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M&A (Factors for Successful Merger and Reasons of Failures)

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M&A (Factors for Successful Merger and Reasons of Failures)

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Unpredictability of Market, POSCO withdraws from Burma after coup:

Foreign companies withdrawing from Myanmar after coup | Reuters

https://www.linkedin.com/pulse/5-reasons-why-most-mergers-acquisitions-fail-increase-ali-amir-fcca/

https://dealroom.net/blog/reasons-why-mergers-and-acquisitions-fail

https://www.devensoft.com/blog/10-key-factors-to-consider-in-ma-deals/

Considering A Merger? Keep These 14 Important Factors In Mind (forbes.com)

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This intriguing headline, once seen on the CNN website, continues to hold relevance even after many years.

The world of mergers and acquisitions (M&A) has undeniably become a fascinating stage, drawing widespread attention. At first glance, mergers and acquisitions (M&A) seem like the golden path to gaining access to new technology and products, cutting costs, and gaining a competitive edge. However, the reality beneath the surface is far more complex.

Numerous studies [1] have consistently exposed the alarming risks associated with M&A. Surprisingly, companies worldwide pour over $2 trillion annually into acquisitions, yet the success rate hovers somewhere between a mere 10% and 30%.

Even a most recent study from 2023, published in the Journal of Multinational Financial Management [2], supports the notion that M&A deals often lead to a decrease in shareholder value. Renowned strategy advisor Roger L. Martin remarked in The Harvard Business Review:
"M&A is a mug's game, in which typically 70%-90% of acquisitions are abysmal failures."
This raises the crucial question: why do these seemingly promising M&A ventures end up in disappointment?

In this article, we try to uncover the mysteries behind the underwhelming performance of most M&A ventures. We'll delve into various factors contributing to this phenomenon from the perspectives of multiple industry experts and researchers.

Reason Why Most Mergers And Acquisitions Fail

Mergers and acquisitions come in diverse shapes and sizes, each possessing its own distinct characteristics. Factors such as the size of the companies involved, industry traits, product-market overlap, and customer base all exert significant influence. Additionally, the previous M&A experiences of the parties, the nature of the takeover (whether hostile or friendly), the performance of the acquired firm, and the level of integration required also contribute to the outcome.

Remarkably, research [3] shows that a considerable number of mergers and acquisitions stumble due to the neglect of employees' reactions and interests. This neglect is cited as a probable reason for approximately 67% of all merger failures. Top-level executives often point out that cultural differences and communication barriers pose the most significant challenges in such situations.

A survey was conducted among Fortune 500 Chief Finance Officers. 45% of them attributed the failure of mergers and acquisitions to "unexpected post-deal people problems." When dealing with different cultures, issues spanning corporate governance to employee satisfaction become increasingly complex. [4]

Although debates about success definitions and measurement timescales in mergers and acquisitions may continue, one undeniable truth remains: too few of these deals achieve the sustainable long-term profitability, market share, and company growth they were anticipated to bring. It's important to note, however, that not every M&A effort fails, and there are notable success stories like Adobe and Figma, Dow Chemical and DuPont Merger, Verizon and Vodafone Acquisition, and others.

This leads us to a pivotal question: why do some mergers and acquisitions succeed while others falter?

Various researchers and industry experts offer their unique perspectives, but amid the diversity of views, certain major reasons tend to garner widespread agreement among them.

1. Overvaluation and Overpaying

Overpaying and overvaluation are considered the top among the major reasons why most mergers and acquisitions (M&A) fail to create value. Often, companies are drawn by the potential of a target. They may invest billions without a proper assessment which eventually leads to severe consequences like financial distress and damage to their reputation among shareholders and stakeholders.

An illustrative example of overpaying took place in 2001 when America Online and Time Warner stepped into the new media market and ended up shelling out more than necessary. This impulsive move resulted in the largest annual net loss ever reported just one year after the deal was struck.[5]

Similarly, misjudging market trends or making miscalculations during assessments can also lead to overvaluation, as was the case with Microsoft's acquisition of aQuantive in 2007. This acquisition eventually resulted in a staggering $6.2 billion write-down in 2013.[6]

2. Poor Integration Process

Industry experts widely acknowledge that the primary reason behind many M&A failures is inadequate integration between the participating entities. This issue plays a crucial role in determining the success of M&A transactions, according to 22 percent of professionals in the field [7].

Another common pitfall in the M&A process is the failure to grasp the target company's culture, values, and goals, which hampers the integration efforts.

When mergers and acquisitions suffer from poor integration, they often fail to deliver the anticipated value to shareholders. Achieving a seamless integration becomes essential for two companies to merge together to ensure a successful outcome and avoid unnecessary disruptions.

Let's take the example of the AOL and Time Warner merger in 2000, a colossal deal worth $182 billion. Unfortunately, it remains one of the most significant M&A failures to date. The major obstacle was the difficulty in blending their distinct business models and cultures.

3. Effective Communication

In successful integration, effective communication plays a pivotal role. When employees fail to communicate adequately, it can lead to confusion and errors, hampering the entire process. Moreover, resistance to change adds to the complexity, resulting in delays and inefficiencies.

A major concern is the risk of losing customers in the new company. This may happen if the management is perceived as distant and unresponsive to customer needs.

To overcome these challenges, managers from both entities must engage in clear and proactive communication both with the employees and customers. They should take the lead in championing the post-integration milestones, one step at a time. Additionally, it is crucial for them to understand and embrace the target company's branding and customer base.

4. Cultural Clashes

In the realm of mergers and acquisitions (M&A), cultural differences play a crucial role in causing disappointments for shareholders. When two companies with distinct cultures, values, and management approaches come together, it can lead to clashes and a lack of collaboration, which can hinder the integration process.

These cultural clashes can disrupt the plans made after the integration, causing tensions and conflicts among employees and affecting their ability to work together effectively, resulting in a lack of synergy. Additionally, cultural disparities between the merging entities can lead to misunderstandings and conflicts that further impede the integration process. Integrating systems and processes can also be challenging, particularly when they are incompatible or outdated, resulting in operational inefficiencies.

A classic illustration of this challenge can be found in the Daimler-Chrysler case. The merger faced significant hurdles due to a mismatch in cultures. Daimler-Benz's hierarchical structure clashed with Chrysler's more informal and entrepreneurial culture, leading to communication gaps and conflicting decision-making processes. Failing to bridge these cultural differences caused internal conflicts, operational inefficiencies, and financial losses, ultimately leading to the dissolution of the merger in 2007.

5. Market Challenges

In the fast-paced world of mergers and acquisitions (M&A), there's an exciting yet challenging journey ahead. M&A deals must brave the ever-changing tides of the market, where economic trends, technological advancements, and customer behaviors can unexpectedly shape the landscape.

As the M&A process unfolds, unforeseen hurdles might arise due to shifts in customer preferences, disruptive technologies, or new players entering the market. These curveballs can disrupt the anticipated benefits and value creation from the deals. To navigate through these potential roadblocks, comprehensive market analysis and careful scenario planning during due diligence are essential. Being adaptable and agile in the M&A approach becomes paramount.

Beyond the market's natural fluctuations, the regulatory and economic environment also plays a critical role. Government policies, trade regulations, and antitrust laws can significantly influence the feasibility of M&A transactions.

Conclusion:

In a nutshell, the reasons behind M&A disappointments are multifaceted. Acknowledging the impact of overvaluation, poor integration, communication gaps, cultural clashes, and market challenges is crucial. Moreover, inadequate due diligence, incompatible business strategies, unforeseen regulatory hurdles, leadership conflicts, and financial constraints contribute significantly to M&A failures.

The world of mergers and acquisitions is full of both promises and pitfalls. While some M&A ventures soar to success, many fall short of their intended objectives. By understanding and addressing the factors behind M&A failures, businesses can increase their chances of creating sustainable long-term value for their shareholders.

Sources:

1. https://www.hbs.edu/faculty/Pages/item.aspx?num=39920

2. https://www.mdpi.com/1911-8074/16/3/199

3. https://www.researchgate.net/publication/305406845_Mergers_and_Acquisitions_failure_rates_and_perspectives_on_why_they_fail

4. https://www.researchpublish.com/upload/book/Mergers%20and%20Acquisitions-7402.pdf

5. https://dealroom.net/blog/biggest-mergers-and-acquisitions-failures

6. https://martinroll.com/resources/articles/strategy/reasons-why-most-mergers-destroy-shareholder-value/#:~:text=One%20report%20by%20KPMG%20concluded,people%2C%20culture%20and%20human%20emotion.

7. https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/m-a-trends-report.html

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5 Reasons Why Most Mergers And Acquisitions Fail To Increase Shareholder Value

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"Mergers fail more often than marriages." This intriguing headline, once seen on the CNN website, continues to hold relevance even after many years.

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Trade, GDP and General Economic Trends, 2021: Brazilian Market > Chilean Market

https://oec.world/en/profile/bilateral-country/chl/partner/bra#latest-trends

2023 Economic Freedom Index: Chilean Free Economy + Stability > Brazilian

https://www.heritage.org/index/country/chile

https://www.heritage.org/index/country/brazil

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Korean and Brazil / Chile: Initiatives on Collaborative Economies / Investments

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Korean and Brazil / Chile: Initiatives on Collaborative Economies / Investments

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Brazil Explores Tech Collaboration with Korea, Secures Deals with Top Businesses, 2023:

https://m.koreatimes.co.kr/pages/article.asp?newsIdx=363880

Chile and Korea promotes Reciprocal Investments, signed MoUs, 2023:

https://www.investchile.gob.cl/chile-south-korea-reciprocal-investment/

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Brazilian vice minister explores tech collaboration with Korean companies

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Elias Rosa, the Brazilian vice minister of development, industrindustry, commerce and services (MDIC), initiated a series of institutional visits in Seoul starting Thursday.

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Korean Hierarchical Corporate Culture Vs. The World:

https://www.koreaherald.com/view.php?ud=20160719001053

Cultural Characteristics of Chilean and Brazilian Workers:

https://research.manchester.ac.uk/en/publications/cultural-characteristics-of-chilean-and-brazilian-workers-and-str

English Proficiency Index: Chile > Brazil:

https://www.ef.com/wwen/epi/

General Facts (Geographical, Demographical, Historical, etc.) Comparison:

https://www.indexmundi.com/factbook/compare/chile.brazil

https://www.worlddata.info/country-comparison.php?country1=BRA&country2=CHL

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This country comparison is a concise, tabular overview of numerous data from our respective country pages for Brazil and Chile. There, we provide many explanations and details per country that go far beyond this comparison.
On this page:
General information Population Quality of life Economy Infrastructure Energy balance Telecommunication Healthcare system Climate languages Religions

General information

Population

Details for Brazil and Chile

Quality of life

Values from 0 (bad) to 100 (very good)
See also: Explanations and country ranking on quality of life

Economy

Details for Brazil and Chile

Infrastructure

Details for Brazil and Chile

Energy balance

Details for Brazil and Chile

Telecommunication

Details for Brazil and Chile

Healthcare system

Climate

We also provide a more detailed climate comparison of both countries.
The data for each country can be found here: Brazil and Chile

Maximum daily temperatures in comparison
Brazil
Chile

Native languages

Religions

Data inventory and updates

A country comparison like this can be based on several hundred individual data items from dozens of different sources. All data are based on the most recent data available to us. Most of them refer to the previous year and are updated around March of the following year. If a country has not yet published data for the most recent or penultimate year, we present the most recent official data. Updates are made on an ongoing basis depending on the subject area or source, so there is no single "cutoff date" for this comparison. Sources for almost all data can be found on our respective country pages.

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Chile and Brazil compared: demography, Economy, energy, languages and further dimensions.

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Anam Electronics - Global Department #3

Group Name - Mastermind 2.0

Meeting Purpose - Module Session 2, Group Discussion I (Departmental Meeting)

Meeting Date / Time - 2023.12.04, 12:15 p.m. ~ 13:13 p.m.

Participants -

박중현, 박주현, 서우진, 라민우

Leader - 라민우

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Brazil's diverse culture is influenced by indigenous, European, and African cultures, while Chile has a more homogenous culture with a strong European influence.

M&A with Chile would require a nuanced approach. Recognizing differences to time perceptions would be crucial. Additionally, the European influence in Chile will help create strategies tailored to each country. Culturally sensitive leadership and effective communication strategies will be necessary for the success of the integration.

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I looked up the difference between Korea and Brazil, and the concept of 'Brazil Cost' is said to be difficult for Korean companies to enter the Brazilian market. Brazil Cost is mean that Korean companies face a lot of difficulties to 'composite tax systems', 'customs and customers policies', 'exchange rate instability', 'inefficient bureaucracy', and 'employment and labor management'. So I think it quite hard for Anam electronics to enter brazilian market.

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In Chile, Korea's perception is good due to the Korean culture, but media reports make Korea look negative. I think the media has a great influence in Chile, but if Anam Electronics enters Chile, I think it should try not to look negative to the Chilean media.

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Main Differences Between Korea and Chile

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Main Differences Between Korea and Chile

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1. Communication Style: Korea has a careful and indirect communication style while Chilean communication is more directly spoken.

2. Time perception: Chile workers pose a more relaxed approach to time or due dates whereas Korea emphasizes punctuality and efficiency.

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Main Differences Between Korea and Brazil

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Main Differences Between Korea and Brazil

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1. Relationship Building:

In Brazil, building strong personal relationships is often considered essential for business success. Koreans may find it challenging to establish these relationships quickly, as Korean business culture tends to be more formal and hierarchical.

2. Business Etiquette:

Korean business culture is known for its formality and respect for hierarchy. Brazilian business culture, on the other hand, is often more informal and emphasizes a friendly approach. Adapting to Brazilian business etiquette, which may involve more informal interactions, is important.

3. Diverse consumers:

Brazil has a unique market with diverse consumer behaviors and preferences. Korean companies may face challenges in understanding and adapting their products or services to meet the specific needs of Brazilian consumers.

(Diversity comes from Ethnic and Racial Diversity, Geographic variation, Income equality, Colonial legacy, etc..)

+)Hard to consider Brazilian Cost

1. Complicated Tax System: Without a free trade agreement, Brazil imposes high taxes and tariffs on imported goods and services coming from the other markets. In addition to high taxes, the system is incredibly complex, and in 2020, it ranked 184 out of 190 countries in terms of ease of paying taxes according to The World Bank’s Doing Business report.

2. Non-transparent Public Procurement Processes: Government tenders often favor domestic players due to local content requirements and high levels of corruption. While the Government of Brazil is the largest buyer of goods and services in Brazil, navigating the government procurement process can prove challenging if firms are not equipped with the proper contacts and information.

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1) Brazil is mostly an extended family, placing great importance on family bonds, while Korea places greater importance on individual satisfaction because the ratio of nuclear families and individual living people is very high.

2) Unlike Brazil, Chile has the western culture’s family structure. So, Chile has the similar family constructure with us. Chile is the longest country in length. So, Chile has the various climate compared to us. This difference will connect to the difference in demand at every regions.

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Acquisition of Chilean company was viewed as a superior choice based on corporate, general cultural, economic, market, and PMI criteria.

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What to prepare before the Interdepartmental Meeting

Divide the workload in accordance to the academic stress level of the Final Exam

Roles

1. Presenter for group discussion 2 - 라민우

2. Presenters for the final presentation - 서우진, 라민우

3. Content and Materials + Research -

박주현 (Aspects of Chile)

박중현 (PMI Alignment)

서우진 (Aspects of Brazil)

라민우 (Candidate Decision & Rationale Compilation)

Focus of Wednesday's meeting: departmental decision and rationale derived through various cultural aspects and solid PMI.

If the candidate aligned (i.e., when Finance department also chose Chile), the departments cooperate to validate the choice through corporate valuation, and cultural integration; while reviewing and agreeing on individual steps of PMI.

If the candidates diverged, the departments debate to assert which value is more important to a successful merger; then agreeing on a final decision, PMI strategies and rationale.

With additional research as necessary, construction of final presentation material, with works from both departments (Finance: value estimation figures, Global: cultural synergies and integration)

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The last module deviated from the previous scenarios where corporations fight for their own survival in intense market competition. Anam Electronics being a home entertainment and home appliance manufacturer of considerable size (132 subsidiaries, more than 70,000 employees local and abroad), intends to foray into the South American market via acquisition of one of the two companies (Brazilian and Chilean), valued at $8 and $8.9 millions each. However, with Finance Department citing corporate valuation as the most important aspect to consider for a successful merger, Global Team chose to differ, claiming that cultural differences are a notable part of the success of an M&A which is to be sustained by management and marketing purposes in a different cultural environment, exemplified through Yonhee Electronics. Final decision (candidate, rationale, and respective analyses) has to be taken up to the Board meeting, amidst several intangible factors such as Market Uncertainty and Large Departmental Conflict.

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1. Announcement of Cultural Differences with Chile and Brazil, which have been investigated respectively

(Focusing on corporate culture, consumer culture, regulations of each country, etc.)

2. Selection of countries based on analysis content.

3. Research divided into cultural research part, PMI part, Chile selection reason part, etc

4. Writing a padlet

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Why it is hard to enter the Brazil Market

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Why it is hard to enter the Brazil Market

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https://www.tmf-group.com/en/news-insights/articles/top-challenges/doing-business-in-brazil/

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International Trade Administration | Trade.gov

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Doing business in Brazil requires in-depth knowledge of the local environment, including the high direct and indirect costs of doing business, commonly referred to in Portuguese as the "Custo Brasil" or "Brazil Cost." Brazil has been working to enact reforms that will improve the business climate. Recent reforms include a 2021 "Doing Business" law, that seeks to simplify the process to open a business, facilitate foreign trade, and expand the powers of minority shareholders in private companies. In June 2023 the country enacted new transfer pricing regulations that will reduce the likelihood of double taxation on multinational firms repatriating profits. This reform will go into effect in 2024. Additionally, the Brazilian Congress is considering a reform measure that would greatly simplify the Brazilian tax structure and align it with international standards. While these new laws move Brazil in a positive direction towards economic integration, further reform is needed to address Brazil's restrictive labor laws. Companies seeking to enter the Brazilian market should identify local partners and customs brokers to help navigate Brazil's complex legal, regulatory, and tax systems.

Some of the challenges that U.S. companies in Brazil may face include:

Complicated Tax System: Without a free trade agreement, Brazil imposes high taxes and tariffs on imported goods and services coming from the United States and other markets. Moreover, Brazil applies federal, state, and local taxes and charges to imports that can effectively double the cost of imported products in Brazil. While tax simplification legislation is expected to be approved by the Brazilian Congress later this year, until it is implemented the tax system will remain incredibly complex. The implementation phase would likely begin in 2026 and continue through 2032. It is important to note, that if passed, the tax reform will significantly simplify tax regulations for all companies doing business in Brazil.

However, the current complexities of Brazil's domestic tax system, including multiple cascading taxes and tax disputes among the various states, pose challenges for all companies operating in and exporting to Brazil, even the most experienced ones. The U.S. Commercial Service has numerous industry specialists and a host of other contacts that are equipped with tools to help U.S. exporters succeed when met with the bewildering bureaucracy surrounding taxes and tariffs.

Other Non-tariff Barriers: U.S. exporters can expect to encounter a complicated regulatory system, inadequate or ineffective intellectual property protection and enforcement, and unique standards with limited recognition of the international standards commonly used in the United States. Companies must navigate a complex web of federal, state, and local regulations affecting their products, and frequently must be prepared to meet different standards and technical requirements from those used in the United States. This means that even if a company has already tested its products and successfully met technical requirements in the United States, it may still be necessary to re-test and re-certify those products to meet the technical requirements used in Brazil.

Logistical Costs and Delays: Poor infrastructure and inefficient customs processes mean getting products to a destination can often be a lengthier process than exporters are accustomed to experiencing. Companies should be prepared to face fees and delays in getting goods into the market. However, Brazil has taken steps to improve its infrastructure and bureaucratic inefficiencies over the past several years; and as a result, product clearance time and costs are falling. In September 2022, the customs administrations in the United States and Brazil signed a Mutual Recognition Arrangement which enhances cooperation on security and trade and will reduce wait times at the border for trusted traders.

Non-transparent Public Procurement Processes: Government tenders often favor domestic players due to local content requirements. While the Government of Brazil (GOB) is the largest buyer of goods and services in Brazil, navigating the government procurement process can prove challenging if companies are not equipped with the proper contacts and information. In order to make the procurement market more open to international bidders, Brazil passed a new government procurement law in April 2021 which more closely follows global procurement practices for government contracts, including eliminating some of the regulations that favored local companies. The law which was expected to be fully implemented in April 2023, will now be implemented in 2024. However, U.S. exporters may still find themselves at a competitive disadvantage if they do not have an in-country presence, either through established partnerships with Brazilian entities or a Brazilian representative, along with endurance and financial resources to respond to legal challenges and bureaucratic issues. The U.S. Commercial Service in Brazil (CS Brazil) can help U.S. companies find trusted local partners through our matchmaking and due diligence services .

There are a number of things that companies can do to familiarize themselves with the local market and overcome these challenges. First and foremost, work with the U.S. and Foreign Commercial Servicewhen considering doing business in the market, and with our Advocacy Center when bidding on public procurements. Companies should be prepared to make a long-term commitment to the market, as it will take time to establish and build relationships locally. Given that imported U.S. products will likely be more expensive than local products, your company will need to be prepared to make the case for your product's overall quality and value.

U.S. companies may also wish to work with our team to identify potential tools that can help to mitigate Brazil's high tariffs and taxes. These include programs such as ex-tarifario , which grants a temporary waiver of import duties on some products not produced in Brazil. Finally, if you do encounter a trade barrier, make sure to report it either through the Commercial Service or the Department of Commerce's Office of Trade Agreements, Negotiations and Compliance website .

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Learn about barriers to market entry and local requirements, i.e., things to be aware of when entering the market for this country.