Potential challenges of the mergers and acquisitions strategy
The process of formalising a merger or acquisition is often lengthy and tedious to the managers involved. FILE PHOTO | NMG
Recently, a number of well-known companies in Kenya have explored mergers and acquisitions as part of their strategy to remain competitive. A merger typically occurs when two companies agree to come together and operate as a single business entity while an acquisition occurs when one company buys a majority shareholding in another company.
The reasons for choosing mergers and acquisition as a strategy vary depending on the objectives of the parties involved. In Kenya, the implementation of new accounting standards has been cited as a possible reason for making mergers and acquisition strategy an attractive choice for companies in the financial sector.
Such companies may come together in a merger if they feel that their combined strengths would make them more competitive in the market.
A foreign company may also choose to acquire a local company instead of going through the lengthy process of setting up a subsidiary. This saves on time and accelerates the acquiring company’s growth in the target market. Similarly, a company wishing to exit a certain market for strategic reasons can sell its shares to a willing buyer.
The process of formalising a merger or acquisition is often lengthy and tedious to the managers involved. Approvals are required from the shareholders and the process also needs to comply with regulations. During the formalisation process, it is important for the firms involved to carry out due diligence and also be honest with each other when sharing information.
While mergers and acquisitions often appear appealing to the executives involved, a lot of caution is required even after the deal has been formalised. A study by KPMG in 2017 in the United States revealed that close to 70 percent of mergers and acquisitions reduce shareholder value in the long run.
Those involved in closing such a deal should tread with caution or risk failure as the process faces a number of challenges. One major challenge is the retention of talented employees.
After the deal is closed, studies have revealed that some employees voluntarily leave, yet they could have made a significant contribution to the company. These employees may not be comfortable with the some of the changes taking place leading to job dissatisfaction.
After an acquisition, managers from an acquiring firm may also feel and act like they are more superior to the managers from the company they acquired. This creates an intimidating work environment that causes some employees to leave. All managers should instead work together as partners after a merger and acquisition. Differences in culture between the companies can also affect the long-term success of the deal.
This problem is often compounded further when the companies involved are from different countries. The cultural differences between the companies involved can make the integration process difficult. Another important challenge to watch out for is communication problems.
Sometimes, communication on the many changes taking place may be poor leading to rumours and reduced productivity from employees who become anxious and fear for of their jobs. The fear arises due to downsizing that often follows mergers and acquisitions as companies eliminate redundant employees.
