Corporate Development: Mergers and Acquisitions

This article focuses on the corporate development practice of mergers and acquisitions. It provides a description and analysis of the main types of mergers and acquisitions including vertical mergers, horizontal mergers, and conglomerate mergers. Antitrust regulations, corporate procedures, and government guidelines overseeing mergers and acquisitions will be addressed. In addition, this article summarizes the human resource issues that result from corporate mergers and acquisitions.

Keywords Acquisitions; Antitrust Regulations; Conglomerate Mergers; Corporate Development; Growth; Horizontal Mergers; Mergers; Vertical Mergers

Management > Corporate Development: Mergers & Acquisitions

Overview

Corporations create growth through organic or inorganic business activities. Growth refers to economic expansion as measured by any number of indicators such as increased revenue, staffing, and market share. Investors and economists debate the relative strengths and weaknesses of organic and inorganic business growth. Inorganic and organic business growth each move in and out of favor depending on the strength of the economy, political environment, and government regulations. Organic growth is created by expanding existing business resources rather than through mergers and acquisitions. Inorganic growth is created by corporate development practices. Corporate development refers to the activities that companies undertake to grow through inorganic means such as mergers and acquisitions, strategic alliances, and joint ventures.

Mergers and acquisitions are business methods that legally unify ownership of corporate assets that were formerly subject to separate controls. Mergers and acquisitions are considered to be one of the most important business tools for achieving competitive advantage and growth. In the merger and acquisition process, one corporation is completely absorbed by and into another corporation. The acquiring company usually maintains its identity and name. Mergers and acquisitions vary from corporate consolidation, the process through which two corporations join and form a wholly new corporation. Mergers and acquisitions were one of the main engines of business growth in the 1990s. For example, during the 1990s, the telecommunications industry grew from the merger and acquisitions activity of large companies such as AT & T and British Telecom. In the twenty-first century, business trends are moving more toward organic business growth and away from mergers and acquisitions as an engine of growth (Shin, 2005).

In the United States, mergers and acquisitions are regulated by the federal government to control anti-competitive practices. Mergers and acquisitions can potentially limit competition in the marketplace, reduce output, and raise prices for consumers. As a result of anti-competitive practices, the federal government has developed formal merger and acquisition regulations, procedures, and guidelines commonly referred to as antitrust regulation or law. Antitrust regulations operate to prohibit mergers and acquisitions that have more negative than positive consequences for society. Despite the problems associated with anti-competitive practices, mergers and acquisitions, when successful, have the potential to produce numerous benefits for business, government, and society. Common benefits of successful mergers and acquisitions include more effective management within a business organization; optimization of underused assets; reduced costs for corporations and consumers; improved product quality; and increased output.

The following section provides a description and analysis of the main elements of the merger and acquisition process: Choosing growth through mergers and acquisitions; types of mergers and acquisitions; managing mergers and acquisitions; and merger and acquisition regulations, procedures, and guidelines. This section will serve as a foundation for later discussion of human resource management of the problems that result from mergers and acquisitions.

Applications

The merger and acquisition process, across businesses and industries, shares similar trajectories, timelines, management concerns, regulations, procedures, and guidelines. The following sections discuss these elements and variables of the merger and acquisition process.

Choosing Growth through Mergers & Acquisitions

The decision to create growth by merging with or acquiring another company is a form of corporate development and strategic planning. All successful business organizations engage in corporate development and strategic planning. Strategic planning, indistinguishable from corporate development in most instances, refers to the way an organization defines its future direction and makes decisions on allocating its human and capital resources in a way that will achieve these established goals. Corporate development and strategic planning require companies to accurately predict future needs and potential opportunities so to choose the appropriate course of action and time frame for growth. Once a corporation chooses its growth objective as a development strategy, corporations must choose the most effective course of action to achieve this goal. Corporations that choose merger and acquisition as their path or engine for growth must make decisions regarding what mode of merger or acquisition to choose based on their resources, industry, and goals (Lu, 2006).

Types of Mergers & Acquisitions

There are three main types of mergers and acquisitions: Horizontal merger, vertical merger, and conglomerate merger. Horizontal merger refers to the business act in which a firm acquires another firm in the same industrial and geographical area that sells a similar product. Horizontal mergers are a way companies eliminate competition. Vertical merger refers to the business act in which one firm acquires one of their customers or suppliers. Conglomerate mergers refer to all non-vertical and non-horizontal mergers and acquisitions. Examples of common conglomerate mergers and acquisitions include pure conglomerate transactions, geographic extension mergers, and product-extension mergers.

The nature of the competition between parties involved in the potential merger is the main factor influencing the choice of merger type. The federal government has different concerns about each type of merger and acquisition. Areas of concern surrounding horizontal mergers and acquisitions include the possibility that the merger will eliminate competition, raise prices, and reduce product output and availability. Areas of concern surrounding vertical mergers and acquisitions include the possibility that mergers will limit the competitions' access to sources of supply or to customers and impede new businesses from entering the market. Areas of concern surrounding conglomerate mergers and acquisitions include the possibility that mergers will transition a large firm into a dominant firm with a decisive competitive advantage and keep other companies from successfully entering the market.

Corporations decide what type of merger or acquisition to pursue based on their resources and objectives. Corporations with significant capital resources may choose to pursue the purchase of assets. In the purchase of assets scenario, the buyer purchases another company's assets and, in some instances, its debts. Corporations may choose to pursue the purchase of stock. In the purchase of stock scenario, the buyer buys some amount of the seller’s stockholdings and inherits the seller’s responsibilities and rights, including debt, relative to the amount bought. Corporations may choose to pursue a statutory merger. In the statutory merger scenario, the merger allows the merging companies to continue existing as one legal entity. Ultimately, there are numerous different types of mergers and acquisitions that correspond to varying business needs and business models (Lu, 2006).

Managing Mergers & Acquisitions

Common problems and issues experienced during and after mergers and acquisitions include strategic, moral, organizational, legal, financial and human resource issues. Mergers and acquisitions, throughout their lifecycle from the first proposed idea to post-merger, require careful oversight and management. Corporations are increasingly implementing ongoing merger and acquisition policies to guide merger and acquisition activities. From 1994 to 1995, the number of corporations in the United States with merger and acquisition policies in place grew from 35 to 65 percent. Corporate merger and acquisition policy ranges from very simple to very complex. Simple corporate merger and acquisition policy generally includes the mandate that any merger and acquisition transaction over a certain dollar amount must go to the board of directors for approval. Complex merger and acquisition policy may include, for example, rules and strategies for strategic plan approval, sale of company assets, reporting of inquiries, and formulation of a takeover defense. Corporate development officers are generally in charge of developing merger and acquisition policy as well as overseeing all merger and acquisition proposals. Corporate development officers are also increasingly proactive in seeking approval from the company's board before undertaking any merger or acquisition regardless of scale (Liebs, 1999).

Mergers and acquisitions of all types follow a somewhat similar trajectory. Ideally, mergers and acquisitions are implemented over a six to nine month period. This period, sufficient to address organizational issues, includes the following management duties: "pick the right people for a dedicated integration management team; orient employees to the new organization and the vision of the future quickly and directly; establish a clear sense of urgency to act; build an enthusiasm for a successful merger completion; set clear objectives and hold individuals and teams accountable for achieving them; communicate clearly, honestly, and frequently; clearly explain decisions once they are made; keep senior management on both sides highly visible; and change plans if conditions change" (Walker, 2000).

Regulations, Procedures, & Guidelines for Mergers & Acquisitions

In the United States, state governments, with government direction, oversee corporate mergers and acquisitions. Antitrust regulation, which is sometimes called competition policy, refers to legislation that regulates and forbids the consolidation of business power into industry monopolies. Although one of the benefits of a free-market economy is supposed to be competition between businesses, the reality of today's global market is often reduced competition due to corporate monopolies. In the United States, the electorate supports government regulation of mergers and acquisitions.

The procedure for a corporate merger and acquisition is, on the surface, a simple process. Corporations are required, in most states, to submit a plan of merger that explicitly describes the names of the corporations involved in the merger, any proposed change in the name of the acquiring corporation, the plan for converting and joining shares of both corporations, and the response of shareholders to the proposed merger. If the state and local governments approve the merger, the Secretary of State issues a certificate of merger that authorizes and officially recognizes the merger. Mergers and acquisitions between states and countries are often complicated by the need to meet the regulations and procedures of multiple state or national governments.

For example, in 1997, the companies of Boeing and McDonnell Douglas merged into a single company. The number of major aircraft manufacturers was reduced from three (Boeing, Airbus, and McDonnell Douglas) to two (Boeing/McDonnell Douglas and Airbus). This large merger fell within the scope and jurisdiction of the antitrust authorities of several nations, and, as a result, was evaluated by both the Federal Trade Commission (FTC) and the European Commission (EUC). The FTC ruled the merger lawful, but the EUC found the merger unlawful and required numerous concessions from the merging parties before approving the deal. The EUC's ruling was based on its desire to protect Airbus, a European Union-based corporation, which is Boeing/McDonnell Douglas's only real industry competition (Gifford, 2000).

Corporate mergers and acquisitions follow government procedures and guidelines established by the Federal Trade Commission in 1968, dramatically changed in 1982, modified slightly in 1984, and reworked and updated in 1992 to reflect the needs of business and society. The 1982 and 1992 versions of the Merger Guidelines are the most influential on current merger and acquisition activity and enforcement. In 1982, the Federal Trade Commission developed new Merger Guidelines to help corporations engage in lawful merger and acquisition activities. The Merger Guidelines are not law themselves but are the guides that state courts use in determining whether or not a merger is lawful. The Merger Guidelines are based on the Justice Department's interpretation of the merger provisions of the Clayton Act and the Sherman Act. The Clayton Act (1890) and the Sherman Act (1914) are the foundation laws of the federal government's antitrust policy. In 1992, the Federal Trade Commission joined with the Department of Justice to update the merger regulations, now called Horizontal Merger Guidelines, to include more focus on horizontal mergers.

The Horizontal Merger Guidelines, as described by the Federal Trade Commission, are founded on the principle that strict enforcement of merger regulations is a critical element of the free enterprise system. The federal government argues that sound merger enforcements are believed to benefit American firms through ensuring free competition and the welfare of the American consumer. The main goal of the Horizontal Merger Guidelines is to keep mergers that adversely affect competition from occurring while allowing competitively neutral mergers to happen freely. The Federal Trade Commission and the Department of Justice view the 1992 Horizontal Merger Guidelines as a framework for the evaluation of mergers by the public and private sectors.

Issues

Human Resource Management of the Merger & Acquisition Process

The mergers and acquisitions process, across businesses and industries, shares similar human resource problems including human resource management, ethical management of the merger and acquisition process, and post-merger management. The following sections discuss the human resource problems and solutions related to the merger and acquisition process.

Human Resource Management

Successful mergers and acquisitions require careful management to ensure that mergers and acquisitions are well-conceived, planned, and executed. Human resource leaders play a vital role in the merger and acquisition process as they function to integrate the staff of two distinct businesses. Common human resource problems created by mergers and acquisitions include the following: "retirement, pension, or other liabilities; executive contracts or other constraining compensation arrangements; employee relations risks, including union relationships, contracts, and issues; legal actions or compliance issues; availability of capable management talent for key roles; and employee commitment vital for the retention of talent and sustained high performance" (Price, 2000).

Human resource managers work to ensure that key talent of both businesses is integrated and retained and that the people-related systems, processes, and organization correspond to the new company's objectives. Human resource managers assess the merger and develop their strategy based on the answer to the following questions: "Does the merger make sense? What are the people-related issues? How will we integrate and retain talent? How will we integrate cultures and transfer knowledge? How will we maintain commitment and performance during the merger process? How will we implement the merger quickly and effectively?" (Price, 2000, ¶3).

Human resource managers are often responsible for the company-wide merger announcement. Managers evaluate and announce assumptions regarding potential costs, risks, and benefits. Human resource managers will do the following to integrate and retain key talent in the new business organization: "define the future roles of executives in both merger partners; define the management capabilities required for the future success of the business; identify the individuals who will be critical and any capability gaps that will need to be filled; determine the actions required to retain key individuals through the merger; and establish ways to share knowledge and learn from each other" (Price, 2000).

Choosing managers for the new, merged organization is one of the most important post-merger human resource decisions. If the merger occurs between equal companies, the new company generally includes management representation from both companies. The management representation decisions in acquisitions vary by business (Walker, 2000).

Ethical Management of Personnel during Mergers & Acquisitions

Mergers and acquisitions transform the cultures and structures of both businesses. As a result of the transition, the staff of each business may feel stressed, angry, disoriented, frustrated, confused, or frightened. Work-related manifestations may include lowered productivity, lowered commitment, increased dissatisfaction, disloyalty, high-turnover, leadership, power struggles, sabotage, and other dysfunctional behavior. Mergers and acquisitions have periods of waiting, frenzied activity, conflict, and rising tensions. Human resource problems associated with merger and acquisition are common. Managers can positively influence the integration process. For example, managers may strategize to alleviate the difficulties related to large-scale transformations including grief, loss, staff reduction, and termination.

Human resource managers should keep the following ethical principles in mind as they assess and plan the new human resources structure: Mergers and acquisitions involve multiple parties with separate interests, agendas, and needs; tensions can often arise from miscommunication and obfuscation of information; mergers and acquisitions often force people into certain work situations; grief, loss, and termination management effect employee attitudes; and managerial respect for organizational members as individuals influences the commitment that organizational members feel toward their work and the company (Buono, 1990).

Post-Merger Human Resource Management

The success of mergers and acquisitions, as measured by profitable and sustainable growth, is significantly influenced by post-merger management decisions. There are five management skills that are associated with successful post-merger business integration. These skills include: Early action regarding financial and physical integration of businesses, re-engineering of products and processes, valuing and reshaping business culture, maintaining valued customers, and capitalizing strategic merger options such as new markets and new products.

Managers are rarely able to perform an in-depth human resources audit before the merger and acquisition. As a result, management is responsible for working quickly once the merger is in place to identify key talent and leaders. Issues include identifying key talent, resolving job-overlap, and resolving culture clash. Ideally, post-merger managers will create an explicitly transitional culture and job assignments to ease employee stress and upset over organizational changes. Management during the post-merger phase of the merger or acquisition should focus on key areas such as managing organizational stress; establishing performance criteria; identifying who will stay and who will go; creating a new organizational structure; and assuming the leadership of the emerging organization (Corwin, 1991).

Conclusion

Mergers and acquisitions are, for some countries, one of the most effective corporate development tools or tactics. Mergers and acquisitions are a key means of fast growth, increased market share, entry into new markets, expanded product offerings, strengthened supply chain, and optimized cost efficiencies (Walker, 2000). Companies that reject the quick growth and profit of mergers and acquisitions instead embrace organic growth and alliances. Companies that prioritize organic growth and alliances over mergers and acquisitions believe that organic growth is more profitable and more sustainable than mergers and acquisitions. In addition, financial markets tend to favor the stability of organic growth over growth created through mergers and acquisitions. Ultimately, individual companies planning their corporate development prospects must analyze their market, their resources, and their objectives and decide what tools are most appropriate to help the company grow (Dalton, 2006).

Terms & Concepts

Acquisition: The process in which one company purchases another and incorporates its human and capital resources.

Clayton Act: The 1914 Act in which Congress barred anticompetitive stock acquisitions.

Conglomerate Merger: All non-vertical and non-horizontal mergers and acquisitions.

Corporate Development: The activities that companies undertake to grow through inorganic means such as mergers and acquisitions, strategic alliances, and joint ventures.

Corporation: A firm owned by stockholders and managed by professional administrators.

Corporate Consolidation: A process through which two corporations join and form a new corporation.

Growth: Economic expansion as measured by any number of indicators such as increased revenue, staffing, and market share.

Horizontal Merger: The business act in which a firm acquires another firm in the same industrial and geographical area that sells a similar product. Horizontal mergers are a way companies eliminate competition.

Performance: The measured results of organizational or investment activities over a certain time period.

Sherman Act: The federal government's first antitrust statute.

Strategic Planning: The way an organization defines its future direction and makes decisions on allocating its human and capital resources in a way that will achieve these established goals.

Vertical Merger: The business act in which one firm acquires either a customer or a supplier.

Bibliography

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Suggested Reading

Audretsch, D. (1989). The determinants of conglomerate mergers. American Economist, 33. Retrieved June 12, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4524508&site=ehost-live

Ettorre, B. (1997). Too much of a bad thing? Management Review, 86, 9. Retrieved June 12, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9712126577&site=ehost-live

Kreitl, G., & Oberndorfer, W. (2004). Motives for acquisitions among engineering consulting firms. Construction Management & Economics, 22, 691-700. Retrieved June 12, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=14795126&site=ehost-live