged in the same

line of business in the same industry.

Vertical Merger: It refers to merger of firms engaged at different stage

of production of the same good in an industry. For example: Merger of a

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Leader tannery with a shoe company where the shoe company would be

the surviving company. The benefit is improved coordination of

activities, lower inventory levels, and higher market power of the

combined entity.

Circular Merger: It refers merger of firms for facilitating activities like

distribution and Research & Development since a small company may not

be able to get good prices to make the project more viable. For example:

Ranbaxy.

Conglomerate Merger: It refers to merger of firms engaged in unrelated

or assorted fields. This was earlier very popular among cash rich

companies as a means to obtain tax advantage of set off of losses by

merging with loss making group companies. Other benefits can be

reduction or elimination of certain overhead expenses.

Purpose of a Merger

(1) Procurement of supplies and revamping production facilities

(2) Reduction of Costs by achieving economies of scale

(3) Market expansion

(4) Financial Strength/support for example: Bank Borrowing,

guarantee, funds

(5) Increase Product range or product lines

(6) Image building and attract superior talent, especially with respect

to small companies.

(7) Better satisfaction to user of the product

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Advantages of Merger

(1)

Synergy: the principal economic rationale of a merger is thebelief that the value of the combined entity is expected to be

greater than the sum of independent values of the merging

entitles. If the firms A&B merger, the value of the combined

entity, V (AB), is expected to be greater than (VA+VB), the sum

of the independent values of A&B.

(2) Economies of Scale: When two or more firms combine, certain

economies arise due to larger volume of operations of the

combined entity. These economies arise because of better and

intensive utilization of production capacities, distribution

networks, research and development facilities etc.

Economies of Scale are most prominent incase of horizontal

mergers where the scope for more intensive utilization of

resources is greater.

(3) Strategic Benefit: When a firm decides to enter or expand in a

particular industry, acquisition of a firm engaged in that industry,

rather than dependence on internal expansion, may offer several

strategic advantages:

a. As a pre-emptive move it can prevent the competitor from

establishing a similar position in the industry.

b. It offers a special ‗timing‘ advantage because the merger

alternatives enable firm to ‗leap frog‘ several stages in the

process of expansion

c. It may entail less risk and even less cost.

d. In a ‗saturated market‘, simultaneous expansion and

replacement (through a merger) makes more sense than

creation of additional capacity through internal expansion.

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(4) Complementary Resources: If two firms have complementary

resources, it may make sensed for them to merge. For example, a

small firm with an innovative product may need the engineering

capability and marketing reach of a big firm.

(5) Tax Shields: Merger with a firm that has huge accumulated

losses and /or unabsorbed depreciation helps a profit-making firm

take advantage of tax provisions for a long period of time. This is

because when a profit-making firm merges with a loss-making

firm it can set off its profi t against th e other fi rms‘ loss es an d

thereby manage to lower tax outgo.

(6) Utilization of Surplus funds: A firm in a mature industry may

generate a lot of cash but may not have opportunities for

profitable investment. Such a firm ought to distribute generous

dividends an even buy back the shares if possible.

(7) Managerial Effectiveness: One of the potential gains of a

merger is an increase in managerial effectiveness. This may occur

if the existing management team, which is performing poorly isreplaced by a more effective management team. Often a firm,

plagues with managerial inadequacies can gain immensely from

superior management that is likely to merge as sequel to the

merger..

(8) Debt Leverage: The unutilized debt capacity of the merged entity

can be leveraged by the new entity.

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Problems in mergers

(1) Lack of Secrecy – The news about a merger or acquisition raise

market expectation and share price of the target.

(2) Management‘s enthusiasm to make an acquisition results in the

targets valuation being tainted by unrealistic expectations of

synergies.

(3) During negotiations with the target, the pressure to ―clinch the

deal‖. Results in the deal getting consummated at a large

premium, which cannot be recouped from the actual synergies,

obtained post acquisition.

(4) The benefit of economies of scale can be procured only up to the

optimal point, thereafter an increase in size would make the

organization too bulky and unwieldy and thus slow down the

processes and in turn harm the organization.

(5) Failure of other Mergers have made people skeptic about

evaluating mergers as a viable mode towards growth.

Motivations for Mergers and Acquisitions

There are a number of possible motivations that may result in a merger or acquisition.

One of the most oft cited reasons is to achieve economies of scale. Economies of

scale may be defined as a lowering of the average cost to produce one unit due to an

increase in the total amount of production. The idea is that the larger firm resulting

from the merger can produce more cheaply than the previously separate firms.

Efficiency is the key to achieving economies of scale, through the sharing of

resources and technology and the elimination of needless duplication and waste.

Economies of scale sounds good as a rationale for merger, but there are many

examples to show that combining separate entities into a single, more efficient

operation is not easy to accomplish in practice.

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A similar idea is economies of vertical integration. This involves acquiring firms

through which the parent firm currently conducts normal business operations, such as

suppliers and distributors. By combining different elements involved in the

production and delivery of the product to the market, acquiring firms gain control

over raw materials and distribution out-lets. This may result in centralized decisions

and better communications and coordination among the various business units. It may

also result in competitive advantages over rival firms that must negotiate with and

rely on outside firms for inputs and sales of the product.

A related idea to economies of vertical integration is a merger or acquisition to

achieve greater market presence or market share. The combined, larger entity may

have competitive advantages such as the ability to buy bulk quantities at discounts,

the ability to store and inventory needed production inputs, and the ability to achieve

mass distribution through sheer negotiating power. Greater market share also may

result in advantageous pricing, since larger firms are able to compete effectively

through volume sales with thinner profit margins. This type of merger or acquisition

often results in the combining of complementary resources, such as a firm that is very

good at distribution and marketing merging with a very efficient producer. The shared

talents of the combined firm may mean competitive advantages versus other, smaller

competition.

The ideas above refer to reasons for mergers or acquisitions among firms in similar

industries. There are several additional motivations for firms that may not necessarily

be in similar lines of business. One of the often-cited motivations for acquisitions

involves excess cash balances. Suppose a firm is in a mature industry, and has little

opportunities for future investment beyond the existing business lines. If profitable,

the firm may acquire large cash balances as managers seek to find outlets for new

investment opportunities. One obvious outlet to acquire other firms. The ostensible

reason for using excess cash to acquire firms in different product markets is

diversification of business risk. Management may claim that by acquiring firms in

unrelated businesses the total risk associated with the firm's operations declines.

However, it is not always clear for whom the primary benefits of such activities

accrue. A shareholder in a publicly traded firm who wishes to diversify business risk

can always do so by investing in other companies shares. The investor does not have

to rely on incumbent management to achieve the diversification goal. On the other

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hand, a less risky business strategy is likely to result in less uncertainty in future

business performance, and stability makes management look good. The agency

problem resulting from incongruent incentives on the part of management and

shareholders is always an issue in public corporations. But, regardless of the

motivation, excess cash is a primary motivation for corporate acquisition activity.

To reverse the perspective, an excess of cash is also one of the main reasons why

firms become the targets of takeover attempts. Large cash balances make for

attractive potential assets; indeed, it is often implied that a firm which very large

amount of cash is not being efficiently managed. Obviously, that conclusion is

situation specific, but what is clear is that cash is attractive, and the greater the

amount of cash the greater the potential to attract attention. Thus, the presence of

excess cash balances in either acquiring or target firms is often a primary motivating

influence in subsequent merger or takeover activity.

Another feature that makes firms attractive as potential merger partners is the

presence of unused tax shields. The corporate tax code allows for loss carry-forwards;

if a firm loses money in one year, the loss can be carried forward to offset earned

income in subsequent years. A firm that continues to lose money, however, has no use

for the loss carry-forwards. However, if the firm is acquired by another firm that is

profitable, the tax shields from the acquired may be used to shelter income generated

by the acquiring firm. Thus the presence of unused tax shields may enhance the

attractiveness of a firm as a potential acquisition target.

A similar idea is the notion that the combined firm from a merger will have lower

absolute financing costs. Suppose two firms, X and Y, have each issued bonds as a

normal part of the financing activities. If the two firms combine, the cash flows from

the activities of X can be used to service the debt of Y, and vice versa. Therefore,

with less default risk the cost of new debt financing for the combined firm should be

lower. It may be argued that there is no net gain to the combined firm; since

shareholders have to guarantee debt service on the combined debt, the savings on the

cost of debt financing may be offset by the increased return demanded by equity

holders. Nevertheless, lower financing costs are often cited as rationale for merger

activity.

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One rather dubious motivation for merger activity is to artificially boost earnings per

share. Consider two firms, A and B. Firm A has earnings of $1,000, 100 shares

outstanding, and thus $10 earnings per share. With a price-earnings ratio of 20, its

shares are worth $200. Firm B also has earnings of $1,000, 100 shares outstanding,

but due to poorer growth opportunities its shares trade at 10 times earnings, or $100.

If A acquires B, it will only take one-half share of A for each share of B purchased, so

the combined firm will have 150 total shares outstanding. Combined earnings will be

$2,000, so the new earnings per share of the combined firm are $13.33 per share. It

appears that the merger has enhanced earnings per share, when in fact the result is due

to inconsistency in the rate of increase of earnings and shares outstanding. Such

manipulations were common in the 1960s, but investors have learned to be more wary

of mergers instigated mainly to manipulate per share earnings. It is questionable

whether such activity will continue to fool a majority of investors.

Finally, there is the ever-present hubris hypothesis concerning corporate takeover

activity. The main idea is that the target firm is being run inefficiently, and the

management of acquiring firm should certainly be able to do a better job of utilizing

the target's assets and strategic business opportunities. In addition, there is additional

prestige in managing a larger firm, which may include additional perquisites such as

club memberships or access to amenities such as corporate jets or travel to distant

business locales. These factors cannot be ignored in detailing the set of factors

motivating merger and acquisition activity.

TYPES OF TAKEOVER DEFENSES

As the previous section suggests, some merger activity is unsolicited and not desired

on the part of the target firm. Often, the management of the target firm will be

replaced or let go as the acquiring firm's management steps in to make their own mark

and implement their plans for the new, combined entity. In reaction to hostile

takeover attempts, a number of defense mechanisms have been devised and used to

try and thwart unwanted advances.

To any offer for the firm's shares, several actions may be taken which make it difficult

or unattractive to subsequently pursue a takeover attempt. One such action is the

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creation of a staggered board of directors. If an outside firm can gain a controlling

interest on the board of directors of the target, it will be able to influence the decisions

of the board. Control of the board often results in de facto control of the company. To

avoid an outside firm attempting to put forward an entire slate of their own people for

election to the target firm's board, some firms have staggered the terms of the

directors. The result is that only a portion of the seats is open annually, preventing an

immediate takeover attempt. If a rival does get one of its own elected, they will be in

a minority and the target firm's management has the time to decide how to proceed

and react to the takeover threat.

Another defense mechanism is to have the board pass an amendment requiring a

certain number of shares needed to vote to approve any merger proposal. This is

referred to as a supermajority, since the requirement is usually set much higher than a

simple majority vote total. A supermajority amendment puts in place a high hurdle for

potential acquirers to clear if they wish to pursue the acquisition.

A third defensive mechanism is a fair price amendment. Such an amendment restricts

the firm from merging with any shareholders holding more than some set percentage

of the outstanding shares, unless some formula-determined price per share is paid.

The formula price is typically prohibitively high, so that a takeover can take place

only in the effect of a huge premium payment for outstanding shares. If the formula

price is met, managers with shares and stockholders receive a significant premium

over fair market value to compensate them for the acquisition.

Finally, another preemptive strike on the part of existing management is a poison pill

provision. A poison pill gives existing shareholders rights that may be used to

purchase outstanding shares of the firms stock in the event of a takeover attempt. The

purchase price using the poison pill is a significant discount from fair market value,

giving shareholders strong incentives to gobble up outstanding shares, and thus

preventing an outside firm from purchasing enough stock on the open market to

obtain a controlling interest in the target.

Once a takeover attempt has been identified as underway, incumbent management can

initiate measures designed to thwart the acquirer. One such measure is a dual-class

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recapitalization; whereby a new class of equity securities is issued which contains

superior voting rights to previously outstanding shares. The superior voting rights

allow the target firm's management to effectively have voting control, even without a

majority of actual shares in hand. With voting control, they can effectively decline

unsolicited attempts by outsiders to acquire the firm.

Another reaction to undesired advances is an asset restructuring. Here, the target firm

initiates the sale or disposal of the assets that are of primary interest to the acquiring

firm. By selling desirable assets, the firm becomes less attractive to outside bidders,

often resulting in an end to the acquisition activity. On the other side of the balance

sheet, the firm can solicit help from a third party, friendly firm. Such a firm is

commonly referred to as a "white knight," the implication being that the knight comes

to the rescue of the targeted firm. A white knight may be issued a new set of equity

securities such as preferred stock with voting rights, or may instead agree to purchase

a set number of existing common shares at a premium price. The white knight is, of

course, supportive of incumbent management; so by purchasing a controlling interest

in the firm unwanted takeovers are effectively avoided.

One of the most prominent takeover activities associated with liability restructuring

involves the issuance of junk bonds. "Junk" is used to describe debt with high default

risk, and thus junk bonds carry very high coupon yields to compensate investors for

the high risk involved. During the 1980s, the investment-banking firm Drexel

Burnham Lambert led by Michael Milken pioneered the development of the junk-

bond market as a vehicle for financing corporate takeover activity. Acquisition

groups, which often included the incumbent management group, issued junk bonds

backed by the firm's assets to raise the capital needed to acquire a controlling interest

in the firm's equity shares. In effect, the firm's balance sheet was restructured with

debt replacing equity financing. In several instances, once the acquisition was

successfully completed the acquiring management subsequently sold off portions of

the firm's assets or business divisions at large premiums, using the proceeds to retire

some or all of the junk bonds. The takeover of RJR Nabisco by the firm Kohlberg

Kravis Roberts & Co. in the late 1980s was one of the most celebrated takeovers

involving the use of junk-bond financing.

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VALUING A POTENTIAL MERGER

There are several alternative methods that may be used to value a firm targeted for

merger or acquisition. One method involves discounted cash flow analysis. First, thepresent value of the equity of the target firm must be established. Next, the present

value of the expected synergies from the merger, in the form of cost savings or

increased after-tax earnings, should be evaluated. Finally, summing the present value

of the existing equity with the present value of the future synergies results in a present

valuation of the target firm.

Another method involves valuation as an expected earnings multiple. First, the

expected earnings in the first year of operations for the combined or merged firm

should be estimated. Next, an appropriate price-earnings multiple must be determined.

This figure will likely come from industry standards or from competitors in similar

business lines. Now, the PE ratio can be multiplied by the expected combined

earnings per share to estimate an expected price per share of the merged firm's

common stock. Multiplying the expected share price by the number of shares

outstanding gives a valuation of the expected firm value. Actual acquisition price can

then be negotiated based on this expected firm valuation.

Another technique that is sometimes employed is valuation in relation to book value,

which is the difference between the net assets and the outstanding liabilities of the

firm. A related idea is valuation as a function of liquidation, or breakup, value.

Breakup value can be defined as the difference between the market value of the firm's

assets and the cost to retire all outstanding liabilities. The difference between book

value and liquidation value is that the book value of assets, taken from the firm's

balance sheet, are carried at historical cost. Liquidation value involves the current, or

market, value of the firm's assets

Some valuations, particularly for individual business units or divisions, are based on

replacement cost. This is the estimated cost of duplicating or purchasing the assets of

the division at current market prices. Obviously, some premium is usually applied to

account for the value of having existing and established business in place.

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Finally, in the instances where firms that have publicly traded common stock are

targeted, the market value of the stock is used as a starting point in acquisition

negotiations. Earlier, a number of takeover defense activities were outlined that

incumbent management may employ to restrict or reject unsolicited takeover bids.

These types of defenses are not always in the best interests of existing shareholders. If

the firm's existing managers take seriously the corporate goal of maximizing

shareholder wealth, then a bidding war for the firm's stock often results in huge

premiums for existing shareholders. It is not always clear that the shareholders

interests are primary, since many of the takeover defenses prevent the use of the

market value of the firm's common stock as a starting point for takeover negotiations.

It is difficult to imagine the shareholder who is not happy about being offered a

premium of 20 percent or more over the current market value of the outstanding

shares.

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Mergers and Aquisitions as a Business Strategy

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the

corporate finance world. Every day, Wall Street investment bankers arrange M&A

transactions, which bring separate companies together to form larger ones. Whenthey're not creating big companies from smaller ones, corporate finance deals do the

reverse and break up companies through spinoffs, carve-outs or tracking stocks.

Not surprisingly, these actions often make the news. Deals can be worth hundreds of

millions, or even billions, of dollars. They can dictate the fortunes of the companies

involved for years to come. For a CEO, leading an M&A can represent the highlight

of a whole career. And it is no wonder we hear about so many of these transactions;

they happen all the time. Next time you flip open the newspaper‘s business section,

odds are good that at least one headline will announce some kind of M&A

transaction.

Sure, M&A deals grab headlines, but what does this all mean to investors? To answer

this question, this project discusses the forces that drive companies to buy or merge

with others, or to split-off or sell parts of their own businesses. Once we know the

different ways in which these deals are executed, we'll have a better idea of whether

we should cheer or weep when a company you own buys another company - or is

bought by one.

One plus one makes three: this equation is the special alchemy of a merger or an

acquisition. The key principle behind buying a company is to create shareholder value

over and above that of the sum of the two companies. Two companies together are

more valuable than two separate companies - at least, that's the reasoning behind

M&A. This rationale is particularly alluring to companies when times are tough.

Strong companies will act to buy other companies to create a more competitive, cost-

efficient company. The companies will come together hoping to gain a greater market

share or to achieve greater efficiency. Because of these potential benefits, target

companies will often agree to be purchased when they know they cannot survive

alone.

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Although they are often uttered in the same breath and used as though they were

synonymous, the terms merger and acquisition mean slightly different things. When

one company takes over another and clearly established itself as the new owner, the

purchase is called an acquisition. From a legal point of view, the target company

ceases to exist, the buyer "swallows" the business and the buyer's stock continues to

be traded.

In the pure sense of the term, a merger happens when two firms, often of about the

same size, agree to go forward as a single new company rather than remain separately

owned and operated. This kind of action is more precisely referred to as a "merger of

equals." Both companies' stocks are surrendered and new company stock is issued in

its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two

firms merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one

company will buy another and, as part of the deal's terms, simply allow the acquired

firm to proclaim that the action is a merger of equals, even if it's technically an

acquisition. Being bought out often carries negative connotations, therefore, by

describing the deal as a merger, deal makers and top managers try to make the

takeover more palatable. A purchase deal will also be called a merger when both

CEOs agree that joining together is in the best interest of both of their companies. But

when the deal is unfriendly - that is, when the target company does not want to be

purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on

whether the purchase is friendly or hostile and how it is announced. In other words,

the real difference lies in how the purchase is communicated to and received by the

target company's board of directors, employees and shareholders.

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Synergy

Synergy is the magic force that allows for enhanced cost efficiencies of the new

business. Synergy takes the form of revenue enhancement and cost savings. By

merging, the companies hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses.

Consider all the money saved from reducing the number of staff members

from accounting, marketing and other departments. Job cuts will also include

the former CEO, who typically leaves with a compensation package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a

new corporate IT system, a bigger company placing the orders can save more

on costs. Mergers also translate into improved purchasing power to buy

equipment or office supplies - when placing larger orders, companies have a

greater ability to negotiate prices with their suppliers.

Acquiring new technology - To stay competitive, companies need to stay on

top of technological developments and their business applications. By buying

a smaller company with unique technologies, a large company can maintain or

develop a competitive edge.

Improved market reach and industry visibility - Companies buy companies to

reach new markets and grow revenues and earnings. A merge may expand two

companies' marketing and distribution, giving them new sales opportunities. A

merger can also improve a company's standing in the investment community:

bigger firms often have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized

once two companies merge. Sure, there ought to be economies of scale when two

businesses are combined, but sometimes a merger does just the opposite. In many

cases, one and one add up to less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders and

the deal makers. Where there is no value to be created, the CEO and investment

bankers - who have much to gain from a successful M&A deal - will try to create an

image of enhanced value. The market, however, eventually sees through this and

penalizes the company by assigning it a discounted share price. We'll talk more about

why M&A may fail in a later section of this tutorial.

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Mergers and acquisitions as growth strategies

Mergers and acquisitions as growth strategies are once again in vogue. This business

drama seems to be fueled by recent highly visible mergers between rich and famous

players. Even speculation around a low ball offer by Comcast to acquire Disney

seems to excite global interest in corporate marriages. However, like all such deals,

long-term success is rarely accomplished by a mere combination of cool stuff and

know-how. In the midst of all the hype, a well documented fact is that most merger

and acquisition activity rarely delivers the highly anticipated synergies between

companies. Throughout a merger or acquisition, people in an acquired company often

complain that they don‘t know what is happening, express fear about losing their jobs,

and feel demoralized as to the future of their contributions. Failed mergers that

otherwise have a sound strategic and financial fit are typically the result of the

irretrievable loss of intangible, messy-to-measure, and difficult-to-implement human

factors on which the company‘s tangible assets ultimate rest.

Traditional integration practices have been built around consolidating key resources,

financial and physical assets, brand names, and tradable endowments. The most

forward thinking integration strategies also capture key pieces of elusive core

competencies, such as an organization‘s best practices, skills, knowledge bases, and

routines. Typically excluded are critical root strategic assets, which can make or break

a union that is otherwise ―made in heaven.‖ These root strategic assets include

collaborative leadership, cultural cohesion and talent retention.

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The Impact of the Merger or Acquisition on the New Organization

Mergers and acquisitions immediately impact organizations with changes in

ownership, in ideology, and eventually, in practice. Of the three root strategic assetsnoted above, cultural cohesion is most often the critical asset in the eventual success

or failure of the overall deal and the one that impacts the extent to which qualitative

talent retention can be attained.

Despite the fact that it is increasingly common these days for companies to publish

their cultural traits or values, what is listed does not always reflect the actual culture

of the place. Anthropologists have long known that the task of learning about a

specific group‘s culture does not start by asking members themselves to identify the

specific traits. In fact, cultural traits are not readily identified by the members of a

social group. Understanding the depth of cultural influences that are practiced over

time within a specific group or organization requires long periods of reflective

observation and the formation of key questions about beliefs, disciplines and

innovative problem solving strategies.

Cultural Cohesion

Discerning a company‘s cultural cohesion is based on identifying the organization‘s

bedrock cultural components, which are the functional equivalents of the structural

elements of a building: the foundation, beams, pilings, etc. Careful inspection,

identification, and assessment of the supporting walls of a building are crucial to

determining the ultimate integrity of the space before it can be effectively and safely

renovated or restructured. While a company might be acquired because of the

synergies around brands, competencies or physical assets, the success of the merged

firm may well depend on whether or not steps have been taken to identify and retain

the organization‘s primary cultural underpinnings that support and maintain those

valuable resources.

The practice of cultural cohesion as a root strategic asset in merger and acquisition

integration involves identifying the underlying disciplines, conditions, and beliefs that

make up the internal weight bearing structures of an organization and lead to the

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formation of outward cultural traits. However, identifying and describing a

company‘s culture is inadequate, in and of itself, for maintaining key structural

supports of the organization. Even if cultural traits are accurately identified, the

process of maintaining their integrity within a new organizational structure presents

an entirely new set of challenges that most managers are ill equipped to meet

successfully. Cultural traits by themselves don‘t provide enough information to

determine where specific structural supports are located in a company. Cultural traits

tend to be simple outward manifestations of the more complex underpinnings that

hold a company together, help define what the company does, and, more

importantly, how the company does it.

Terminology to Identify Cultural Cohesiveness

Developing terminology that identifies cultural cohesive elements common to all

organizations can be a first step for managers to begin the process of understanding of

how cultures form and the ways in which cultures determine behavior, as well as of

identifying elements required to retain structural and cultural cohesion throughout the

merger and acquisition process. This first step of understanding cultural cohesiveness

and the origins of cultural traits provides critical strategic information that managers

need in order to make an acquisition produce true synergy and add real value.

By borrowing terms from diverse disciplines, we can create language that helps us

examine specific bedrock origins of culture that are common to most organizations

and that result in visible cultural traits and practices. Each of the cultural cohesion

classifications listed here describes a cultural origination point and its outward

cultural trait and suggests implications for effective merger and acquisition

integration strategies. In mergers and acquisitions, immediate replacement of cultural

cohesion practices can result in the loss of a key cultural driving force for individuals

in the organization who are crucial to the work of the new organization. Following are

seven of the most important of these concepts.

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Metallurgy

Traditionally, metallurgy describes the structures and properties of metal, the way it is

extracted from the ground and is refined, and the various means of creating things

from it. When describing organizations, the term refers to a system of processes andprocedures that occurs in all organizations and that creates specific cultural traits

around the ways people approach their work on a day-to-day basis.

Over time, a successful organization‘s approach to truly innovative work that is done

to create a product or service becomes a ―best of‖ practice. Possible cultural traits that

develop as a result of a company‘s approach to ―organizational metallurgy‖ could be a

sense of overall pride of accomplishment, reverence for the company‘s long history of

always carrying out processes and procedures in a particular way, and overall

openness or resistance to change. In view of the cultural traits embedded in the

―organizational metallurgy‖ of a given company, managers involved in mergers or

acquisitions might not want to rush to replace these practices. The history of such

processes can be leveraged to the acquirer‘s competitive advantage if investigation of

the practices‘ validity warrants. The extent to which that history of practice does or

does not result in pride or stagnation is a critical piece of information for managers

moving forward in an effective integration strategy.

Mythology

Mythology is the group of stories, ideas, or beliefs that become a part of an

organization. While these stories are not necessarily based on facts, they usually

reflect historical accounts of greatness or tragedy and will likely show up in the

organization either as a respected legend or common gossip. Mythology in a company

can serve either to create a culture of inspiration or a culture of mistrust. During the

process of mergers and acquisitions (M&A) integration, managers should identify

organizational myths. If those myths serve inspirational purposes or appropriately link

current work to the company‘s history, creating ways to acknowledge such stories

could improve the odds of talent buy in.

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Missiology

Missiology is the process of persuading others to accept or join a belief, cause, or

movement. Most organizations have a tacit, though usually quite subtle, process

through which new employees are effectively assimilated into or blocked from theorganization. Depending on the unspoken practices of the organization, this

assimilation process may also include opportunities to commit to or question

company values. The attitudes that current employees have in supporting or

prohibiting the integration of new talent directly impact the integration process. It is

particularly important to realize that this informal socialization process may not be the

same as the new employee recruitment, orientation, and professional development

programs set up by the Human Resources Department even though the latter may be

held up as providing ways to acculturate new members so that they learn valuable

cultural traits.

Implications for effective M&A integration include a realization by senior managers

that an attitude of ―This is a great place to work‖ is a powerful resource to fold into

the company. Its antithesis, ―We hate this place,‖ offers a challenge to replace that

negative attitude and create a productive outlook.

Managers who correctly identify a company‘s existing missiology or approach to

integrating new people have an advantage in designing new strategies that represent

well-thought-out processes for enlisting broad support of the integration process. At

the end of the day, it is the people within a company who have the most impact on

how effectively new talent is integrated into the organization and whether that

integration is into a positive or cynical culture. Managers who leverage in a positive

manner the resources of those individuals‘ attitudes can increase the odds of

successful integration of those resources.

Meritocracy

A meritocratic system gives opportunities and advantages to people on the basis of

their contributions and abilities rather than on the basis of their job longevity,

connections, status, or other such attributes. People are more likely to contribute

genuinely to the organization and maintain trust when there are clear and fair

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promotion, advancement, and recognition practices. More importantly, the degree of

meritocracy can be an indicator of the real ethical practices of a place. The degree to

which meritocracy is perceived to be the norm translates into cultural traits of reward

expectations and the extent to which such expectations are fair or not. Implications for

effective M&A integration include addressing ways in which individuals‘

contributions are recognized and valued. People will take notice if the merging

companies have differing traditions and systems for advancement and reward

regardless of whether or not they perceive a company‘s practice of meritocracy to be

positive or negative. Since each organization weights contributions and abilities

differently, it is important for managers to recognize the real reward systems that are

in place in the merging companies and how these systems differ in the ways they are

implemented and perceived by employees. These differences could impact

employees‘ resistance to or acceptance of integration eff orts.

Modality

Modality is a treatment or strategy applied to a specific disorder or circumstance that

needs improvement. Typically used as a medical term, modality can be medication or

therapy used to treat an illness or disease. In a company in which there is a healthy

awareness that dysfunctional behavior and processes can exist, appropriate modalities

must be chosen to address or remedy specific problems rather than ignoring or

accepting the problems. Over time an organization may have accumulated an

im pressive ―medicine chest‖ of very specific remedies that could bring value to the

acquisition. Managers would do well to identify and evaluate these modalities for

integration into the new organization. On the other hand, if an organization has

routinely avoided or ignored organizational maladies, a triage approach to those

challenges might be necessary in order to move the integration process forward. Theway successes and failures are acknowledged and dealt with is important to successful

integration.

Eff ective ―treatments‖ within a company may be worth close scrutiny and an effort to

bring them into the merged organization. By the same token, preparing strategies to

integrate into a new entity an organization that has a history of ignoring problems or

treatments requires particular attention during the integration process in order to avoid

the transference of ineffective modality practices.

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Mores

Mores are customs and habitual practices, especially as they reflect moral and ethical

standards that a particular group of people accept and follow. This cultural cohesion

classification reflects the ways ethics plays out in the daily life of the organization andthe ways in which ethics statements and/or ethics training impact behavior within an

organization. Implications for effective M&A integration include paying attention to

the ways ethics is practiced in the organization: How do ethics training programs

affect employees? Is training pushed down throughout the organization simply to

meet requirements, or is living with integrity actually valued and rewarded within the

organization? Managers should identify the mores of each organization and the ways

in which they can be effectively shared across organizations. If an acquiring

company‘s mores are viewed as being based on low standards, people in the acquired

company will be less likely to support integration initiatives and may leave. Strategies

should be formulated to equalize mores between organizations by advancing a ―best

of‖ approach to mores and ethics development in the new organization.

Mettle

Mettle — the courage, spirit, or strength of character of a group within an

organization or the particular mental and emotional character unique to an individual.

The extent to which individuals pay attention to their own spiritual development or

are encouraged by the organization to develop mettle can result in an important

cultural value. This cultural cohesion classification has only recently begun to receive

attention as a valuable characteristic of companies and individuals. Effective M&A

integration suggests that managers should look closely at ways that individuals show

their mettle by practicing altruistic concern and respect for others within the

organization. Enhancing and supporting these behaviors is critical to the success of

the organization and could serve as a positive leavening effect throughout the

organization.

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Varieties of Mergers From the perspective of business structures, there is a whole host of different mergers.

Here are a few types, distinguished by the relationship between the two companies

that are merging: Horizontal merger - Two companies that are in direct competition and share

the same product lines and markets.

Vertical merger - A customer and company or a supplier and company. Think

of a cone supplier merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in

different markets.

Product-extension merger - Two companies selling different but related

products in the same market.

Conglomeration - Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed.

Each has certain implications for the companies involved and for investors:

Purchase Mergers - As the name suggests, this kind of merger occurs when

one company purchases another. The purchase is made with cash or through

the issue of some kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them

with a tax benefit. Acquired assets can be written-up to the actual purchase price, and

the difference between the book value and the purchase price of the assets can

depreciate annually, reducing taxes payable by the acquiring company.

Consolidation Mergers - With this merger, a brand new company is formed

and both companies are bought and combined under the new entity. The tax

terms are the same as those of a purchase merger.

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Documents

IM Assgnmt