- Finance and the Capital Market
- Strategic Management
- Organizational Behavior
Researchers from the field of strategic management focus on the management of the organization itself and its long-term planning. Strategic management does not accept the assumptions of economic/finance researchers and of the capital market approach that maintains that
- It is possible to precisely predict the future cash flow of the firm for a period of several years.
- There is the potential for increased inner effectiveness that is greater than the performance of the acquired party’s managers.
The experience and knowledge that have accumulated in the realm of strategic management show that strategies change following the frequent environmental shifts and following implementation difficulties. Therefore, future cash flow, which constitutes a main basis for the value evaluation, is difficult to predict.
In addition, strategic management scholars maintain that the ability of inner improvement of effectiveness of the organization is limited, and at some stage, it may detrimentally influence its competitive ability. In contrast, the ideas advocated by economics/finance reseachers led at the end of the 1980s to a growth of hostile takeovers and leveraging using finance and LBO (acquisition of the company using the leveraging by managers and workers). Capital actors who adopted these methods believed that it was possible to increase the effectiveness of the organization and thereby boost its value. However, these hostile takeovers nearly vanished in the 1990s. In addition, it must be remembered that this economics/finance approach is influenced by the American capital market for the measurement of M&A success and emphasizes the short-term effects. In Japan and Europe, the tendency is to focus on performance and long-term strategic goals, and the measurements and reward systems are commensurate with this tendency.
The strategic management approach addresses a large number of measures of success, including the size of sales, the increase of the market share, the improvement of competitive abilities, and of course the change in profitability after the merger in relation to a period before the M&A. These measures are influenced, according to strategic management researchers, by the fit between the organizations, and therefore the main factor of success/failure in the merger/acquisition is the degree of strategic fit between the two companies. Strategic fit is expressed in the synergy potential (2 + 2 = 5) of the merger. (The topic of synergy will be discussed separately in Chapter 5, “Synergy Potential and Realization.”) Simply put, there is synergy when it is possible to operate two business units more profitably when they are under the control of one factor than when each one operates separately. Strategic fit and synergy exist in the related merger in which the two organizations operate in the same industry or in related industries. The clearest example is the merger of competitors, when it is then possible to unite administrations and operative functions. Thus, it is possible to achieve the joint level of sales (or more than that) at lower costs, such as in the merger of Elco and Electra in the beginning 1990s in the field of air-conditioning units.
In contrast, when Elco acquired Shekem, which included a food chain and a clothing chain, the synergy was low (only evident in the area of the marketing of electronic products). This was similarly the situation in which a building contractor acquired the Pizza Hut chain. There was no potential for synergies, and the merger was defined as an unrelated merger. Some people asserted that there were synergies because Pizza Hut restaurants are situated in buildings. (Cynics maintained that the only synergy would be if pizzas were sold with a cement sauce.) These unrelated mergers did not succeed. The recommendation in the strategic management approach is unequivocal: Only synergetic mergers are recommended, and unrelated mergers should be avoided, with the exception of highly specific cases.
However, even in related mergers, the number of failures is high. Research conducted by Professor Michael Porter from Harvard examined the percentage of success among related mergers. The criterion of success/failure was the percentage of organizational divorce in a period of 5 years (and even more) after the merger/acquisition. The sample included large firms in the United States, and the basic assumption was that in related mergers, the intention is to maintain the acquired party for a long period of time to realize the synergy potential. In this sample, too, the percentage of divorce was high, above 50 percent. The conclusion was that a firm that is forced to resell a company it has acquired does so after several attempts to connect the organizations and to exploit the synergy, and when it finally despairs, after much suffering, it “vomits” the company. This was the case in the merger of Madge and the Israeli company Lannet. Lannet was acquired for 330 million dollars and was sold after approximately 3 years to Lucent for approximately 100 million dollars. The integration process of the organizations did not succeed. Madge’s profits dropped, and its stock value reached approximately 5 percent of the value on the day of the merger.
Explanations to the miserable results of related mergers are that the potential of synergy is not always realized in the implementation. There are two main reasons for such lack of synergy realization. First, the synergy is not exploited because of lack of prior planning. Using prior planning, it is possible to avoid superfluous costs, to identify the main sources of synergy, and to enable the actualization of the synergy potential in a relatively short time frame. Without a defined plan, the potential of synergy melts away in long and complex organizational processes that do not bear fruit. (Part II, “Analysis Tools for Key Success Facgors,” is dedicated to the process of planning.) The second reason for the lack of synergy realization in related mergers is linked to the lack of focus on human factors, namely, the managers and the workers, and then primarily those of the acquired company. This reason is the topic discussed under the title of organizational behavior next.