Best Practices of Mergers and Acquisitions

Running head: BEST PRACTICES OF MERGERS AND ACQUISITIONS Mergers and Acquisitions: Best Practices for Success Abstract Mergers and acquisitions have become a growing trend for companies to inorganically grow a business within its particular industry. There are many goals that companies may be looking to achieve by doing this, but the main reason is to guarantee long-term and profitable growth for their business. Companies have to keep up with a rapidly increasing global market and increased competition.

With the struggle for competitive advantage becoming stronger and stronger, it is almost essential to achieve these mergers. Through research I will attempt to dissect the best practices for achieving merger success. Mergers and Acquisitions: Best Practices for Success When companies are acquired or merged, people almost immediately start to focus on the differences in the companies. They also begin to pay attention to who are the winners and who are the losers. It is typical in an acquisition for the acquiring company to see itself as the winner, and the acquired company as the loser.

The controlling company wants to impose changes and view those in the acquired company as highly resistant to change. It is clear that most mergers and acquisitions are primarily based on strategic, financial, or other objectives. However, ignoring a potential mismatch of people and cultures can lead to strategic and financial failure. In most mergers, serious consideration should be given to cultural and leadership style differences. The success of a merger or acquisition can be defined as the creation of synergy.

But every merger and acquisition is a unique event, occurring in a unique environment that is subject to various influences. Analyzing a merger should begin by understanding the culture and core values of the business that is being acquired. Ashkenas, DeMonaco, and Francis (1998) observed that “. . . it is increasingly important that executives learn how to manage the integration of acquisitions as a replicable process and not as a one time only event” (p. 166). DiGeorgio (2002) has researched this topic extensively through the mergers and acquisitions of Cisco and GE Capital.

Cisco approaches mergers by “. . . (a) doing [its] homework to select the right companies and (b) applying an effective reliable integration process once the deal is struck”(DiGeorgio, 2002, p. 138). Cisco has in the past turned down deals with companies which did not fit within its strategy. Cisco looks at deals from the following perspective (DiGeorgio, 2002): 1. Are our visions basically the same? 2. Can we produce quick wins for shareholders? 3. Can we produce long-term wins for all four constituencies – shareholders, customers, employees, and partners? 4.

Is the chemistry right? 5. For large M&A, is there geographic proximity? (p. 138) GE Capital, on the other hand takes a more process-based approach to handling mergers. Since GE has performed plenty of mergers and it learns and grows from each one. The crux of its process is “[g]etting the right integration leader [which] constitutes 95 per cent of the success of an integration” (DiGeorgio, 2003, p. 139). This study highlights the importance of being proactive in pre-merger planning and offers advice to help ensure that the merger process will be a success.

Within this paper, I plan to discuss the best practices companies can use to ensure a successful merger. These practices include timely merger planning, choosing the right leadership, focusing on corporate culture, communicating effectively, and engaging the staff, human resources, and middle management. Timely Merger Planning There is a lot of time and effort spent on finding good merger candidates and courting them only to fall through on the follow-up integration activities. As soon as serious discussions begin with a potential merger candidate, the integration planning efforts should begin.

It is essential that acquisitions be assimilated into the parent as quickly and as smoothly as possible to minimize any losses in productivity and maximize opportunities between the two organizations. “There is good agreement that the first 100 days after a merger change set the tone, signal the troops about the real direction of the organization and its vitality”(DiGeorgio, 2003,p. 266) A slow integration process can actually worsen problems. Merger integration should not be treated as an after-thought. It is something that needs to be addressed uring the merger search and negotiations phase while there is time to minimize any negative impacts. Choosing the Right Leadership Choosing the right leadership, not only for the merger integrations, but also for the new combined company is important in terms of vision, mission, culture, and expectations. A leader should focus on the larger design of the new corporation. A leader has to resist the temptation to take the easy way out. It is not pleasant to deliver bad news or to be a naysayer, but it is necessary at times. It is also important for a leader to promote and ensure good morale.

This starts with treating people with respect and listening to their opinions, rather than telling them what to do. “Leaders set the tone for the culture and for how relationships are going to unfold in the combined organization” (DiGeorgio, 2003, p. 260). Effective working relationships and increased trust developed among the senior executives will carry throughout the organization as a model of how the newly integrated organization will work. Senior executives need to establish the cultural rules of engagement in the new entity quickly and effectively.

Company leaders should strive to provide as much transparency as possible to decision making and address employee concerns such as changes to roles and responsibilities, compensation and employee benefits as promptly and practical as can be performed. “Integration management is a full-time job and needs to be recognized as a distinct business function. . . ” (Ashkenas et al. , 1998, p. 169). The role of the transition merger leader cannot be taken lightly. This person must make critical personnel, process, and structural decisions quickly.

This role requires the mental tenacity to endure long meetings, tough questions, and low morale. The G. E. Pathfinder model as presented by Stopper (1999) suggests that it find an integration leader to direct these merger activities and get the necessary results done to have a successful integration. Stopper (1999) also suggests a few other skills and qualifications necessary to look for in this person which include experience in project planning and management, communication planning and implementation, expertise specific to acquisitions, and corporate culture familiarity.

Research by Ashkenas (1998), on the other hand, believes a merger leader should have ability to facilitate integration activities, to help the acquired business understand processes of the new company, and to help his or her company understand the business that is being acquired. Leadership also needs to be held accountable for the success of the merger (DiGeorgio, 2002). The leader should have a sense of purpose and responsibility not only for his or her job but also for the company as well as the employees who work there.

When leaders don’t exhibit this accountability, they can take a nonchalant attitude which can hinder any progress which has been made. Ensuring the appropriate leadership is in place from the start will present a successful blueprint for the outcome of the merger or acquisition. Focusing on Corporate Culture When companies merge there can be a clash of cultures, conflicting beliefs, and different norms. Organizational culture is important because it has been shown to have a significant impact on organizational performance.

Cultures that support the missions, goals, and strategies of an organization provide a means for dealing with change and conflicts when they arise. “Cultural integration is ignored in the majority of business combinations” (Pekala, 2001, p. 32). Research has shown that because of cultural aspects, mergers often encounter difficulties in achieving the goals of the merger. While due diligence is performed on all of the financial aspects of a merger, one major reason that so many mergers fail is a lack of “cultural fit” (DiGeorgio, 2003, p. 259).

Understanding how things are seen in the other cultures, learning mutual respect, and being open to exploring different points of view are the keys to the people factor in any merger or acquisition. “A sound M&A integration strategic plan is as cultural as it is structural and entails both the welding of hard assets and a delicate/neurosurgery of minds” (Brahy, 2006, p. 54). Corporate culture tends to be viewed as a company having casual Fridays or working alternate work schedules. However, it runs deeper than the external characteristics.

Pekala (2001) suggests that “merger partners need to zero in on the basic ways that decisions get made in their companies and how different approaches can be combined in harmony” (p. 32). The organization’s culture is simply how things are done in the organization. It could be as simple as putting the customer first or driving for excellence in safety. The challenges encountered when merging two different cultures are that either one or the other (or both) needs to change. The issue, then, becomes not just culture awareness, but culture “change management” (LaMarsh, 2006, p. 9) during the integration period. Building a new culture that combines the best of both previous cultures makes the new organization better, stronger, and more competitive than either of the organizations can be on its own. One way to build a new culture is by having representatives from both companies or organizations list the principles that currently guide its behavior and attitudes. Once this has been captured, both groups can then combine their efforts into a discussion of what type of cultural behavior is necessary to ensure that the best of both worlds is fairly represented.

Brahy (2006) even suggest the acquiring company learn another language to help the merging companies feel more at ease and are accepting of their individual culture and traditions. Top management, however, must support this new combined culture. Management cannot force people to work together to build a new culture. As DiGeorgio (2003) notes “leaders set the tone for the culture and for how relationships are going to unfold in the combined organization” (p. 260). Control over the new corporate culture is critical to the success of a merger.

Achieving cultural synergy is possible, but it takes work and effort especially on the side of leadership. Communicating Effectively Communication plays a very critical role at the time of a merger. Communicating with the employees is very important as they should not feel that they have been kept in the dark. It should be remembered that they are the most important assets of an organization and also major stakeholders. Most people understand that mergers and acquisitions take place for business reasons.

But it is important to communicate the specific reasons and benefits of the merger. People may not like it, but if they see that it has a legitimate purpose, and the benefits are clear, then there is less resentment and employees are more likely to accept it. Mergers and acquisitions breed uncertainty, ambiguity, and fear among employees. Rumors often begin in organizations before the announcement of any impending merger is formally announced. “. . . Trying to hide bad news such as layoffs by not revealing further details . . can damage morale and lead to turnover” (Messmer, 2006, p. 15). A good communication plan can help avoid complications by ensuring that employees understand the reasons for the deal, the objectives the organization is trying to achieve, and the potential benefits for everyone involved. In mergers and acquisitions, employees typically want answers to the following basic questions: •Will I have a job in the new organization? •Will my pay, benefits and work locations change? •Will this merger be good for my career?

These and other questions must be addressed soon after an announcement is made since productivity can suffer the longer employees have uncertainty. Straightforward, concise, and timely communication assists in building employee commitment and focuses employees on the day-to-day operations of the organization. “. . . Communication minimizes the negative reactions of the acquired employees” (Brahma, 2007, p. 8). The faster employees feel connected to the new organization, the faster they will begin working toward the business objectives and understand what is expected of them.

Research shows that organizations using effective communication strategies achieve the best results in productivity and shareholder returns. A good communication strategy is critical to a successful merger or acquisition. A successful plan cannot be reactive but proactive and it has to be included as part of the original merger plans. Nikandrou, Papaleaxandris, and Bourantas (2000) assert that “frequent communication does not imply that management should communicate every little detail of the process . . . t rather means that management communicates its concerns about employees . . . ” (p. 336). An effective communication plan must take into account many elements such as the unique needs of various stakeholders, such as managers, employees, investors, customers, suppliers, and surrounding communities, need to be identified and addressed. Successful mergers only happen when upper managers make themselves visible and accessible to all employees affected by the merger. All employees need to experience the buy-in and support of their leaders for the merger or acquisition.

Leaders need to be prepared to communicate the answers they do have and be open to stating what answers they do not have yet (Terranova, 2006). For leaders and managers to maintain credibility and trust with employees, they must be open and honest in dealing with these problems rather than choosing not to communicate at all. Engaging Staff and Middle Management People issues are often the most sensitive but also overlooked aspects of mergers and acquisitions. Organizations fail to realize that people have the capability to make or break the deal.

It is important for organizations to address the viability of the integration on the human resources front. There are key resources within the organization that can help in handling people issues namely the employees, human resources, and middle management. Frequently there are a lot of people who get overlooked in the acquisition process; specifically lower-level employees who may be able to offer valuable input. They are the people who produce the profits, represent the company, and, ultimately, are the ones that will make the combined company succeed.

Proactively engaging the employees can cultivate change agents for the acquisition making the entire process more desirable for all parties involved. “Managing change is a systematic process that requires moving through a series of action steps to predict and address the risk caused by potential resistance” (LaMarsh, 2006, p. 59). The best way for leadership to actively involve employees is to engage in active feedback sessions. This could involve setting up meetings with key people from various groups in the organizations and soliciting feedback from them (Messmer, 2006).

Another suggestion could be to set up a website answer board where employees can ask the integration team or top management questions anonymously and view answers to other questions that have been proposed. Retaining and motivating employees is a major challenge for the human resource department of organizations. Actively engaging human resources early in the process can ensure merger success. Human resource leaders can play a key role in helping senior management identify, involve, and assess the key executives and other critical talent who will be vital for the success of the new business.

Human resources can help facilitate employee question and answer meetings and are the most knowledgeable about current policies and procedures. Human resource skills are essential for the facilitation and negotiation processes regarding combining pay and benefits. Human Resource skills are also needed for supporting, counseling, and coaching line managers, who have to supervise their functions during very difficult times. Middle management also plays an important role in ensuring the success of a merger or acquisition. Communications with the middle managers will help to not only alm their fears and concerns but also help them understand what is in store for them. If middle managers are not kept in the information loop, it can lead to false information getting out that could damage morale as well as increase turnover. They need to fully understand the benefits not only to the organization but also to them as individuals. Once concerns have been dealt with, middle managers should be held accountable for implementation of the change. Without this accountability, they ultimately will not have a desire to change their behavior.

Middle managers should become a positive part of the change process and they should not feel as if it is another program or process that is being forced upon them. Middle managers are the leaders that lower-level employees will look to for timely, accurate information. If approval of the merger is given at this level, then those under them will more than likely not give their approval either. Conclusion Several important lessons have been learned from the merger research conducted throughout this paper.

When a merging with another company, managers should be focused on uniting the two companies as quickly as possible. Management should also be aware of the importance of starting the integration planning as soon as a definitive merger candidate is determined. Another important aspect of the merger process is a commitment to change on the part of leadership. Management needs to assign appropriate leadership resources to complete the transition successfully. Communication is also very critical even when there is nothing new to say. It is impossible to over-communicate throughout the merger process.

Employees have an almost insatiable desire for information, and misinterpretation of silence and rumors are very common. Mergers are seen as a way to solve problems but it also creates a new set of problems as well as opportunities. Success in mergers and acquisitions rests not only on good strategic and financial planning, but also in the analysis of people issues. Making mergers work successfully is a complicated process which involves not only combining two organizations together but also integrating the people of two organizations with different cultures, attitudes, and mindsets.

To ensure success in mergers and acquisitions there needs to be timely merger planning, the right leadership, cultural integration, effective communication, and the involvement of staff and middle management. References Ashkenas, R. , DeMonaco, L. , & Francis, S. (1998). Making the Deal Real: How GE Capital Integrates Acquisitions. Harvard Business Review, 76(1), 165-178. Badrtalei, J. , & Bates, D. (2007). Effect of Organizational Cultures on Mergers and Acquisitions: The Case of Daimler Chrysler. International Journal of Management, 24(2), 303-317.

Brahma, S. , & Srivastava, K. (2007). Communication, Executive Retention, and Employee Stress as Predictors of Acquisition Performance: An Empirical Evidence. ICFAI Journal of Mergers & Acquisitions, 4(4), 7-26. Brahy, S. (2006). Six solution pillars for successful cultural integration of international M&As. Journal of Organizational Excellence, 25(4), 53-63. DiGeorgio, R. (2002). Making mergers and acquisitions work: What we know and don’t know — Part I. Journal of Change Management, 3(2), 134. DiGeorgio, R. (2003). Making mergers and acquisitions ork: What we know and don’t know–Part II. Journal of Change Management, 3(3), 259. LaMarsh, J. (2006). What mergers miss. Journal of Corporate Accounting & Finance (Wiley), 17(2), 59-62. Messmer, M. (2006). Leadership Strategies During Mergers and Acquisitions. Strategic Finance, 87(7), 15-16. Pekala, N. (2001). Merger They Wrote: Avoiding a Corporate Culture Collision. Journal of Property Management, 66(3), 32. Stopper, W. (1999, July). Mergers and Acquisitions: Fulfilling the Promise. Human Resource Planning, 22(3), 6-7.

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