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Successful Mergers and Acquisitions and the Role of Planning in Accelerating Post-Merger Integration

Submitted by

EFOE Freddy SOLLEN-MESSANVI

UNDER THE GUIDANCE OF

PROF. LOUIS HEBERT

 

 

 

 

2021

Successful Mergers and Acquisitions and the Role of Planning in Accelerating Post-Merger Integration

 

 

Efoe Freddy Sollen-Messanvi

McGill University

Department

Prof. Louis Hebert

Due date

Table of Contents

ABSTRACT 5

Acknowledgments 7

CHAPTER ONE 9

1.0 Successful Mergers and Acquisitions and the Role of Planning in Accelerating Post-Merger Integration 9

1.1 Statement of the problem 11

1.2 Definition of Mergers and Acquisitions. 12

1.3 Importance of Mergers and Acquisitions 13

1.3.1 Advantages of mergers and acquisition to the Economy 15

1.3.2 Disadvantages of mergers and acquisitions 15

1.4 Types of Mergers & Acquisitions 17

1.4.1 Horizontal Mergers 17

1.4.2 Vertical Mergers 17

1.4.3 Conglomerate Mergers 18

1.4.4 Financial Acquisitions 18

1.5 Motives for Mergers 18

1.6 Justification of Study 20

1.7 Objectives 22

1.8 Research Questions 22

1.9 Structure of a dissertation paper 23

CHAPTER TWO 25

LITERATURE REVIEW 25

2.0 Introduction 25

2.1 The Importance of the Acquisition Process 30

2.2 Pre-Merger Planning and Acquisition 31

2.2.1 Due diligence 33

2.2.2 Management capabilities 34

2.2.3 Post-Merger Integration 35

2.2.4 Post-Merger Performance 38

2.3 Summary 41

2.4 Theoretical framework. 42

2.5 Conceptual Framework 51

2.6 Sociocultural Factors 53

2.7 Acquisition Process 56

2.8 Merger and Acquisition Strategy 57

CHAPTER THREE 59

RESEARCH METHODOLOGY 59

3.0 Introduction 59

3.1 Research Design 59

3.2 Data collection. 60

3.3 Sampling 61

3.4 Data Analysis 62

3.5 Summary 62

3.7 Case Study 64

CHAPTER FOUR 65

RESULTS AND DISCUSSION 65

4.0 Case Study: British American Tobacco West Africa and Imperial Brands 65

4.1 Introduction to the Planned Transaction 65

4.2 Proposal 1: Deal Size is a Significant Determinant of M&A Success. 66

4.2.0 Revenue 66

4.2.1 Operating Profit 68

4.2.2 Market Share 69

4.2.3 Transaction Decision 71

4.4 Proposal 3: Better Due Diligence and Pre-Merger Planning can Mitigate Post-Merger Integration and Poor Performance Risks. 74

4.5 Interpretation and Recommendations 75

4.5.0 Focus on the big picture 75

4.5.1 Create an M&A process that emphasizes continued due diligence. 75

4.5.2 Keep all employees motivated. 76

4.5.3 Plan to integrate leadership. 76

CHAPTER FIVE 77

CONCLUSION 77

References 81

 

 

ABSTRACT

The dissertation aims at studying the successful mergers and role planning in post-merger integration. The study also focuses on successful mergers and acquisitions in Tobacco companies. The dissertation is majoring in the global Tobacco companies and the role they play in the post-merger integration. The case study is chosen on five major tobacco companies that participate in international markets. The research is focusing on three objectives that are; successful mergers and acquisition, common pitfalls and preconditions

for a smooth and sustainable M&A and how these can be better managed, the culture of the merging businesses

and how they can be aligned to ensure a smooth and sustainable merger. To achieve uniform research, I have majored in only five companies: British American Tobacco (BAT), Philip Morris International, Imperial Brands (IB), China Tobacco, and Japan Tobacco International. There have been noticeable advancements in the Tobacco industry for the last 20 years since Tobacco controls were launched. The purpose of this dissertation is to evaluate Successful Mergers and Acquisitions and the Role of Planning in Accelerating Post-Merger Integration. Mergers and acquisitions have contributed to 5 major Tobacco companies known as` Big Tobacco.’ The study will major on these five global tobacco companies: Philip Morris International, British American Tobacco (BAT), Imperial Brands, Japan Tobacco International, and China Tobacco. In 1992, Tobacco controls were launched, which led to an increase in sales, especially in Phillip. Can companies achieve successful M&As (ones that deliver real value)? There are several theories I have put across several approaches to support this concept. Some ideas give a positive argument, and others provide an opposing view while others offer mixed views. It is challenging to explain why companies acquire others. The purpose of this study is to examine how the acquisition process, deal size, and organizational fit can be handled to facilitate successful acquisitions. There have been noticeable advancements in the Tobacco industry for the last 20 years since Tobacco controls were launched. The purpose of this dissertation is to evaluate Successfully.

Mergers and Acquisitions and the Role of Planning in Accelerating Post-Merger Integration. Mergers and acquisitions have contributed to 5 major Tobacco companies known as` Big Tobacco.’ The study will major on these five global tobacco companies: Philip Morris International, British American Tobacco (BAT), Imperial Brands, Japan Tobacco International, and China Tobacco. In 1992, Tobacco controls were launched, which led to an increase in sales, especially in Phillip. Can companies achieve successful M&As (ones that deliver real value)? There are several theories I have put across several approaches to support this concept. Some ideas give a positive argument, and others provide an opposing view while others offer mixed views. It is challenging to explain why companies acquire others. The purpose of this study is to examine how the acquisition process, deal size, and organizational fit can be handled to facilitate successful acquisitions. Desk and primary research were used for this study. The desk study reviews the literature and theoretical aspects of successful and failed mergers from well-cited authors using publicly available databases, including that of Harvard Business School. The research instruments used to carry out this research were administered questionnaires. The questionnaires covered both open-ended and closed-ended questions for the easy understanding of the respondent. Under the primary survey research, the non-probability sampling method was employed to collect data. The purpose of the data-gathering was to examine how the acquisition planning, deal size, and organizational fit can be handled to improve acquisition outcomes. The research provides evidence that when the deal size is attractive, there is a success. The M&A process and fit factors are just as necessary, beginning with the pre-merger phase appreciation of the growth potential do not always lead to deal consummation and eventual.

 

 

Acknowledgments

I extend my special gratitude and appreciation to my supervisor Prof. Louis Hebert for guidance,

encouragement, and support in this research. His professional guidance, insightful comments, and immense cooperation are of immeasurable benefit to this research. The supervisor acted as my mentor all through, and his advice has helped me write this research.

 

 

Table of Figures

Figure 2.0.1: Global Deals by Volume 26

Figure 2.0.2: Global Deals by Value 27

Figure 3: Conceptual Model 49

Figure 4.0.1: Contribution to British American Tobacco West and Central Africa revenue 65

Figure 4.0.2: Imperial Brands’ Revenue in Million Euros (2016–2019F) 66

Figure 4.0.3: Imperial Brands’ Revenue vs. British American Tobacco’s Revenue in the Same African Markets 66

Figure 4.0.4: Imperial Brands’ Operating Profit and EBITDA Margin (2016–2019F) 67

Figure 4.0.5: Imperial Brands’ Profit Margin vs. British American Tobacco’s Profit Margin in Africa 68

Figure 4.0.6: Market Share of Cigarette Businesses in Africa (2017) 68

Figure 4.0.7: Market Share of Imperial Brands Businesses in Africa (2017) 69

 

 

 

 

 

 

 

 

CHAPTER ONE

1.0 Successful Mergers and Acquisitions and the Role of Planning in Accelerating Post-Merger Integration

There are five major tobacco companies worldwide. The companies are referred to as the “big five” global tobacco companies. They include British American Tobacco (BAT), Philip Morris International, Imperial Brands (IB), China Tobacco, and Japan Tobacco International.

Mergers and acquisitions mean the condensation of two or more companies. Mergers involve consolidating two or more companies to form one company. Acquisitions occur when a company is confiscated taken by another company.

The primary reason for mergers and acquisitions is to add value through synergy. The main objective is to maximize wealth. There are different types of M&As. A merger can occur through absorption or consolidation. M&As strategy is becoming a prominent strategy in Tobacco companies. Companies tend to achieve competitive advantage through mergers and acquisitions. There is improved efficiency and increased growth associated with mergers and acquisitions. (Cheng et al., 2007). Firms that adopt mergers and acquisitions obtain extra advantages from the combination of companies than stand-alone companies. These advantages accrue from optimum allocation of resources, increased competitiveness in the market, shareholders wealth maximization, and broadening of operations’ scale. Mergers and acquisitions are a significant concern in governments and companies.

Mergers and acquisitions began in developed countries such as United States, United Kingdom, and European markets. In 1992, M&As were introduced in Asia (Wong et al., 2009). There are many studies undertaken in European markets, but none of them has tackled mergers and acquisitions in the Tobacco industry. This poses an opportunity to study successful mergers and acquisitions in Tobacco companies globally. The sample of the study will be the big five tobacco companies that operate in global markets. I chose to study the tobacco companies because there has been no recent research in that field. My concern will be on the deal size, organizational fit, acquisition process, and the role those variables play in post-merger integration.

A merger can also occur through horizontal, vertical, or conglomerate. In 2020, tobacco companies’ market size was rated 932.11 billion dollars and was expected to rise at a rate of 1.8% for the next 7 yrs. Tobacco smokers have been increasing globally. The rise in the number of smokers has been caused by introducing clove cigarettes and menthol cigars which are flavored tobacco products. American Lung Association released a report which showed an increase in people who smoke between 2016 and 2017.

The use of electric cigarettes has increased in the United States from 2011 to 2019. Tobacco companies are designing new products to cope up with the changing demand of smokers. Juul Labs launched e new production in July 2018. The vaping device was small with the size of a flash disk. The tobacco industry has been hit strongly by the COVID-19 pandemic. Tobacco addicts are the most susceptible to the disease as it affects the lungs. Tobacco products are getting a negative impact during the pandemic due to its health risks associated with it.

The forecasts show that the tobacco market is likely to record a growth rate of 3.75% from 2020-2025. Tobacco is a significant source of revenue globally. Some countries are imposing strict regulations to discourage smokers from due to increase prices. Change in people’s lifestyles and increase in income has resulted in to increase in demand for tobacco products. In 2019, Imperial Brands (IB) offered to sell its operation in West Africa to BAT, as IB was trying to inject cash into its business. BAT made an offer, but IB considered it far below its worth. If this offer had been accepted, it would have marked another mini merger and acquisition after the major merger that occurred in 1999 between British American Tobacco and Rothmans International; however, the acquisition of IB would have been limited to Africa.

The study will help us to investigate how M&As contribute to business growth either economically or financially. The study will help us to establish challenges faced by companies that adopt M&As and how the challenges can be managed. The study will enable us to understand how the merging businesses can be aligned to enhance competitiveness in the market.

 

1.1 Statement of the problem

Many researchers have undertaken studies on mergers and acquisitions in various sectors such as the insurance industry, locomotive industry, health sector, banking, and finance. Fazlan researched the effect of M&As in Malaysian banks. Data were collected from domestic banks in Malaysia. Fallen confirmed that M&As have a positive contribution to domestic banks through economies of scale. Hazlina et al., in their study, also confirmed that the productivity of Malaysian banks had increased as a result of mergers and acquisitions. .Liu et al. carried out research on the impact of mergers in banks in New Zealand (1989-1998). He used efficiency, cost, and benefit effect as the main variables of his study. He confirmed that efficiency increases after mergers and acquisitions. Ayadi et al. undertook a survey of how M&As are used in European banks between 1996 -2003. They used technical efficiency and cost management as the research variables. They concluded that the merging of banks contributed positively to productivity. Cummins et al. undertook a study on the M&As in an insurance company in the United States between 1988-1995. They used to cost and revenue efficiency as the research variable. They concluded that insurance companies achieve greater efficiency through M&As. James researched the effect of a merger on public bus services in Norwegian between 1995-2002. He found out that M&As contribute positively to the production efficiency in the bus industry. No research has been carried out on tobacco companies since recent studies were on other sectors apart from tobacco companies. The research gap is filled by this study which investigates successful mergers and their role of planning in accelerating post-merger.

1.2 Definition of Mergers and Acquisitions.

Mergers are also referred

to as amalgamation. Unions refer to the process of consolidating two or more firms under common control. ( Arthur R.Wayes (1963). The companies lose their former identity for the new company. The acquisition is the process of establishing control over the management and the resources of another firm without any consolidation of companies involved. Through

acquisitions, people can

have control of the company’s assets either directly or indirectly hence becoming the managers of the company indirectly. An acquisition takes place when a company buys the net assets oof another company( Anthony and Peak ). Mergers also means joining

two or more incorporation to form one company with common (Bhattacharyya H.K 1998, 1-11).When companies mergers ,they form amalgamation company. This merging of companies makes the assets of each company be owned by the merged company. Debts of all those companies which have merged are immediately transferred to the merged company. If a shareholder of the merging companies has shared with a value of 9 out of 10 becomes a shareholder of the merged company or becomes a shareholder by nomination for the merged company. The acquisition is defined as having control of a company’s interest by another company. When a company takes control over another company, it forms a merger or acquisition. The acquisition is where one company benefits from another company in the form of inflows, and the shareholders of the acquiring company hold that cash. A merger usually takes place when there is neither outflow nor inflow to the company. According to companies offering insurance, the merged company is supposed to give out its shares for consideration as one company. To differentiate amalgamation, mergers and takeover are usually unclear, mostly when big companies merge with another big company since the methods used to join are the same. Mergers and acquisitions can be formed either by the holding company or by the scheme of arrangement. The most commonly used form of mergers and acquisitions is by holding company. This type of merger occurs when two firms join to form a new holding company limited. For example, company A can join company B to form company AB. Company AB that is formed acquires share shares of company A and company B. Company AB formed becomes the subsidiary company. Mergers by holding company can also occur when a holding company acquires a smaller company through the bidding of shares. The shares of the smaller company are transferred to the acquiring company. The smaller company becomes fully absorbed when the holding company purchases all its net assets (Arthur, 1963).

Scheme of arrangement is a requirement by law and is formed under section 59 of the six Companies and Allied Matter Decree securities exchange( CAMA 90). It occurs when the acquired company’s shares are transferred to the acquiring company, and the holders of the shares are fully compensated.

Scheme of arrangement eliminates the payment of stamp duties, which becomes the main disadvantage of using this type of merger. The system of structure is complicated to adopt since it is expensive compared to mergers by holding company. Mergers by the scheme of arrangement can only be approved when three-quarters of shareholders of the acquired company vote and accept the merger. It is a must to hold an extraordinary meeting so that the shareholders can vote. Scheme of arrangement is formed under the court of law and can only be approved by the court of law. If the court approves the merger, the shareholders must accept it even if they didn’t vote in favor of the merger.

 

1.3 Importance of Mergers and Acquisitions

Mergers and acquisitions help in solving challenges that are faced in the business environment. Importance of mergers and acquisition include:

Mergers and acquisitions help a company improve its technology and develop standardized product specifications, thus enjoying production economies. Technology can be used to improve after-sale services, which adds value and reduce the cost of operations. (Arthur 1963)

Mergers and acquisition help a company to get involved in large scale production. Bulk production attracts discounts from the suppliers and improves the negotiation strengths of the merged companies. When two companies merge, a bigger company is formed compared to individual companies. A company gets a constant supply of standardized raw materials (Arthur 1963)

Through mergers and acquisitions, companies can engage in new lines of production, which leads to diversification. The new product attracts new market and reduces competition. Diversification helps companies to protect their existing market and to cut down costs involved in advertisements. (Arthur 1963)

Mergers and acquisitions help a company to get loans from financial institutions such as banks. The loans acquired increase the turnover and earnings of the company, which increases earnings per share and boosts the market price of the claims. Through mergers and acquisition, companies get assets which can be used as a collateral for obtaining loans. The loans acquired can be used to expand the business(Weston & Brigham, 1977).

Mergers and acquisitions help a company to get experienced and skilled managers to manage the business. The success of any company depends on the type and quality of human capital. Merged companies acquire more talented managers and ensure full utilization of existing managerial staff. Mergers and acquisitions help managers to improve their talents due to exposure to different business environments. A big company attracts experienced staff who wish to be associated with the business. Better managerial remuneration involved in merged companies attracts skilled staff to work in such companies. The larger the business, the more the job opportunities. (Arthur 1963).

1.3.1 Advantages of mergers and acquisition to the Economy

Mergers and acquisitions are of great advantage to the Economy of the country. The main advantages include:

1.3.2 Disadvantages of mergers and acquisitions

Significant disadvantages of mergers and acquisition include:

For mergers and acquisitions to exist, one company has to lose its own trade identity and goodwill for the sake of the other company. The acquired company loses its tradename to the acquiring company. Mergers and acquisitions make a company lose its global recognition. (Bhattacharyya H.K 1998)

Mergers and acquisitions bring about the challenge of bringing the two businesses to work together. The levels of employment will change Comparison of different accounting systems and making decisions on which one to follow becomes another challenge. Merged companies face the challenge of establishing a central unit to manage the business. Developing a combined report to reflect the shared ideas in accounting systems, profitability, and asset control is a challenge.

Harmonization of procedures used by different companies is a significant challenge. Mergers and acquisitions attract a pool of people’s opinions and evaluating the views to make a decision on which ones to follow and which one to remove pose a big challenge to the company.

The problem of integration can be addressed by forming a joint committee that meets to coordinate the members to attain a collective decision that is acceptable. (Bhattacharyya H.K 1998).

Large companies formed through mergers and acquisitions tend to become so independent. This may make some people become inferior and very insignificant to the business. A decline in power can be witnessed, especially where a manager of one of the companies becomes an ordinary employee in the merged company. To overcome this challenge, effective personnel policy and communication should be established within the organization.

The disadvantages discussed above should not be a hindrance to the companies who want to merge. The benefits involved in mergers and acquisitions outweigh the demerits. Companies should engage in mergers and acquisitions for the survival of the business. For every decision made, there must be advantages and disadvantages, and such decisions need sacrifice. Mergers and acquisitions are compared with two sides of a coin.

. (Bhattacharyya H.K 1998)

 

1.4 Types of Mergers & Acquisitions

-Mergers and acquisition can be classified into the following categories;

Horizontal mergers, vertical mergers, and conglomerate mergers. Characteristics of these types of mergers differ widely. The effect of mergers on companies’ performance also varies in each merger.

1.4.1 Horizontal Mergers

Under this category, Mergers of companies with similar or different but related product lines are known as horizontal mergers. Horizontal mergers seek to minimize competition in the market by merging with competitors and gaining a higher market share. Horizontal mergers also seek to reduce concentration in the industry (M&A Milford Green, 1990).

There are rules and guidelines to ensure that competition is fair within the market and reduce power misuse by monopolies. The mergers seek to increase efficiency and protect the trust of existing companies. Horizontal mergers enable companies to enjoy economies of scale. The dominating company is usually protected from other minor competitors. (Lipczynski, Wilson, 2004). Examples of such mergers in the global market are the European airline industry. Lufthansa-Swiss International merged with Air France-KLM (Lucey, Smart, and Megginson, 2008). This is the most preferred type of merger compared to other kinds of unions.

1.4.2 Vertical Mergers

Vertical mergers involve two or more companies from different production lines of the same product joining together to form one company. Vertical mergers seek to secure good sources of supply in the market (Babu, 2005). This type of union brings both the distributors and manufacturers together to form a long-lasting partnership. Vertical mergers tend to restrict the competitors from thriving because of the advantages that are associated with the merger. The product distributor does not incur many costs paying the manufacturer because they are now one company. Vertical mergers create a synergy that attracts enormous profits to the company, thus making the company more profitable. Examples of vertical mergers include Ford and Vauxhall in the automobile industry, Ford and Hertz (Geddes, 2006), and a merger between Flag Telecom and Indian telecom company Reliance.

1.4.3 Conglomerate Mergers

In this category, two or more companies with different products join to form one company. Conglomerate mergers seek to form a central office that runs the business and allocate resources and capital to the business. The people employed to manage the business should have enough expertise and knowledge of the company. (Robert Bruner, 2004).

The objective of a conglomerate is to diversify risk since the other company’s strengths counteract the weaknesses of one company. (BrianCoyle, 2000). Conglomerate mergers can occur between companies that are not in competition. There is a belief that conglomerate mergers are not very successful as other types of mergers, but Electronics (GE), a conglomerate merger, proves the opposite by being very successful. According to (Patrick Gaughan, 2007), most conglomerate mergers fail.

1.4.4 Financial Acquisitions

Financial acquisitions are a minor classification and are not commonly considered while discussing types of mergers. They have classified either

leveraged buyouts or management buyouts (H. Ross Geddes, 2006)

1.5 Motives for Mergers

Factors influencing mergers and acquisitions are broadly classified into political factors, social factors, legal factors, and economic(Kaushal, 1995). There are two significant reasons why companies adopt mergers and acquisitions. These include the need for efficiency gain and profit maximization(Neary, 2004).

Companies achieve efficiency by enjoying economies of scale. Integration of the two companies leads to profit maximization due to efficient allocation of resources. There is the strategic rationale that is derived from a change in the structure of the two companies. I have summarized the motives of mergers and acquisition to the following according to(A soft et al. 1971):

Through mergers and acquisitions, a company tends to grow externally by owning another company.

 

1.6 Justification of the Study

The term Mergers and acquisitions (M&As) is used to depict the combination of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, asset purchases, and management acquisitions. The term M&A also refers to the desks at financial institutions that deal in such activity.

There are also different mergers: horizontal merger, vertical merger, congeneric merger, market-extension merger, product-extension merger, and conglomeration, amongst other forms. M&As helps expand economies of scale due to the effective utilization of available resources and facilities in an organization. The scope of effective utilization of resources is more significant in horizontal mergers than the other types of mergers.

Duplication of operations will be wiped out, which causes operational inefficiency. M&As will enhance companies to take advantage of synergy. It leads to substantial growth within the merging businesses. Merging companies can decide to venture into a new business, thus leading to diversification. Shareholder’s wealth is greatly maximized through amalgamation. M&As helps in reducing the cost of operation by cutting down the cost structure. Companies may decide to merge to gain new assets that consume a lot of time to design within an organization. The merging companies improve their financial capability, which enhances business success.

Mergers and Acquisitions can help organizations gain greater market share, build economies of scale, improve profitability, enter a new market, or acquire a new capability. International corporations and local or regional key players show a growing appetite for expanding its market, striving to expand into new source markets and boost their bottom lines both through market entries since their existing home markets offer only limited growth potentials well as well-directed acquisitions.

Therefore, M&As have become relatively frequent in the business world. Companies are now merging more often than ever before, and all these actions have the same goal: to improve business performance. Even though mergers and acquisitions are not uncommon, many organizations still struggle to implement these changes smoothly.

I chose to study this topic to advance my knowledge about mergers and acquisitions. The information gained will help investors evaluate their firms and adopt an acquisition strategy that matches the organization. Few studies were carried out on successful mergers and acquisitions, which provides a gap for my research.

 

1.7 Objectives

Objectives refer to what the research intends to achieve after the analysis. The main objective of this study is to evaluate successful mergers and acquisition and their role planning of post-merger integration.

This thesis intends not only to write a paper on M&As but also to approach Mergers and Acquisitions from a different perspective. I will review the successful mergers and acquisitions. I will also consider the common pitfalls and preconditions (including the deal size) for a smooth and sustainable M&A and how these can be better managed. I will extensively investigate how the culture of the merging businesses (target and acquirer) can be aligned to ensure a smooth and sustainable merger. M&As create special challenges in businesses. Any change in corporate control brings new strategic directions, business priorities, organizational dynamics, and values that must be conveyed. Moreover, common challenges in the event of an M&A are gaining people’s acceptance and achieving organizational alignment.

Resistance to change is in human nature; therefore, the possibility that M&As may not be initially welcomed by employees is high. Companies face employee-related challenges before, during, and after M&As.

In this paper, I intend to look beyond the financial aspects of an M&A and into how to implement teams to manage the M&A communication and keep employees committed to the business operations and adequately rewarded.

1.8 Research Questions

Research questions provide an overview of what the researcher wants to study. These questions will be answered before the research comes to an end. The proposed study will answer one major question: how can companies achieve successful M&As (ones that deliver real value)?

The sub-questions are as follows:

The questions will give enough information on the strategies, how to prepare efficient strategic exercise in mergers and acquisition and how merged companies provide enough input for organizational redesigning.

 

1.9 Structure of a dissertation paper

The dissertation paper consists of five chapters: introduction, literature review, research findings, conclusion, and references. Each chapter is summarized below.

 

Chapter one

This chapter gives a brief discussion about mergers and acquisitions, motives for studying M&As, justification for the study, financial acquisitions, advantages and disadvantages of mergers and acquisitions, the importance of M&As, and definition of mergers and acquisitions.

This chapter’s main objective is to introduce the research problem and state the goals and aims of the research. The researcher may use either hypothesis or research questions, but the two cannot be used together. The purpose of this research and areas for further research are stated in this chapter.

 

Chapter two

 

This chapter gives theories that support the topic under study. The chapter tackles

introduction, the importance of acquisition process, pre-merger planning and acquisition, due diligence, management capabilities, post-merger integration, post-merger performance, theoretical framework conceptual framework, sociocultural factors, acquisition process, and acquisition strategy.

 

 

Chapter Three

The chapter is called research methodology. It explains the process used by the researcher to do the research. The chapter starts with an introduction, research design, data collection, sampling, data analysis, summary, and a case study. The chapter specifies the various tools used by the researcher in doing the research.

 

Chapter Four

This chapter gives the analysis of data collected in chapter three about mergers and acquisitions. The chapter covers a case study on British American tobacco, introduction to a planned transaction, deal size, revenue, operating profit, market share, transaction decision, interpretation, and recommendation, plan to integrate leadership, and employee motivation.

 

Chapter five

This chapter gives a conclusion on whether successful mergers and acquisitions play a role in planning post-merger integration, lessons learned, what contradicts my knowledge on mergers and acquisition, what confirms what I know about mergers and acquisition, and a summary of how the research was conducted. Limitations of the study are also included in this chapter.

 

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

A literature review serves as the backbone of the research. It enables a researcher to use the available knowledge to complete the study. The available literature is crosschecked to identify an area for further research.

M&As are viewed as the driving force towards a company’s growth and profitability. Diversification is a result of successful mergers and acquisitions. Several studies on mergers and acquisitions have been undertaken and how mergers can improve the company’s market share and increase profitability—been confirmed to be a critical method in achieving the organization’s growth, diversity, and profitability. The critical aspect of merger and acquisition is proper planning for post-merger integration. The mission statement and vision statement should be included in strategic plans and communicated between the merging companies to achieve effectiveness and efficiency in the transformation process. Mergers and acquisitions involve a change in the structure of the business so as to attain a strategic fit(Schweiger, Csizar, and Napier, 1993). The research paper aims at evaluating several pieces of literature on mergers and acquisition and their contribution to post-merger integration. The study will also consider successful and unsuccessful mergers and acquisition and what caused the companies’ success and failure; the research encourages researchers to do further research on the area of mergers and acquisition and provide a more significant outcome for mergers’ activities and acquisition.

M&As are one of the most crucial strategic exercises in the contemporary business world. M&As have been an enduring phenomenon practiced across all public companies, private companies, large corporations, and even smaller firms. Mergers are processes whereby two or more previously independent companies come together under common control. Mergers are essential features of corporate structural changes. They have played an imperative role in the external growth of top economies globally. They have become the backbone of many businesses globally.

Major businesses grapple with the opportunities for competitive advantages, economies of scale, and higher profitability in recent years (Boateng et al., 2017). M&A can be described as a multifaceted phenomenon that may include different kinds of acquirers, targets, motivations, and deal types (Faulkner et al., 2012). Purchases of entire companies or divisions (especially the purchase of distressed companies) are likely to involve greater organizational changes and challenges. In contrast, minority investments may be managed in a more “hands-off style,” rather like alliances. In general terms, a purchase that involves one company purchasing a majority of the shares (over 50%) of another company or part of a company (commonly referred to as a “merger”) is, accurately, an acquisition. A merger, on the other hand, is a consolidation of two existing companies to form a new company. Bhattacharyya (1998), however, noted that an acquisition entails cash moving from the company to the target shareholders in payment for their holding. Alternately, in a merger, there is no such flow (or merely an insignificant flow). In practice, the distinction between mergers, acquisitions, and takeovers is not always clear (in this paper, these terms are used interchangeably), and this is especially true when large companies join with other large companies. It should be noted that a merger tends to be used metaphorically by managers to position an acquisition as a combination of equals, thereby alleviating fears of a takeover (Junni & Teerikangas, 2019).

M&As, as an external growth strategy, have gained momentum because of increased deregulation, privatization, globalization, and liberalization adopted by several countries all over the world (Gupta, 2012). Global M&A transaction values reached $2 trillion in 2018, exceeding values witnessed at the peaks of the previous worldwide M&A waves in 2007 ($1.8 trillion) and 2000 ($1.5 trillion). (See Table 2.0.1 below).

In the USA, mergers (or merger waves) occurred for the first time between 1890 and the Second World War and continue globally today (Bakare, 2016).

The sixth merger wave, characterized by shareholder activism, private equity, and leveraged buyout, emerged in 2003 and ended in 2007 due to the financial crisis (Salvato et al., 2007). We are currently on the seventh wave, with increases in yearly takeover activity since 2011 (BCG, 2011). Acquirers from emerging markets increasingly play an essential role in driving M&A activity (EY, 2018). Market companies and people behind the acquisitions have motives that include access to technologies; they are caused by technology disruption (Loui et al., 2016, 2017).

Figure 2.0.1

Global Deals by Volume

 

 

Figure 2.0.2

Global Deals by Value (U.S.$ bn)

Several motives back m&As. The motives include ;

Several studies have been written to review peoples’ motives, benefits, and actual performance in M&As. As early as the 1950s, research on M&As has been conducted in the fields of economics and finance, but these studies did not gain prominence in management until the 1960s. Economics researchers focused on motives for firms undergoing M&As, while finance literature sought to examine the value gained from M&A processes using stock and accounting-based techniques to examine enterprise gains. Similarly, management researchers have continued to examine managers’ motives for pursuing M&As and how this impacts the organization or firm. The researchers have also examined the performance and determinants of M&As.

Economic research has examined M&A motives relating to economies of scale and market structure and whether M&As improve performance using, primarily, accounting-based measures, such as sales margin, return on assets or return on equity.

On the other hand, finance scholars have looked at pre-M&A valuation, transactional structures, and pricing, focusing on abnormal returns. These studies have yielded important insights concerning the economic and financial motives and outcomes of M&As.

However, as discussed, there are strategic motives such as a manager’s ambitions. Management scholars also considered strategic factors influencing M&A performance, such as firm relatedness, pre-acquisition announcements, payment method, conglomerate acquisitions, and prior acquisition experience.

Inconsistent findings call for more research on how the “process” of conducting M&As affects the performance of M&As. In response to research gaps in the economic, financial, and strategic perspectives, and paralleled with academic engagement in real-life, scholars began paying attention to M&A processes in the 1980s, giving rise to the “process perspective” in M&As (Junni & TeeriKangas, 2019).

The process perspective focuses on “how and why things emerge, develop, grow, or terminate over time” (Langley et al., 2013, see also Graebner et al., 2017). In this perspective, M&As consist of pre-and post-M&A phases and involve activities that need to be adequately managed in order to create deal value (Haspeslagh & Jemison, 1991).

 

2.1 The Importance of the Acquisition Process

A paradox remains around M&As – although M&A deals are a popular tool for the development of a firm, there have been mixed results for the broad range of stakeholders involved in these deals (Cartwright & Schoenberg, 2006). Agrawal and Jaffe (2000) found that, while the investors in the acquiring firm’s benefits are uncertain, shareholders of the target company gain positive short-term returns. Furthermore, it was found that manager attrition in the target firm is higher – with about 70% within ten years after an acquisition – than attrition in managers who joined the firm after the acquisition (Krug & Aguilera, 2005). Managers of acquiring firms report that more than half of M&As are considered unsuccessful when measured against the original objective set for them (Schoenberg, 2006). Similarly, Smith & Hershman (1997) found that 50% of acquisitions in the 1990s failed, while in the 1980s, 57% of deals were unsuccessful. Empirical evidence also suggests that firms terminate up to 25% of their merger and/or acquisition attempts at some point in the negotiation process (Holl & Kyriazis, 1996).

Meanwhile, one dollar earned through growth is found to be worth 30–50% more than the same dollar earned through cost-cutting (Smith & Hershman, 1997). As highlighted by Kim & Olsen (1999), to survive in the 1980s, USA firms cut costs and scaled-down their staff, but these actions did not adequately create value. In addition, Marks and Mirvis (1997) found that raising revenue by 1% has five times more impact on the bottom line than cutting expenses by 1%. This is based on an idea common to many managers and scholars: revenue growth is more likely to improve earnings (or the bottom line) than cost-cutting. Cost-cutting comes with attendant issues, such as a decline in the product or service quality, the client experience, and, eventually, sales. This indicates that growth is widely seen as a medium of performance and is considered the most valid option for firms. Firms will hold a high potential for value growth through acquisition if they use acquisitions well.

Thus, the process perspective focuses on the premise that the acquisition process itself and the dynamics therein play a pertinent role in the future performance of acquiring firms. Jemison and Sitkin (1986) state that understanding acquisition outcomes may be more readily discovered in theories that direct to the underlying process-driven impediments to acquisitions.

The rest of the literature review will be structured across four thematic areas: pre-merger planning and acquisition, post-merger integration, post-merger performance, and the known factors for successful M&As across these areas.

2.2 Pre-Merger Planning and Acquisition

The pre-merger planning and acquisition phase entails the timeframe from the initial development strategy until the M&A deal resolution. According to McSweeney(2012) and Sudarsanam (2012), this phase involves various steps. The first step is to develop a strategy of acquisition that helps to know what your expectations are from the merger. The second step is search criteria for mergers and acquisitions, which helps to locate your customers, target profits, and firm location. The third step is the evaluation of the firm’s goals and objectives which will be obtained from the merger.

The fourth step is acquisition planning which involves gathering information from other firms found in search criteria. The fifth step is valuation analysis, whereby detailed information about financial aspects and market share is collected. The research helps to evaluate the value of each company. The sixth step is to start negotiations whereby you set the objectives and terms of negotiation. With the help of the valuation models, you can make a realistic offer.

The seventh step is to merge and acquisition due diligence, whereby you appoint a due diligence team that confirms the assessment of purchasing and the company’s target value. The due diligence team performs an analysis of the company’s overall operations, such as target customers, finance,

liabilities and assets, and the number of employees within the firm. The eighth step is to draft a contract about the purchase and sale. In this step, a final contract is made, which states the agreement’s type and terms. The second last step is to develop a strategy for financing the acquisition, and it appears after the merging companies have signed the contract. The final step is to begin the acquisition process whereby the two companies come together and integrate their business.

The pre-M&A planning phase has been cited as a grossly undervalued yet fundamental element of any M&A deal. Its importance is underscored by the fact that it sets the tone and foundation for post-acquisition implementation and, if not done correctly, it could impact post-acquisition performance. Yet, in an interview with CEOs following M&As, the most commonly cited was “not having done adequate pre-acquisition planning and not allowing enough time for it” (Hubbard, 1999).

This might be due to the complicated nature of pre-merger planning; this phase has been referred to as the most complicated of the M&A phases due to the decisions and planning that underpins the process, such as the degree of integration, speed of implementation, and addressing of cultural differences. These decisions make up major M&A success factors, and they must be critically considered (Hubbard, 1999).

Success factors for the pre-M&A phase include strategic fit (depending on the organizations’ goals and strategies), choosing the right partner, maintaining trust between the merging companies, honest and open communication between the parties, proper execution of implemented policies, overall strategies, adequacy of planning, due diligence, management capabilities and relations, prior acquisition experience, price negotiation, and acquisition approach. Some of these factors will have expatiated below.

The drive for an M&A deal should have strong strategic thinking behind it and an understanding of the merger’s human issues. It should not be merely to increase stakeholder value. With that in mind, “strategic fit” does not mean that the acquirer and acquiree must be in complementary businesses or be related; as long as the reason behind the deal is apparent, the companies’ differences are appreciated, the strategies for merging are presented, the aspects that need to be integrated and management styles are appropriately defined, and expected synergies are not overestimated, then the deal is likely to succeed (Markides& Willaimson, 1994; Cartwright & Cooper, 1993; Gupta, 2012).

2.2.1 Due diligence

Due diligence is the objective analysis of the target’s capabilities to ensure a strategic fit. This analysis looks into financial structure and performance, product portfolio, customer base, marketing, sales and distribution structures, research and development, management, personnel, legal matters, IT, and organizational culture. Due diligence helps to identify where synergies can be obtained and offers an indication of the “right price” for the deal. Essentially, due diligence ensures that the outcome of the deal is as anticipated and, where it is not, that there are alternative strategies in place. While almost all M&A deals involve due diligence, success lies in the depth of the analysis, preparedness for contingencies, and risk management strategies.

2.2.2 Management capabilities

Management capabilities at the target firm need to be known, and where they are not deemed sufficient, management change must be planned (albeit cautiously, to avoid adverse reactions). Alternately, a seasoned M&A could help the companies to move faster and act more decisively. In all, efforts should be made to retain people who are integral to the success of the merger, and the plan for this must be clear before the acquiring company goes ahead with the deal (Itoh & Vestring, 2001; Gupta, 2012).

An organization experienced in M&As may have specific systems and structures in place (e.g., teams that specialize in negotiation, people management, integration, etc.) that provide an edge over an organization that is new to M&As. However, this factor is not a substitute for due diligence; though important, it does not guarantee the success of the new deal (Gupta, 2012). Effective communication within the targeted and acquiring firms during the deal encourages acceptance of the process. Communication fosters inclusivity and squashes rumors. Communication has been cited as one of the most important contributors to the success of an M&A deal, and the period immediately following the deal announcement is the most critical time to ensure adequate and effective communication across the organization (Konstantopoulos et al., 2007; Cornett-DeVito & Friedman, 1995).

The amount and depth of planning carried out in this phase can become a precise predictor of post-merger success. Planning highlights the process required to make an organization successful, prevents decision pitfalls, and prepares for contingency. Hence, ample time and commitment should be given to this important phase.

Detailed pre-acquisition planning remains vague in many companies planning a merger. Epstein (2004) found that pre-merger planning and its impact on integration has received much appreciation and understanding by stakeholders involved in the M&A process, and it is not researched enough by academics. Although examining post-M&A performance is incredibly useful, more attention should be paid to pre-M&A activities and their effects on post-merger performance. Suppose acquirers can identify and prepare for a diverse variety of factors in the pre-acquisition stage. In that case, they can achieve smoother post-acquisition integration that leads to post-merger performance.

2.2.3 Post-Merger Integration

The degree of post-M&A integration between the acquirer and target firm has been a cause of literary concern, and varying schools of thought exist on whether the acquired firm should be kept autonomous from the acquiring firm or if it should be integrated partially or fully.

Some popular forms of mergers are based on exchanging assets and shares, people and culture (Bakare, 2016). There are implications for post-merger integration. This is captured below:

Lasserre (2003) suggests that accurately determining the need for strategic interdependence and organizational autonomy would assist the acquirer in determining what integration approach to adopt.

Findings from Angwin (2012) indicate that acquisitions in knowledge-based, service-intensive, and high-technology sectors tend to benefit from firm autonomy, while acquisitions in the manufacturing sector might require more integration. Nonetheless, different integration strategies can co-exist within the firms, and the degree of integration can change over time depending on a number of factors, including the background of the acquiring firm and the business stage of the organization being acquired (Junni & Teerikangas, 2019).

Further research indicates that post-M&A integration management best practice begins with planning the integration process early on (Colombo et al., 2007) and( Junni & Teerikangas, 2019). “Planning the integration process allows the knowledge that the organization has built up on the basis of previous experience to be completed as well as combining it with knowledge about the acquired company from previous partnership relationships. Planning therefore has a positive effect on managerial resource redeployment.” (Colombo et al., 2007)

 

Various debates concerning post-acquisition integration speed which involve sudden integration or gradual integration over time also exist. Homburg and Bucerius (2006), in their survey of 232 horizontal M&A deals, found that speed in post-acquisition integration is most beneficial when external relatedness between the firms prior to the deal is low and internal relatedness is high. In addition, a study by

PricewaterCoopers(2017) of successful and unsuccessful deal makers and the reasons behind success revealed that successful deal makers were able to achieve speedy integration and benefit from the positive effects of the merger. With unsuccessful deal makers, it was observed that the integration process took longer than the determined optimum speed of integration due to minimal planning leaving employees frustrated and resulting in low productivity.

Another area of concern in relation to integration is the

the organizational fit between the firms involved in the M&A (Bauer & Matzler, 2014). The theoretical framework of M&A success was tested using 106 Small and Medium Enterprise (SMEs) transactions across various sectors. The study’s results found strategic complement, cultural fit, and degree of integration to be key elements of M&A integration success. A PricewaterCoopers (2017) survey also established culture and change management as important success factors in the integration process; companies that prioritized culture and change management during their integration process performed excellently and managed to stick to their timelines.

Closely tied to the issue of change management is the role of the integration manager and integration committee in an M&A deal, which has been established as a success factor for the post-merger integration. The committee is expected to focus attention on decisions that provide stability within the company and help create opportunities. Research findings suggest that involvement of the acquired organization (not just the acquirer) is required to foster integration, motivation, and mutual learning (Angwin, 2004; Graebner, M., 2004; Kanter, 2009).

A survey carried out by (Kay & Shelton, 2000) of top executives at 190 companies in Brazil, China, Hong Kong, the Philippines, Singapore, South Korea, and the USA revealed that more than three-quarters of respondents believed that retaining key talent is a critical factor for an M&A integration. Although a high degree of integration is needed post-acquisition, new management may be required to drive success, especially because acquired firm managers have been seen to be critical towards value creation (Graebner, 2004). Nonetheless, communication strategies must be developed, and efforts must be made to ensure integration and minimize human conflicts (Gupta, 2012).

Koi-Akrofi (2016) wrote that, while there are success factors to be considered in post-merger integration, no one strategy fits all. Appropriate strategies will always depend on the type of deal, cultural differences, size of the firms involved, human resources available, motives for the M&A, compatibility, and other factors. Ultimately, success begins with the pre-merger planning phase and relies heavily on the “human factor” approach; success in these areas will give any M&A deal a fighting chance.

2.2.4 Post-Merger Performance

Communication is required for success throughout the M&A deal process, and this remains true in the post-merger performance phase.

Researchers (Angwin et al., 2016; Yakis-Doouglas et al., 2016) have identified post-acquisition communication with internal and external stakeholders as an important contributor to M&A performance. Examining communication approaches used during the M&A wave in the Nigerian banking sector, Angwin et al. (2016) discovered that institutions that communicated throughout the M&A process were more effective and obtained better outcomes than those that did not communicate well.

Researchers taking a resource-based viewpoint have also noted that resource combination and transfer have been shown to improve the acquirer’s competitive advantage and overall M&A performance (Sarala & Vaara, 2010).

Results from further research by Dewan (2007) on the post-merger financial performance of acquirer companies and acquired companies across various industries in India revealed that significant differences exist between the financial performance of the companies before and after the merger. This study was carried out on M&A cases in 2003 and analyzed financial results three years prior to the deal and three years after the deal. Dewan’s conclusion from the study also highlighted that the type of industry in which the companies operated made a difference to the post-merger operating performance.

This position was corroborated by Mantravadi and Reddy (2008), who studied the impact of M&As on the operating performance of acquiring companies in different industries (all publicly traded companies), and they arrived at the same conclusion: the type of industry does impact performance.

In addition, the skills and abilities of the organization’s management team have been seen to play a role in the post-merger performance of both the acquirer company and the acquired company. Results from Menapara et al. (2012) examining the impact of M&As on the key financial ratios of

selected companies revealed that, when the merging companies were taken over by companies with reputable and skilled management, there was greater possibility for the merged firms to successfully reform business operations.

While management skills may set the acquired company on the course for success, the ability to manage employee’s post-merger is important for retaining key people in the acquired organization and working together to achieve excellent performance. Some believe that success depends largely on middle managers; they are responsible for managing the change while running the business. As such, their involvement is essential for an M&A deal to be effective and successful (Martinez & Madariaga, 2015).

In addition, Dunbar (2019) identifies a number of standard operating procedures which, when implemented, will eradicate leadership-related challenges and improve the odds of achieving better M&As deal outcomes. Some of these practices include fully understanding the rationale and objectives for the deal, developing an M&As-specific leadership competency model by deal type, and incentivizing leader participation in assessing acquired companies. Remembering and communicating that deal success is about leadership and culture, knowing that leadership skills matter to deal success, and preparing the acquirer company executives to ask questions based on the behavior of target leaders.

Other practices include using existing leadership assessment data for M&As leadership insight, remembering that successful application of leadership practices in M&As is about leveraging the strength and mitigating risks. The practices involve building M&As integration teams based on individual leadership strengths, not overlooking middle management, and focusing on collective leadership in addition to individual leadership, preparing for leadership attrition, creating deal-specific leadership integration plans, and performing organizational network analysis and identifying key influencers at every level of leadership, facilitating acquirer and target leader alignment sessions. Utilizing business simulations to help leaders understand the culture and prepare for integration.

Research by the Boston Consulting Group (2018) also revealed that M&As where a “full-potential” approach is considered (instead of merely integrating the target company to capture the most obvious synergies) yield the best business outcomes. A full-potential plan would generate improvements to the target company, capture all synergies, and capitalize on the opportunity to make needed upgrades to the acquirer, thus creating the opportunity to achieve significant positive performance.

Despite the success factors discussed above, research into the financial performance of organizations (using stock market and financial ratios) involved in M&As have yielded mixed views. The most common theme is that M&A deals do not improve short-term performance (Kouser & Saba, 2011; Joshi & Desai, 2012) but improve long-term performance (Sinha et al., 2010). Where positive performances were recorded, some were more significant than others (Leepsa & Mishra, 2012). Nonetheless, Leepsa and Mishra’s research also identified that financial performance might not be the only parameter necessary to measure M&As.

2.3 Summary

The success of M&As deals is due to several factors which

include strategic fit (depending on the organizations’ goals and strategies), choosing the right partner, maintaining trust between the merging companies, honest and open communication between the parties, proper execution of implemented policies, overall strategies, adequacy of planning, due diligence, management capabilities and relations, prior acquisition experience, price negotiation, and acquisition approach. The factors have been extensively reviewed. Various combinations of these factors would be required for different types of deals at various stages. Sensitizing the deal managers on these factors has also been suggested as a way to help companies focus on the most important factors over the course of the deal, which are able to boost long-term business. Likewise, it is important to set measures of success at the various phases of the deal process. This will ensure the deal team receives timely information on the success or failure of a deal and will allow them time to set a course correction plan, if possible (Gupta, 2012).

In the tobacco industry, the past two decades have been marked by a number of M&As that served to strengthen the market position of the four largest transnational Tobacco companies in the world market. Other previously significant tobacco companies have been folded into one of the “Big Four.” Notable M&As have included British American Tobacco (BAT) and Rothmans in 1999, UK-based Imperial

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