Mergers & Acquisitions - Success or Failure?
The Role of Corporate Governance and Strategic Management in Mergers and Acquisitions with the examples of DaimlerChrysler and Sony Ericsson
Analysis of Data and Findings
Mergers & Acquisitions (M&A) are an increasingly important instrument for direct investment and growth in companies all over the world. They are very complex procedures, prior researches show that approximately 64% of all M&A‘s do not produce the expected benefits, more than 50% do not even repay the investment (Boglarsky, 2005). Common reasons, assumed by experts, are lacking preparation, management mistakes and insufficient compatibility. The explanation why M&A‘s are still so attractive are the very high profit opportunities. (Wirtz, 2003)
In this research we aimed to investigate on the importance of strategic management and corporate governance for the success of M&A‘s. It will provide deeper understanding of the relationship between those very important aspects and the success of one of the most critical investment strategies. To conduct our research we analysed and compared the two very different Mergers of DaimlerChrysler and Sony Ericsson.
The DaimlerChrysler merger on the one hand is often regarded to as one of the best examples of failure. Taking the situation before the merger, it could have been a very successful event. Mismanagement and lacking implementation of corporate governance though, destroyed every possibility of a profitable future.
Sony Ericsson on the other hand is a very successful Joint Venture, even though there were some difficulties at the beginning. Thanks to a very clear vision, culture and the determination to learn, Sony Ericsson is today one of the leading companies in the mobile market.
We are interested to see, how the theory of mergers and acquisitions can be applied to companies of our day to day life and how important strategic management and corporate governance really are for the success of a company.
II. Research Question
For the purpose of this study, we formulated the following research question, including two hypothesis:
To what extent, if any, is there a relationship between Corporate Governance and Strategic Management and the success of a Merger?
H0: There is no relationship between Corporate Governance and Strategic Management and the success of a Merger.
H1: There is a relationship between Corporate Governance and Strategic Management and the success of a Merger.
To conduct our research, we used exclusively secondary data. Primary data was unavailable and not necessary in this case. We gathered our information from various books, journal articles, articles and webpages. A summary of the most important literature can be found in the „literature review“.
Firstly, we gathered information on a broad range of topics regarding the success of M&A, to afterwards refine our research question to the now above stated problem. Secondly, we revised the theory of corporate governance and strategic management to get a clear impression of the impact it might have on M&A, and picked the examples of DaimlerChrysler and Sony Ericsson, as they are very representative.
Thirdly, we analysed the two cases regarding significant performance in Strategic Management and Corporate Governance.
Finally, we compared the two companies and evaluated the contribution of the respective performance to the overall success of the mergers. The findings can be seen in the paragraph „findings“.
IV. Literature Review
a) Mergers and Acquisitions
Sherman and Hart (2006) stress that “mergers and acquisitions are a vital part of any healthy economy and importantly the primary way that companies are able to provide returns to owners and investors”. Furthermore, they point out, that “successful mergers and acquisitions are neither an art nor a science but a process. In fact, regression analysis demonstrates that the number one determinant of deal multiples is the growth rate of the business. The higher the growth rate, the higher the multiple of cash flow the business is worth”. This is certainly true, but it does not offer an explanation to what mergers and acquisitions are.
Bernd Wirtz (2003) offers such an explanation in very simple and short terms, stated in 1990 by Behrens/Merkel: “Mergers and Acquisitions (M&A) are fusions and overtakes of organisations, divisions or affiliates, respectively” (german original: “Mergers und Acquisitions (M&A) sind Fusionen und Übernahmen von Unternehmen bzw. deren Teilbereichen oder Tochtergesellschaften“). The book „Mergers and Acquisitions Management“ by Wirtz is a very well structured German textbook, which combines theoretical approaches with practical examples. It explains strategic, financial and personal motives of acquirers, as well as personal and business relevant motives of the seller. It also describes the different participants of M&A‘s.
The book also explains the umbrella brand strategy, as it states, that in the case of DaimlerChrysler the brand personality after the merger differed significantly from the wish personality before the merger. Whereas it is known, that Sony Ericsson conducts a very successful umbrella brand strategy, supported by the structure of the company.
The above mentioned literature gave us an overview of mergers and acquisitions and their importance in business. They did also give advice on how to structure a merger. We will now emphasise on the influence of corporate governance and strategic management in this process.
b) Corporate Governance
The term corporate governance refers to the relationship between the board of directors, top management and shareholders. The board of directors and top management are connected by their respective responsibilities. The prior are supposed to set corporate strategy, mission and vision and therefore setting a framework for the actions of the top management. Furthermore, the board is in charge of hiring and firing the CEO and monitoring, controlling and supervising the top management. They take responsibility in the usage of resources. All these actions happen in order to care for the interests of the shareholders and, more recently, also to care for social responsibility. (Wheelen/Hunger, 2008)
Fama and Jensen (1983) state, that „good corporate governance is key to the integrity of corporations, financial institutions and markets, and central to the health of the economies and the stability.“ As Wheelen and Hunger describe in the book „Strategic Management and Business Policy“, a well-implemented corporate governance usually leads to higher shareprices, as people perceive corporate governance to lower the risk of failure and ensure a healthy company and long-lasting success.
Laws and standards defining the responsibilities of boards of directors vary from country to country.
The board of directors is also involved in strategic management. It can carry out the three tasks of monitoring, evaluating and influencing, and initiating and determining, depending on their degree of involvement in strategic management. Boards can range from being phantom boards with no real involvement to catalyst boards with a very high degree of involvement. Catalyst boards take a leading role in setting mission, objectives and strategy of a company and have a very active strategy committee. Research suggests that active board involvement in strategic management is positively related to a corporation’s financial performance and its credit rating.
Though not explicitly stated, we assume, that a good corporate governance will affect and determine the success of a merger. Therefore, we will analyze our examples regarding the relationship of board of directors, top management and shareholders.
c) Strategic Management
The textbook „Strategic Management and Business Policy“ by Wheelen/Hunger (2008) provides a very good definition of strategic management. They say that „strategic management is that set of managerial decisions and actions that determines the long-run performance of a corporation. It includes environmental scanning (both external and internal), strategy formulation (strategic or lang-range planning), strategy implementation, and evaluation and control.“
This implies, that the aim of strategic management is to deal with the external environment by using internal competences.
Over time, there crystallised 4 phases of strategic management, through which a company usually evolves when management tries to deal with the faster and faster changing world. Basic financial planning, with itʻs very simple annual budget planning, develops to a forecast-based planning, when managers realise, that the one-yearʻs-budget does not contribute to a long-term planning. The phase of externally oriented strategic planning takes a step outside the own company and looks at the market. Planning is centralised to a strict top-down planning, supported by consultants and more modern techniques.
Only when managers realise that the input of lower-level management is very valuable, a company can proceed to the level of strategic management. Managers and employees from various departments are involved in decision making. There is no top-down management but constructive communication.
The benefits of strategic management according to Wheelen/Hunger are a clearer sense of strategic vision, a sharper focus on strategically important issues and an improved understanding of a rapidly changing environment.
It is therefore most probable, that a well organised strategic planning contributes not only directly to the success of a merger or an acquisition, but it also enables a company to become a learning organisation, which then again influences the success of M&A.