Marriage rows.
| Author | Tavakoli, Iraj |
Expansion is not a choice for firms, it is is a question of survival, and this is becoming increasingly true as markets consolidate into global enterprises. But, warns Iraj Tavakoli, successful mergers and acquisitions depend on more than ambition and grand plans
It is a truth universally acknowledged that ambitious and energetic entrepreneurs are always hungry for expansion. But, in recent decades, this natural hunger has been further fuelled by globalisation, which has made continuous growth a necessity. It has become a common maxim that not growing is tantamount to going backwards, and a company that does this will fall prey to expansionist competitors and takeover predators.
Acquisitions and mergers are important vehicles for growth -- largely because they are much faster than the other two methods: internal development and strategic alliances. Over the past three decades, the quantity and value of mergers and acquisitions have increased exponentially, but the failure rate for acquisitions is also high (some estimate that more than 50 per cent of all acquisitions fail). This is not acceptable in a world where stock markets are increasingly demanding and management agendas focus on creating shareholder value.
To succeed with mergers and acquisitions, companies must fulfil three sets of criteria: they need a valid strategic logic or economic rationale; sound purchase processes; and the ability to apply modern change-management practices to the integration process.
Mergers and acquisitions are justified only if they lead to enhanced competitive advantage and improved shareholder value (M E Porter, Competitive Advantage, Free Press 1985). Revenues can be boosted if the acquirer and the target company have complimentary product lines or markets, or if the two firms can reduce costs by sharing activities, processes and competencies (G Hamel and C K Prahalad, Competing for the Future, Harvard Business School Press, 1994).
Joining activities along the value chain, such as production, distribution and procurement, can lead to considerable economies of scale. For example, the strategic logic behind Royal Bank of Scotland's acquisition of Natwest Bank was obvious and strong. By mid-August this year, the two companies had cut costs significantly, without reducing customer service. As a consequence, their share price rose substantially.
In diversified companies there is another logical justification for acquisitions -- it is a good way to enter an...
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