Term Paper on "Mergers and Acquisition as a Growth Strategy"

Term Paper 7 pages (2466 words) Sources: 7

[EXCERPT] . . . .

Mergers and Acquisitions

Organizational culture is a fluid and individualistic part of the modern business world. It is the environment formulated by the interaction of employees within the workplace defined by the experiences, strengths, weaknesses, education, and cultural ethics of all the employees. Corporate leaders, of course, play a huge role in defining and implementing organizational culture by their actions, modeling behaviors, and the type of environment they engender, but one cannot minimize the manner in which employees contribute to this overall paradigm. Since truly the one constant in business is change, it is how we adapt to such changes; as individuals and part of groups, that helps manifest behaviors as he culture evolves. This is quite the case in modern healthcare organizations which have become so complex and competitive that the old paradigm -- improve efficiency and the bottom line improves, is no long the case, not what is required to protect stakeholder interests (Horibe, 2001). Indeed, many believe that one of the templates that make up this fluidity is the concept, even more popular in the late 20th and early 21st centuries, of mergers and acquisitions.

Definitions -- Mergers and Acquisitions (M&a) typically refers to a corporate fiscal and strategic set of strategies that deal with the purchasing, selling, and/or combining of different companies or pieces of companies that are able to help grow a company or experience rapid innovation with either creating another business entity or investing research and development from the ground up (Hennepopf, 2009).

Modern organizations are so highly complex and competitive that the old paradigm -- improving efficiency and the bottom line improves, is no longer all it takes to be successful. Instead, continued reinvention of both the company's product line and industry capabilities is not only necessary, but will help decide which companies succeed and which fail. Too, because the half-life of technology is so short, radical and category breaking innovation is needed not just to compete, but to provide the global environment with positive growth. Thus, it must be robust and unafraid to take chances (Farb, 2004).

Strategic Use of Mergers and Acquisitions- Typically, depending on the maturation level of a given market, there are four possibilities for an organization's growth: market penetration, market development, product/service development, and diversification (See. Fig. 1): Each of these has a unique strategic and tactical way of establishing growth and is dependent upon numerous things: expertise in the market, cash flow, individual needs from the stakeholders, and market development.

Figure 1 - Possibilities of Growth Strategies

Present

Products

New

Products

Present

Markets

Market

Penetration

Product

Development

New

Markets

Market

Development

Diversification

(McCarthy & Perrault, 2008, 66).

Market penetration attempts to increase the sales of an organization's current products through a more aggressive marketing mix. They may try to increase use, encourage alternative uses (e.g. using Baking soda in different ways), and may need to promote differently or add more outlets or ways to purchase. The key to this is the motivation of the customer in the purchase decision.

Market development tries to increase sales by selling present products in new markets by uncovering new target customers, areas, countries, or adding new channels of distribution.

Product development offers new and/or improved products for present markets. The organization is fairly confident in knowing the market's needs and, but adding features or new versions or design, is able not only to increase revenue with new customers, but to recapture present customers with better bells and whistles.

Diversification -- moves the organization into a different line of business which may include unfamiliar products, markets, or even new levels in the system. The new market or product/service could be a companion business, but could also be something only ancillary related (Friedman, 2002).

Mergers and Acquisitions, as a tool for growth, may be used within each of these four structured boxes, or as a larger strategy combining many of them. If one was a pet store, for instance, with 15 locations, and another chain wanted to sell or go out of business, one could increase their business presence simply by acquiring new physical locations and outlets for products. This strategy would require minimal long-term planning, and as long as the leases and outlets were viable, simply whatever case was required to purchase and stock the locations, plus funds to communicate and resign the locations to the public. This type of M&a is important because it focuses on an acquisition strategy to capture market share -- buy more to hopefully get more. Sometimes markets in particular products or areas are so stratified, this is the only way to actually grow within the same product or service line (Sherman, 2010).

Sometimes, though, there is a blur between needed growth and a defensive strategy in which if you do not grow, one of your competitors will figure out a way to erode your own market. This view is rather dangerous at times, because it takes the idea of a growth strategy and puts the organization on the defensive; making that organization reactive even if the resources or right reasons are not there for the proposed M&a. Using M&a as a strategy is a powerful tool, but even the most careful companies must continually consider both financial and marketing aspects of the operation in order to make appropriate decisions (Vachon, 2007).

In many cases, an ideal M&a may find that the financial and marketing aspects were good but that there were other circumstantial and operational issues that were not considered in robust (See Impact Study below). For instance, when units are merged, professional staff often are unclear about their roles, or the potential redundancy of their position. These issues include retaining employees, use of those employees, continuing or improving quality and operational management (why we do what we do and how we do it), knowing that quality must go beyond numbers and deep into the surface -- not what people will accept, but what will grow the business, strategic goals and ways to achieve them, customer service and overall philosophy, a public relations plan that works internally as well as externally, and a clear line of decision making and change management that allows a win-win situation for everyone involved (Angrisani & Goldman, 1997, 4-6).

Impact Study -- While each individual transaction within an M&a paradigm is unique, there are global issues involved within every organization. These issues tend to impact the psychological effects that M&a have on the company or companies, and therefore the potential profitability and ability for that company to be sustainable in the long run. Research has found that there are six major "cultural" indicators that have impact within an M&a platform: Job security, wages/benefits, schedules/work hours, technology, quality, and innovation. Note that many of these are actually psychographic in nature, and rarely appear on any direct balance sheet or company profile. However, most contemporary managers realize that the negotiations between executives and owners can all be positive and complete, but that if a Human Resources and communication strategy is not effective, these sixe items will throw off M&a as a viable growth strategy.

This is actually enough of a factor that most of the newer scholarship on the use of Mergers and Acquisitions devotes a good bit of time to suggesting that asking the right questions behind the balance sheet prior to the merger is almost as important as the fiscal reporting, balance sheet and/or company sales and marketing documents. The challenge is that it is qualitative, not quantitative, and evolves in a non-linear manner that has not completely predictable outcome.

Table 1- Psychographics of Mergers & Acquisitions

Issue

Impact

Miscellaneous

Job Security

Of considerable importance to both sides of the equation. Understandably, employees and managers are unclear whether the merger will result in more work for less people, less work for more people -- and therefore redundancy and layoffs, and the way responsibility may be allocated. Middle management may be hardest hit -- someone with 8 years at one location who is senior might be lower on the totem pole when the merger hits. The idea of unknowing forces changing job issues is frightening to most people.

This is where a critical and strategic merger of the HR departments must occur. A communication plan, availability to answer questions, and to provide as much assurance as possible will prevent shut downs on all sides and continue to create a culture of quality.

Wages/Benefits

Wages and benefits will change. This is a fact of a merger. The question is, in what direction will this change. For most mergers, there is a longer-term strategy of growth and improvement and/or relocating into a different market. Therefore, in the long-term, wages and benefits should theoretically increase in order to retain the best and the brightest.

This should, in the medium to long-term, have a positive effect for employees.

Schedules/Work Hours

Schedules and work hours may change based on seniority and need within the Departments. Larger organizations often allow for greater lateral transfers, or the ability for… READ MORE

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