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Chapter 12

Chapter 12 - Mergers & Acquisitions

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Human Resources Management
HRM 3430
Gordon Qi Wang

Chapter 12 Merger  two or more firms join together Three categories for mergers: Horizontal Merger  the merging of two competitors to achieve economies of scale. • Coles Books and SmithBooks formed Chapters • Chrysler and Daimler-Benz o Chrysler (American) Daimler-Benz (German) o Failed merger because of cultural differences Vertical Merger  split into two categories Forward Vertical/vertical integration - the merger of a buyer and seller • PepsiCo acquired KFC and Taco Bell to ensure distribution of its product Backward Vertical– the merger of a supplier and a Buyer - To achieve the synergies of controlling all factors affecting a company’s success, from production of raw goods to manufacturing to distribution and retail sales. Conglomerate Merger  the merger of 2 organizations competing in different markets • Nokia mergers with McDonalds Acquisition  purchase of an entire company by another Consolidation  when two or more companies join together and form an entirely new company. • Three hospitals in Toronto – York Finch, Humber Memorial and Northwestern General merged to form Humber River Regional Hospital Takeover  one company acquiring another company • Usually refers to a hostile transaction - the acquisition of a company against the wishes of its management • Can mean a friendly merger as well - the management of a company is willing to agree to the acquisition Companies merge for three reasons: 1) Strategic benefits 2) Financial benefits and/or 3) The needs of the CEO or managing team Management Needs Theory is managers seek to acquire firms for their own personal motives, and economic gains are not the primary consideration. • Managers may pursue their personal interests at the expense of stockholders  Positive correlation between the size of the firm and management compensation, so CEOs can expect higher salaries for managing larger firms • Other indirect incentives may include prestige or status of owning larger firms or companies in fashionable sectors – entertainment or sports sectors • Personality characteristics – need for power • The greater the ego of the acquiring company’s CEO, the higher the premium the company is likely to pay Agency theory: There are some agency conflicts between managers (agent) and outside shareholders (principal). Managers may pursue their personal interests at the expense of stockholders. The Success Rate of Mergers - 20 % of all mergers and acquisitions are successful - 60 % are disappointments - 20% are failures - Acquisitions of related businesses fare better than acquisitions of businesses unrelated to the parent business - Problems merging two companies include – integrating computer systems, eliminating duplication, re-evaluating supplier relationships, reassuring clients, advising employees and reconfiguring work routines. - Size of the company influences success – two large firms have more problems Reasons M&As Fail • Integration difficulties • Inadequate evaluation of target • Large or extraordinary debt • Inability to achieve synergy • Too much diversification • Managers overly focused on acquisitions • Too large an acquisition • Reduced employee morale due to layoffs and relocations • Difficult to integrate different organization cultures  Combination of values and characteristics that define an organization. It drives behaviours and unites employees around a shared set of values.  Organizational culture is rooted in the countless details of an organization’s life: how decisions are made, how careers are managed, and how awards are allocated.  Cultural issues in mergers • Assimilation – occurs when one organization willingly gives up its culture and is absorbed by the culture of the acquirer or the dominant partner • Integration – the fusion of two cultures, resulting in the evolvement of a new culture representing (one hopes) the best of both cultures. Rarely happens as one company usually dominates. • Deculturation – Sometimes the acquired organization does not value the cultures of the dominant partner and is left in a confused, alienated, marginalized state known as deculturation. Temporary state, existing until some integration of separation occurs. • Separation – the two cultures resist merging, and either the merged company operates as two separate companies or a divorce occurs. The loss of employee productivity stems from many sources: - Employees go underground, afraid to make themselves visible or do anything that may put their jobs at risk - Overt sabotage occurs when employees deeply resent the turmoil the merger is causing in their lives - Self-interested survival tactics emerge, including hiding information from team members to accumulate a degree of power (the employee feels that he or she is “the only one who really knows how things work around here”) - A resigned attitude appears, stemming from the belief that no amount of work will prevent one from being fired - Employees spend at least one hour a day dealing with rumours, misinformation and job search activities Employee issues are responsible for the failure of one-third to one-half of mergers. People problems include: - Difficulty in blending cultures – main reason for failure - Reduction in service levels - Poor motivation - Loss of key people and clients - The loss of focus on longer-term objectives The Impact of a Merger
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