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Paper 39

Mergers and Acquisitions: an overview of pre and post merger activities

An abstract

Our study tries to look into the burning issue of mergers and acquisitions.

Merger and acquisition literature suggests that managers will have various motives for

mergers; in our study we summarize the motives for mergers into four broad

categories, namely economic motives, synergy motives, strategic motives and

managerial motives. We try to explore the post merger activities of a firm by looking

into the potential cross-effects of asset divestiture on revenue enhancing capabilities

and of resource redeployment on cost savings. Finally we investigate the possible

lingering direct effects between asset divestiture and resource redeployment on

acquisition performance.


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Internationally, the amount and volume of mergers and acquisitions is reaching

record braking levels, where the main role is taken up by cross-border deals, as

businesses gain from low-cost funding to chase their M&A strategies. This previous

statement is backed up by a survey conducted for the behalf of Accenture/Economist

Intelligence Unit 2006 in certain wealthy nations in Europe, along with US companies

and companies headquartered in Asia.

The fact is that many businesses recognize the uncompromising demand to

venture overseas, or within their region, so as to seek out growth and profits. In the

strategy literature acquisitions are explained by two main classes of theories: first is

the value-maximizing theories and secondly is the managerial theories (Seth

1990a). Merger and acquisition literature suggests that managers will have various

motives for mergers (Trautwein, 1990). The form of these motives can be from purely

financial to personal. In addition there exists the traditional cost efficiency theory

based on the notion of economies of scale and scope, as well as the resource-based

view based on enhanced utilization of core competences and resources (Prahalad and

Hamel 1990). Our aim is to examine both of these two main classes of theories by

proposing a model, looking into the pre-acquisition/merger and post-acquisition

performance of the target and acquiring firms (Singh and Montgomery 1987) and by

investigating the post-acquisitions actions in terms of asset divestiture and resource

redeployment and their impact on the long-term performance of acquisitions (Capron

1999). Our work follows Newberts (2007) and Armstrong & Shimizu (2007)

suggestions. It holds that some resources do contribute to a firms competitive


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advantage and resulting in a positive performance, but also the case that other

resources can have negative effects on organizational competitiveness and

performance. According to RBV, managers are able to recognize these negative

resources but are daunted by the task of removing them. Resources that have a

positive effect on competitive advantage are usually accumulated over time and can

be multifaceted, while causality can be ambiguous (Dierickx & Cool, 1989; Reed &

DeFillipi, 1990; Kogut & Zander, 1995). According to Leonard-Barton (1992), when

a firm changes operating environments then it needs to make a swift reformulation to

its strategy and that is when previously valuable resources are hard to identify and

therefore become a source of core-rigidities. Therefore, when competitors of the

firm do not have to cope with such resources, the focal firm can be subject to a

competitive disadvantage and can result in a negative performance. It is our intention

to demonstrate along with the positive effects of a firms resources on

competitiveness and performance, the negative effects that might exist from that

reallocation of resources.

The first step into examining the phenomenon of mergers and acquisitions is to

understand why it occurs in the first place. What is the driving force behind it?

Looking into the mergers and acquisition literature, merger motives do not play a

substantial role and have sparked less theoretical effort than merger consequences

(Trautwein, 1990). Taking into account Nearys (2007) work in cross-border mergers,

we find that according to him, because of the vast literature that exists in the industrial

organization (IO), two areas of motives are suggested, namely an efficiency motive

and a strategic motive. As far as efficiency gains are concerned, they can be

developed from various sources, such as managerial synergies or even the use of firm-

specific assets. On the other hand mergers according to Neary (2007) can raise costs,


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because different managerial and production capabilities and dissimilar corporate

cultures have to be integrated. He continues by stating that empirical evidence on

efficiency gains is far from conclusive. Moving on to the broader area of the strategic

motive, Neary (2007) contends that taking into account Salant, Switzer and Reynolds

(1983) mergers between identical firms are without profit, but for the case that

merged firms produce a high proportion of pre-merger industry output.

In fact, taking into consideration the work of Allen et al (2002) that was based in

Trautwein (1990) findings and assumptions, we believe that, mergers are motivated

by a complex form of motives and that no single motive or method can provide a full

explanation. In our effort to look into merger motives we summarize the motives for

mergers into four broad categories, namely economic motives, synergy motives,

strategic motives and managerial motives.

The first part of our proposed model refers to the premerger activity of the merger

or the acquisition. Four different stages are observed. First of all the motives of the

merger or the acquisition have to be recognized by the businesses and the reasons why

that particular business desires to undergo this strategic movement. Such motives

include increasing profitability, the pursuit of market power, marketing economies of

scale, cost reductions and creation of barriers to entry. Secondly the potential targets

to be acquired or merged with a business have to be identified. Thirdly we move on to

the stage of the justification to the premerger and all of the activities that are going to

follow for the actual activity of the merger or the acquisition. Finally, in this phase, is

where we stumble upon the last stage of the premerger, which is its implementation.

The second part of our model is all about the post-acquisition activities that take

place after a merger. The first step is the asset divestiture, because the exploitation of


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economies of scale and scope is usually achieved through that stage. Secondly we

have the step of the resource redeployment. Here, because of the reason that

acquisitions can generate value and boost returns by redistributing resources from the

acquirer to the target, and vice-versa, from the target to the acquirer we include

resource redeployment as the second part of our model. Consequently we try to

explore the potential cross-effects of asset divestiture on revenue enhancing

capabilities and of resource redeployment on cost savings. That is where the third and

fourth stage of our second part of the model lies, cost savings and revenue enhancing

capabilities. Finally we investigate the possible lingering direct effects between asset

divestiture and resource redeployment on acquisition performance, our final stage in

our model, effects that might not have been captured by the interceding value-creating

variables, cost savings and revenue enhancing capabilities. It is in that view that this

multifaceted trend mergers and acquisitions and because of the reason that

although the merger and acquisition dream exists along with several issues that need

to be further addressed, that has attracted our stern attention.

Our belief is that the initial sample should consist of acquisitions that took place in

the European Union between companies operating in the same or different industries.

Most likely four phases are under consideration. First of all measurement scales are

developed using the Lickert-Scale by reviewing relevant literature, by completing on-

site interviews with CEOs from large firms, academics and consultants and by pre-

testing the resulting scales with a group of academics and consultants. Secondly a

single bilingual research in order to pre-test the preliminary versions of the resulting

questionnaires. These pre-tests might lead to the revision of several items to improve

their clarity and/or the addition of several new items identified. Thirdly on-site

interviews will be conducted with CEOs or executives in charge of their acquisitions


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programs, which will result in the final versions of the questionnaires. Finally the

survey will be then mailed to the acquiring firms included in the sampling frame

mentioned above. The surveys will be addressed to the chief executives of the

business units that undertook the acquisition. The cover letter will request that the

survey be completed either by the CEO or by a senior executive with overall

responsibility for the acquisition case examined. Following Dillman (1978) two

follow-up letters and one replacement questionnaire will be mailed after the initial

one.

Finally, the most probable modeling approach that we are going to choose in order

to estimate our model will be the latest available AMOS (16). Amos provides you

with powerful and easy-to-use structural equation modeling (SEM) software.

Structural modeling addresses structural and measurement issues frequent in survey-

designed research and has been increasingly in strategic management research and we

believe it is suitable for our research too. The reason for that is that a model for

AMOS estimation can be divided into two sections, the first one being an inner

structural model that captures the structural linear relationship between the

endogenous and exogenous latent variables and secondly, an outer measurement

model that captures the expression of the various constructs or latent variables in term

of measures that are observable.

References:


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