Mergers and Acquisitions –Is bigger always better?

Over recent years it appears that the use of mergers and acquisitions is becoming a popular strategy for companies looking to; grow, achieve economies of scale, diversify, increase the value of the firm or even simply feed the egos of CEOs. However, despite the good intentions of M&As, research suggests that the majority usually have depreciative effects on a firm and often result in a decline of shareholder value. What is it then that causes this negative impact? Surely an increase in growth and market power, partnered with the additional motives for M&As would improve business performance?

Take Daimler-Benz and Chrysler for example, Chrysler at the time dominating the American market deemed ‘the most profitable automotive producer in the world’ (Dartmouth Business School, 2002). Meanwhile, Damiler-Benz on the other side of the Atlantic, one of the biggest car manufacturers in Europe, struggling however to penetrate the American market.

The idea was perfect, a $37bn deal; a “merger of equals” American and German engineering giants united under one banner. The company were listed on the NYSE under the symbol DCX, the Chrysler CEO predicted “Within five years, we'll be among the Big Three automotive companies in the world” (Martelin, 2008).

However, unfortunately for them business is never that simple and it wasn’t before long that the cracks began to show…

The main reason believed for the downfall of the firm was the clash of cultures between the two. The autocratic Germans, relentlessly issued orders from Stuttgart to Detroit on all business matters, constantly trying to dominate. It was often believed that the Germans saw the ‘merger’ as more of a ‘takeover’.

Tensions ran high between workers, the Americans often earned up to four times the amount compared to their German counterparts. As the cracks deepened executives became more open about their opinions.

Daimler-Benz executives had been reported to utter snide comments about their partners; “I’d never drive a Chrysler” (Dartmouth Business School, 2002). The Americans retaliated with equally petty jabs all channelled through the media, directly in the public eye.

The cultural differences between the firms were obvious. Although both had the same goal, each had their own way of achieving it. The Germans ran a very tight ship, focusing on precision and uncompromised quality at any cost. Whereas the Americans were more focused on keeping costs low, as a result both had very different ideas on manufacturing standards.

I think the firms were simply incompatible; both were part of the same industry but operated in different markets. To use Warren Buffet’s metaphor of the princess and the toad in this circumstance we had two princesses, neither of which was willing to act the toad. Had either company identified the significant cultural differences between the two before the merge perhaps the multi-billion pound loss may have been avoided.

When considering a merger it essential to consider the human integration factors. Simply adding A+B doesn’t always equal C, on paper, from a financial view it may look an obvious choice but in reality are the firms really compatible?

However, mergers and acquisitions are not all doom and gloom and if thoroughly researched with a strong post-merger strategy both parties can benefit significantly. Take Disney and Pixar for example, Disney bought the animation studio back in 2006 for $7.4 billion a figure believed by a lot of analysts to be significantly overpriced. However, since the acquisition Disney’s stock price has climbed 28% generating wealth for its shareholders (The NY Times, 2008). The new company has gone on to produce films that have made staggering figures in the box office with the film ‘Cars’ hitting $460m in ticket sales.

I believe the success of the acquisition is down to the level of detail and dedication the management team took in carefully uniting the two corporate cultures. Strong communication between management and employees was essential to the success ensuring that everyone had a voice. Pixar even went to the extent of drawing up a list of elements that it would not have changed, for example the company’s health care, employee’s e-mail addresses etc. a list of which Disney were happy to oblige.

Sources used:

Finkelstein, S. (2002) ‘The DaimlerChrysler Merger’, Dartmouth College Website, [Online]. Available at: http://mba.tuck.dartmouth.edu/pdf/2002-1-0071.pdf (Accessed: 09/03/12).

Martelin, N (2009) ‘Daimler-Chrysler Merger Case: Rationale of a failure’ GRIN Verlag oHG: Munich

Barnes, B. (2008) ‘Disney and Pixar: The Power of the Prenup’, The New York Times Website, [Online].  Available at: http://www.nytimes.com/2008/06/01/business/media/01pixar.html?pagewanted=all (Accessed: 09/03/12).