What are the pitfalls of mergers and acquisitions?

There are serious pitfalls associated with mergers and acquisitions particularly where they involve cross border ownership and cooperation. Finkelstein (1998) refers to a study of 89 US companies acquired by foreign buyers during the period of 1977 and 1990 and found the performance of most of them had not improved within one year.

The acquisition of Colombia Pictures by Sony in 1989 is an extreme example of this. Sony’s strategy at the time of the acquisition was to develop the ability to market the software of the leisure industry, such as films, videos and CDs to complement their range of hardware, such as TVs, CD players and video recorders. Sony paid a premium for Colombia and left Columbia’s established Hollywood executives largely to run their own show, but it was forced to accept a $3.2 billion write down in 1994 after considerable problems had emerged in the way the old management had responded to the new ownership.

Cross-cultural challenges in mergers and acquisition

As well as the obvious organizational challenges that follow from a merger, such as who will be in charge, whose products and services will be offered (or dropped) and where costs savings should be made, particularly if the merger or acquisition was not entirely harmonious, there are the cross-cultural challenges, such as the different ways of doing business in Europe, the US and Asia. These include issues which have been alluded including different corporate governance, the status and power of different employee and management groups, job security guarantees, government regulations and customer expectations.

Cross-cultural differences are often quite subtle. Upjohn US and Pharmacia merged in 1995 but suffered a number of problems. Upjohn executives scheduled meetings in July when Swedes traditionally take holidays. Their direct, detail oriented style did not fit well with Swedes preference for discussion and a consensus management style. To avoid the fear of domination by one side the new group opened a head office in London but as the two separate parts retained their old corporate offices in the US and Sweden they simply added another layer of management hierarchy.

Finkelstein’s (1998) recommend that the integration process should focus on value creation by ensuring employees actually achieve the synergy that is promised before the deal is done; planning in detail how the various cross borders problems will be overcome and developing a clear communication plan to cope with the whole process.