This article is written by Nayantara Chowdhuri, pursuing a Diploma in Entrepreneurship, Administration and Business law from LawSikho.

 Introduction

What are mergers and acquisitions all about?

In recent times, there has been a flurry of activity around mergers and acquisitions. The chief business intent behind all M&A activity is expansionism through consolidation which enables a company to retain a competitive edge in the market. Mergers and acquisitions are two forms of business restructuring which are undertaken principally to augment the potentialities of the combining entities.

What are the obvious benefits of mergers and acquisitions?

If it is said that profit-making is at the heart of every business endeavor, then the importance of mergers and acquisitions in the business world cannot be overstated. There are several strategic advantages for effective revenue generation afforded by this manner of restructuring, some of which are as follows-

• Diversification of the goods and services.
Product diversification is a major strategic market advantage. It is a means for considerably expanding the horizon of an existing business, and invigorating the business potentialities considerably. Through concentric diversification, the company can add products or services similar to those that they have already been dealing in. Diversification done well, has great advantages for the company. It acts as a cushion against the vicissitudes of economic cycles, and possible downturns the market. It is also better poised to deal with competition. Further, in case the company is cash-strapped in a slow-moving economy, it can take advantage of the surplus cash flows.

• Greater access to the market share.
To put it simply, greater market share means greater market power and increased earnings.

It is presumed that when a deal is executed properly and on the back of a solidly workable plan, the company would grow significantly stronger, with decreased costs or a definite increase in revenues. However, this effort to capture new audiences and adding to the purpose of the company sometimes just falls flat and doesn’t manage to achieve the desired business results. Here are some of the biggest M&A deals that have come to naught.

Daimler Benz and Chrysler.
When German car manufacturing company Daimler-Benz bought Chrysler in 1998, most thought there would be huge gains to be had from this synergizing move.

What went wrong here?
From the incipient stages, disagreements arising out of differences in vision, and cultural clashes were apparent. These arose from identity crises. Daimler was a luxury car maker and that is what defined its business outlook. Chrysler was more interested in maintaining the mass appeal. Further, Daimler did not want to share car parts with Chrysler, thinking it would in some way affect the integrity of their own product. These tensions eventually tore away at the deal.

Key takeaway –

• One must know what they are marrying. Overhasty decisions will only lead to teary endings.
• Cultural clashes are disastrous for the functioning of a company, chiefly because collective decision making is such an important determinant behind the success of any business. Communication is key to business advancement, and the management of the two companies must work to ensure that employees of the two merging companies are well integrated into the merged entity. Scrimmages must be avoided, and there should be greater cooperation between the employees who should align themselves with a clear common business goal.
  

AOL and Time Warner
The merger between America Online and Time Warner was anticipated as being one of the biggest mergers in value terms. However, it is now remembered for the colossal losses that were incurred by the parties, which led to a precipitous fall in their worth.

What caused this?

Due diligence, in the conventional sense – which entails a perusal of the numbers and the financial situation of either company is obviously not entirely predictive of potential pitfalls. The transactional details are not the only considerations which factor into the eventual success and failure of a merger. It is said that the Time Warner employees were struck by the arrogance and high-handedness of their AOL counterparts. Steve Case, founder of AOL while reflecting on the failure of the merger, had this to say-

“ Vision without execution is a hallucination.” He attributes the debacle to faulty decision-making at the execution stages. He adds that while the burst of the dotcom bubble was the ostensibly predominant reason for the failure of the deal, there were other less visible, but equally important cultural factors such as a variance of opinion at basic levels – even with regard to basic business decisions. AOL found Time Warner’s methods and ideas to be outmoded. Further, it was considered that Mr. Case was the one who was doing the decision making and calling the shots. This thinking naturally created trepidations in the minds of Time Warner employees and made them feel cheated at some level.

Key takeaways-

• A trust deficit is something that will cost the business dearly. Collective decision making would have to be encouraged, and this can only be properly done by encouraging transparency and eliminating suspiciousness among co-workers. The business goals would have to be upheld, over and above any personal or individual thinking.
• Executive-level decision making must be grounded in market realities.

Microsoft’s acquisition of Nokia.

Microsoft acquired Nokia in 2014 which it found attractive for its demonstrated R&D capabilities and manufacturing strengths, with the hopes of establishing and consolidating their place in the mobile phone space. However, within a year of entering into the merger arrangement, the new CEO of Microsoft Satya Nadella revealed a shocking number of lay-offs (mostly of recruits from the Nokia acquisition) and declared that Nokia had to be written down for a sum of 7.6 Billion USD. The Lumia line which was a joint endeavor of Microsoft and Google failed to achieve the vision of the

Key takeaways-  Foresight and proper knowledge of the market before embarking on a deal. Whilst the prospect of a merger seems tempting to any businessperson, because of the potential gains to be had from it, not every deal is a fruitful one.  

Yahoo -Tumblr

Yahoo had paid 1.1 Billion USD to acquire Tumblr, a social networking site with a young user-base. Yahoo had made counter-intuitive decisions with a couple of purchases before this and was keen, under its new management, to reverse the trend and make a very profitable acqui-hiring decision. The idea was to play into the demographic advantage that Tumblr enjoyed, among the younger generation and to become relevant among fresh audiences. As a micro-blogging platform, Tumblr enjoyed blog post entries and views from hundreds of millions of users the world over and would heighten visibility for Yahoo, which had been in need of novel means of advertising. Marissa Mayer, the CEO of Yahoo, noted that Yahoo would gain from a widened social presence on taking over Tumblr, with an increase of 50 % in the audience.

What went wrong?

Tumblr CEO David Karp insisted that Tumblr would not compromise on its vision to provide a platform for creative persons to post their work and find an audience, and would maintain their integrity. However,  there were complaints from users who were not too pleased about advertisements being introduced on the Tumblr platform

Key takeaways-

• A novel or interesting idea might be good in theory, but unworkable in practice. Hasty decision-making is inimical to the healthy functioning of any business. In a bid to overtake Facebook and Google, Yahoo has quite underthought the pitfalls in the Tumblr takeover, failing to balance the needs of the users, across platforms and create the perfect business model.
• Companies often fail to correctly evaluate the synergies due to a lack of information and a gap in understanding of the companies that they wish to bring into their fold. Being myopic about the potentialities they want to engulf, would not serve the eventual goal as per markets reactions.
• In a write-up by Mckinsey and Co, it has been rightly noted that companies should view potential dis-synergies, or faultlines which might develop were they to take on an added business vertical or diversify by bringing another company within their operations. Mergers are a means of sharing value capabilities, but potential pitfalls should be identified first.

Google’s acquisition of Nest.

On the surface, Google’s acquisition of Nest seemed like the perfect union. Google was riding on a high, with the requisite resources to take Nest to the next level. The folks at Nest expected a huge payday with a deep-pocketed investor, in return for their new ideas.  The nest was in possession of ideas such as the Learning Thermostat and the smoke detector, which could be directly controlled using a smartphone. Google wanted to find a place in the peoples’ homes and go beyond merely being a search engine. Therefore, they decided to bring the Nest within their fold. Samsung too had announced software which could be linked to household devices, and Google was interested in playing in that space.

What happened post-acquisition?

Plans misfired – In return for the massive resource pool that Google was ready to pour into the operations of newly acquired Nest, there was the little material result that could be accounted for. Nest had suffered a number of failures before this, and some of its big plans suffered premature endings. The product was only minorly upgraded, and there was a mere renaming. The Nest Learning Thermostat and Nest Protect Smoke Detector did not witness any significant remodeling.

Key takeaways-

• There has been an ageless cycle of bad acquisitions throughout history, and this can be attributed before any other factor, to ill-judged conceptions of opportunity.
• Proper estimation of risk must be had before carrying out an acquisition. Ideation is not a guarantee for market success. Whilst founders of fledgling companies are often enamored by the potential of their own projects or inventions, the chances of their fizzling out are quite high, without a comprehensive and realistic plan.
• No strategy was up in place on behalf of Google before the acquisition was effected. Innovation should not be done merely to follow competitors’ trends. The acquisition was just a hurried attempt to be doing what was considered de-rigeur. Google merely wanted to be up to the minute, and relevant, and did not plan effectively. Premeditated decision making is key to a better result. Nest had previously worked on a security-focussed innovation, which failed to take off. Google should have taken stock of Nest’s track record of failed inventions before placing its money with them.

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