Why 40% of Mergers and Joint Ventures Fail – Business Essay
There have been a lot of companies in the recent past who have merged with other companies. They could be successful or after some time, they may fail. A successful company merger presently could be Sony Erickson, with Sony being one company and Erickson another before the merger. An
incident of a merger failure could be Dunlop Pirelli. This essay will attempt to show the reasons as to why 40% of mergers and joint ventures fail. The topics under which the writer will prove this are change, leadership, communication, culture, McGregor’s X and Y theory. Regarding change, resistance to change will be talked about when it comes to two or more companies merging.
When it comes to leadership, the possible clashes between autocratic and democratic leadership styles will be discussed. We will see what Gaut and Perrigo have to say about it, and also from Adler and Elmhorst. The laissez- faire style of leadership will also be discussed. As for communication, the possible problems that can occur with companies who have open communication merging with others who have closed communication will be discussed. Clashes with supportive and defensive communication will also be shown. It would be clearly explained by Gaut and Perrigo.
Culture is a very big factor which decides whether a merger is a failure or not. Under culture, low context culture versus high context culture; Individualism versus Collectivism; High power distance versus low power distance; Low uncertainty avoidance versus high uncertainty avoidance; masculinity versus femininity, and finally monochronic versus polychronic will be discussed. Here again, Adler and Elmhorst, will explain individualism and collectivism, and so will Trompenaars. We will see the different types of cultures Handy talks about, and also what Hofstede has to say about culture. McGregor’s X and Y theory will be discussed, where problems of X workers clashing with Y workers will be explained.
Mergers take place when two or more companies join together to form one big company. Joint ventures are similar to mergers, but the only difference is that the two companies still keep their separate identities.
“A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a “merger” rather than an acquisition is done purely for political or marketing reasons.”(1)
One main reason as to why mergers fail is that both companies have different leadership styles. If two different leadership styles come together, the chance of a successful merger is very slim. The meaning of leadership is as follows: “In the most simplest terms, leadership is the art of getting someone else to do something we want them to do.”( Gaut & Perrigo).
According to Adler & Elmhorst (2005), there are three main leadership styles. The first style is the autocratic style. “Some leaders are authoritarian, using legitimate, coercive, and reward power at their disposal to control members.”(Adler,R & Elmhorst,J).
Gaut & Perrigo (1998) acknowledges the fact that an autocratic leader is someone who sees himself as the central person in authority and who has power over his workers.
Adler & Elmhorst continues by saying that there are democratic leaders who invite the workers to help in decision making. Gaut & Perrigo (1998) also demonstrates that a democratic leader is a person who involves his followers in decision making. There could also be a third leadership style which is laissez- faire. “The designated leader gives up the power of that position and transforms the group into a leaderless collection of equals.”(Adler & Elmhorst). Therefore one can see that if any of these types of leadership come together then it would be disastrous, as the management of one company will be in conflict with the management of the other merging company as to which leadership style to adopt. They could ultimately come to no agreement and the merger would fail.
The next factor that is going to be discussed is the different types of communication styles of merging companies. According to Gaut & Perrigo (1998), “Communication style is defined as the manner in which you disclose information to your co-workers, supervisor(s) and subordinates.” Gaut & Perrigo further explains that there can be open communication and closed communication. They say that open communication is all about people sharing information and opinions freely. They add that, in contrast closed communication involves little information shared and that workers don’t feel free to tell their opinions. Another type of contrasting communication styles according to Gaut & Perrigo are defensive and supportive communication. They say that defensive communication will be there when the workers lack openness and also honesty with each other.
In contrast, they explain that supportive communication is where there is plenty of openness and honesty. Therefore, defensive communication reduces the communication effectiveness but supportive communication enhances job productivity and satisfaction. Therefore, if there is a clash between any of these types of communication styles when merging – like open and close communication, defensive and supportive communication – then the merger can turn out to be a failure. This is because workers who are used to one type of communication won’t get along with workers who are used to another type of communication.
A very important factor that will decide whether a merger is successful or not, are the culture of both companies who are merging. There are many sub- factors under this. Culture could be defined as follows:
“The shared values, traditions, customs, philosophy, and policies of a corporation; also, the professional atmosphere that grows from this and affects behaviour and performance” (2)
There could be one company who has an individualistic culture merging with another company who has a collectivist culture. Adler & Elmhorst(2005) explains that workers in firms who nature individualistic cultures tend to think about themselves first, and then only the society. They also say that there is a lot of freedom available to them. This is given to them in order to achieve their personal goals. Trompenaars(2003) says that individualism affects three critical areas, which are negotiations, decision making and motivation. He says that individuals seek to be distinguished within the group, and that the other members also approve of this. He says the word “I” is the most used word for individualism. Adler & Elmhorst(2005) say that in collectivist cultures, contrastingly, the workers work in groups and their first loyalty is towards one another in the group. They add that workers of collectivist societies are likely to believe that the welfare of the company is as important as themselves. Therefore as we can see, individualistic workers and collectivist workers will never go hand in hand with each other. This is because both types of workers are working with a different mind set which are two extremes.
The other type of culture clash is power distance. Adler & Elmhorst defines that “power distance refers to attitude toward differences in authority.” They say that there are high power distances and low power distances. They continue by saying that high power distance cultures emphasizes that there is unequal power distributed among the workers. Some workers are believed to have more influence and resources than others. Whereas low power distance cultures treat everyone equal, and even if the manager has a bit more power than the other workers, the managers’ powers are not exaggerated.
According to Handy, he divides culture into four categories. The first is power culture which means authority is with a few people only. It has a few rules only. The second is role culture, where the amount of power is defined from the role of the person in the company. He names the third as task culture where teams are formed to solve the firm’s problems. The last is called a person culture where the workers think they are more important than the company. (3)
If two different cultures explained by Handy merge, for example – power culture and task culture, then the risk of failure will be very high.
In contrast, Hofstede talks about five characteristics of culture. He agrees with Adler & Elmhorst that there can be differences in the power distances, which can be high or low. He also talks of individualism where workers are supposed to stand up for themselves, the other being collectivism where workers work as a group. Additionally, Hofstede talks about masculinity versus femininity, which explains the differences between male and females values. He says that male values usually include competitiveness, ambition and things like material possessions. On the other hand, he describes female values like being feelings and relationships. He also talks of uncertainty avoidance where he says that society or, in this case a firm will be prepared to accept risks only to a certain extent. He also mentions short and long orientations. (4)
Another type of culture clash is between high context culture and low context culture. According to Adler & Elmhorst, a low context culture means that workers will use verbal communication to show feelings, thoughts and ideas. On the other hand, a high context culture expresses meaning by using nonverbal methods, in order to maintain harmony between the workers. The final factor in culture which will be discussed is the concept of monochronic and polychronic. People(in this case workers) who are monochronic will do one job at a time, whereas people who are polychronic will tend to do many jobs at the same time, but at the end of the day hasn’t finished a single job. Monochronic people concentrate really hard on the job they are doing, they also take deadlines very seriously. Contrastingly, polychronic people are very distractible and are prone to interruptions. Monochronic people are low context and need a lot of information, whereas it’s the opposite for polychronic people where they are high context and already have plenty of information. (5) Therefore, it can be said that if polychronic workers of one firm merges with another firm which has monochronic workers- the merger won’t be a successful one as these two types of workers won’t work well hand in hand.
The next topic which will be discussed regarding mergers, is the concept of change. Resistance to change will be discussed in detail as it is appropriate for mergers, and whether they are successful or not. Resistance to change can be defined as: “Resistance to change is the action taken by individuals and groups when they perceive that a change that is occurring as a threat to them.” (6) The workers of a company who are about to go through some kind of change, in this case a merger, will start to oppose the change if they feel that they are going to lose out in the merger. There could be an instance where there is resistance from the customers regarding the merger. They may not support the change, and may switch to firms which are rivals to the merging firms. (7) As can be seen, resistance to change is a threat to the success of a merger. The management of the two firms merging will have to deal with the problems created by the workers. They may lose customers who are against the merger. All this could spell failure.
McGregor’s X and Y theory states that there are two types of workers X and Y.
“Theory X assumes that the average person: dislikes work and attempts to avoid it; has no ambition, wants no responsibility, and would rather follow than lead; is self centered and therefore does not care about organisational goals; resists change; is gullible and not particularly intelligent.” (8) Theory Y is just the opposite of X. Y workers are committed to their jobs, and seek responsibility. They seek rewards and will work hard in order to get it. They are creative and genuine. If there is a merger, where in one company there are X workers and the other- Y workers, probability of a successful merger is very slim. Therefore, from the above established information, one could see that most mergers would fail due to the above reasons.
The writer would also like to add a few things. The problem of tall and flat structures could also be present when two companies merge. A tall structure is where a firm has many layers from the top manager to the lowest worker. A flat structure doesn’t have many layers. If a manager of a flat organisation mergers with an organisation which is tall, he would want to get rid of unnecessary workers by delayering. Many workers will lose their jobs, and they will demand compensation. This is costly as the company will have to pay every worker who got unemployed because of the merger, and if they don’t compensate they will create a bad image, and therefore customers may switch their loyalty to other rival companies. The merger would ultimately fail.
Regarding resistance to change, one solution could be educating the workforce. The managers could tell the workers of the benefits that the merger could bring. This would definitely reduce the amount of resistance and would lead to a successful merger. However, this method may not always work as some workers may not change their minds. Other solutions could be participation and involvement, where the managers will ask the workers to help in the process of merging. This would make the workers more involved, and they would resist less to the change. Facilitation and support could be a third solution where the managers would try to help the workers during the process of merging. The managers could strike an agreement or negotiation with the workers. All this will reduce the amount of resistance.
When we talk about culture clashes and its problems, the solution that comes to mind is that the managers of the different firms which are coming together should first agree on one culture. This corporate culture should remain and should not be changed. However, they should introduce it slowly and not at once, so that the workers will have time to get used to it. If the merged company introduces it too quickly, then workers would not be able to adapt to it. They may get frustrated and leave the company (including efficient workers). In the end, the company would suffer from a shortage of workers and would have to start recruiting workers. This would be a difficult procedure and the merger would eventually fail.
Another factor that could increase the chances of a merger surviving, are government subsidies. If the government thinks that a particular merger is beneficial for the society, then it would provide subsidies which will reduce the cost of merging, and therefore make it easier for the merger to take place. However, the opposite could also happen. The government may think that the merger is not in the best interest of the people. If it thinks like that, it may make it very difficult for the two companies to merge. It could, for example, increase the corporation tax rates of the merged firm. Therefore the firm would have to pay a higher percentage of its profit as tax. The profitability of the firm would fall, and it would fail.
One definite threat for a smaller company merging with a very large company is the fact that it could result in a take over, where the large company would have the ability to take over the smaller one by buying more than 50% of the shares. In which case, the smaller company would lose its identity. Therefore, the workers who were working in the smaller company could become non- co operative because they feel that they have lost their identity. Therefore, the overall efficiency would go down, and they would become less competitive and ultimately fail. Therefore, if a merger is to be successful, it would be advisable that two companies of similar sizes merge. Then, they would have similar powers and not an imbalance of power.
As had been said before, there could be autocratic leaders and democratic leaders. A solution that can reduce the possibility of a merger failing could be that the new management could appoint a leader that can be both democratic, and also autocratic at times. This is because when two companies merge, there will be all sorts of workers. There could be workers who are lazy and inefficient, and there could be workers who are efficient and like responsibility. This type of leader could be democratic towards the workers who are efficient and hard working, but could be autocratic towards the lazy ones. This way the company can get useful ideas out of the efficient ones, and also would be assured that the inefficient workers work. This approach would definitely reduce the possibility of a merger failing.
There could be an instance where one company which is producing one type of product merges with another company producing a different type of product. Since the managers of one company do not have the expertise in the other company’s product, and vice versa, the management decisions would not be professional. This could make them incompetent, and they would lose customers and market share. They would eventually fail. On the other hand, one could say that if two companies producing different products merge, then they would be diversifying. This would be really good as they would have more security. For example, if one product is making a loss, it would be covered by the profit of the other product. Therefore, this would help the merged company to survive in the market and not fail.
Mergers could achieve economies of scale or suffer from diseconomies of scale. This could be further explained. The general understanding is that when a merger takes place, the new company would become bigger in size. This could be an advantage to them as they will have the ability to achieve economies of scale. This is where an increase in output reduces the cost of input. However, if the company goes over the optimum level of output, they could suffer diseconomies of scale, which is when the cost of inputs increases at a higher rate than the output. As a result, if the company can not control its cost due to diseconomies of scale, they would fail. To avoid failing, they should produce the optimum amount of units.
International mergers are discussed when we talk about mergers. It could be said that international mergers, where a company from one country merging with a company from another country, could have less chances of survival. This is because the two companies will have different styles of working. In one country, the people in general may consider relationships and socialising the top priority, and then only working. In the other country however, they may consider work as the highest priority, and then only things like social activities and relationships. Therefore, both companies will probably have different priorities, and so in the end, nothing will be achieved and it will be a disaster. Therefore, if international mergers were to take place, the merger should be with companies of which the two countries have the same priorities. Then only will there be good co ordination. The other big problem when it comes to international mergers is the communication barriers that arise. Since there is a big distance between the two companies, there could be breakdowns in communication. Misunderstandings can occur which can lead to wrong decision making. If they are operating in a competitive market, this wrong decision made could cost the merged company a lot and they may fail. However, these days, due to technological advancement – the amount of distance has reduced for internationally merged companies. In other words, globalisation has helped reduce the possibility of failure. An example of technological progress is in the invention of video conferencing, where the managers from two different countries, can see the person they are talking to without ever actually having to leave the country. This will save time and cost, and reduce the amount of misunderstandings.
When we discuss merger failures, we were mainly talking about the internal factors that contribute to their failure. We have to consider the external factors as well. We could say that if interest rates change, the company that is merging has no power over it. If interest rates increase, then the cost of merging will increase (especially if there were a lot of borrowings involved). This unanticipated cost may be too much to cope and it will fail. However, if interest rates fall it would be beneficial. If inflation rates increase after the merger takes place, the demand will fall as people reduce their spending as it is expensive. The merger will have to cope with the lower demand first up in addition to its internal problems. They may suffer with the huge pressure. However, if the inflation rise is temporary, then it would not be a problem. There could also be special pressure groups who could campaign against the merger for some reason. One reason could be that the merger will convert the new company into a monopoly with over twenty five percent of market share. The pressure groups could convince the public that the merger is not in their interests. The consumers may retaliate be not buying the company’s products. This would lead to a reduction in sales and profits. The company may close down because of this.
Therefore, from the above factors discussed above, it could be agreeable that many mergers fail. However, one doubts whether the percentage of mergers failing could be as high as 40%, it could be a bit lower. The reasons that would explain that 40% is too high can be shown by the following:
Most mergers that are set up have been carefully planned by the merging firms. It’s not practical to choose any firm to merge with. There should be a careful screening of firms, and the firm that is the most compatible one to the other firm who is selecting, should be chosen.
Even if mergers do have problems at the start, it would only be in the short term. In the long term, however, the merger would reap positive benefits. They would become a large stable company, and would become very competitive in the market.
They could also achieve economies of scale, which would reduce costs. The end result would be that they become very profitable, and would not definitely fail.
Therefore, it would be natural for companies who are merging, to go through the usual cycle of short run difficulties, followed by long term gains. There would be cases of mergers failing, but it could be said that it would not be as high as 40%, as long as there is careful planning and selection of the companies who intend to merge.