Analysis of Real Merger / Acquisition Case
Mergers and acquisition are normally done with intention of expanding the operation ability of the merging companies and increasing their level of profitability. Although this process has been extensively and successfully used in company expansion in a number of cases, mergers have not been always successful. Some organization have experienced a number of challenges immediately or sometimes after completing mergers, an aspect that have resulted either to reselling of the acquired company or the total failure of the entire company. This paper focuses on analyzing two cases of failed mergers, establishing various aspects that contribute to merger failure and what can be done to enhance successful mergers.
Review of Two Failed Mergers
The two failed mergers to be considered in this case include AOL-Time Warner Merger and Sprint-Nextel merger:
The AOL-Time Warner merger took place in 2001 with the vision that the integration of the two businesses would enjoy the advantage from synergies in operations, customer reach and technological infrastructure. The merger was anticipated to provide Time Warner the aptitude for content digitalization and reach novel online audience. AOL on return would benefit by gaining access to cable systems of Time Warner, resulting to additional content offered to its 27 million subscribers and innovative broadband ability. Nevertheless, the merger yielded to $99billion net loss in 2002, the biggest loss ever, and after 7 years they two companies were unable to realize the merger synergies. The failure of AOL-Time Warner merger was highly attributed to the variation in the organizations culture. Although the merging sounded strategically compelling, the two companies could not manage to merger due to cultural variation. AOL had arrogant and aggressive employees while Time Warner had corporate and staid employees.
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In this regard, Timer Warner workers were horrified by AOL workers and thus, they were unable to mingle and work together as a team. This resulted to lack of the promised synergies and cooperation as reciprocated disrespect appeared to control their association. The employees were therefore not focused on enhancing successful operation of the company. The merger executors were unable to evaluate the compatibility of the two organizations and as a result the merger failure. Each of the two companies had succeeded in one way or another on their own, and they had a strategy on how each company would benefit from the other. However, they never had strategies on how to execute the company growth and expansion after the mergers (Sanni, 2014).
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Another major reason for the merger failure is that the merger was secretly done between the directors of the two companies. The companies’ employees and some of its executives only heard about the merger from the media. This means that the directors did not prepare their team for the changes that were about to happen and thus, everyone was reluctant to welcome the change. The merger though had been discussed previously by the two companies’ directors in casual meeting and it took place in Time Warner’s house during a dinner. Apart from the companies’ directors, the deal only involved the legal representative of each company. Other executives were informed after the deal was sealed while others learnt about it through the media. This acted as the first stage for the merger failure. To ensure successful merger, the directors were supposed to discuss the situation with their executive and after an agreement is reached, they were supposed to prepare their employees or the entire team for the new changes to ensure good integration and tolerance as the two groups try to define a new organization culture that accommodate both of them.
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This was later followed by inflation in the AOL advertisement cost which resulted to premature retirement of a huge number of employees and premature dismissal of others. The company was making losses and could not meet the anticipated financial target that it anticipated during the merger. The investors started losing money and the situation was out of control. The drastic change of technology in the media world made it hard for the company to recover financially, and eventually the merger failed. Time Warner was also impacted by regulatory approval and thus it was witnessing reduction in its profits (Sanni, 2014).
Sprint-Nextel merger took place in 2004, with what they termed as equal merger though in actual sense Sprint was purchasing Nextel. The merger was anticipated to benefit the two companies in a great way since Sprint contain a strong customer market presence and was leading in wireless data communications. Nextel on the other hand was the walkie-talkie service pioneer, with business customers as their basic customer base. The merger was expected to advancement in operational efficiency in customer support, infrastructure marketing, sales, and general cost of administration. Nevertheless, the two companies experienced incompatibility in their infrastructure and corporate culture (McQuade & Khanfar, 2010).
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Thus, Sprint-Nextel merger failure was highly attributed to the cultural difference. The bottom-down Sprint culture did not match the entrepreneurial culture of Nextel. Although the new company tried to employ efforts to harmonize the culture; through hiring consultants and creating committees the tension difference between the two groups got worse with time. There was mistrust between the two groups. Nextel workers felt that their initial aggressive, entrepreneurial style was faced out by bureaucratic Sprint approach negatively impacting the organization growth. Sprint group also felt deceived by deteriorating network of Nextel which they felt that it contributed highly to loss of customers in the company (McQuade & Khanfar, 2010).
Incompatibility of the network infrastructure also contributed a great deal in the merger failure. Nextel was based on iDEN network system that is on spectrum range while Sprint was based on code division multiple access (CDMA). The Nextel phones could not be used in Sprint network system and Sprint phone could not be used in Nextel network system. The merger thus resulted to poor customer services an aspect that resulted to mass exodus of customers from the Sprint Nextel network. This resulted to dropping of the stock prices. Later in 2008, the Nextel managers and executives as well as most of their customers left the company (McQuade & Khanfar, 2010).
Among the two mergers, Sprint Nextel was highly bound to fail since their infrastructure incompatibility was something that could not be resolved in a short period of time or by the management effort. This was a variation in the technology and thus, it was hard to integrate the two networks. The solution could have only been based on foregoing one form of network to another, or creating a whole different network which simply meant losing customers from either the foregone company network or both in case a new network formed could not accommodate the two different phones. AOL-Time Warner merger was highly compatible in terms of technology only that the approach was highly poor, with better approach; this merger could have been successful.
There are different metrics that can be used to measure merger progress. The AOL –Time Warner merger progress was measured based on the financial return. The merger was anticipated to bring great profit to the two companies but instead AOL recorded great loss one year after the merger which was a clear indication that the merger was failing. There was also inflation in its advertisement fees increasing on the company’s expenses. Sprint Nextel merger was measured based on customers turnover. There was a massive exodus in the company before the company could even think of performing any financial analysis of the performance. Thus the company used head count metrics to measure its progress where a huge decline was noted.
There are a number of metrics that can be used to measure merger progress in any situation. The two other metrics that can be employed include purchase metric and assets reduction metrics. The company should focus on the qualitative metrics that can be easily employed. The service of good purchase metric can be used to evaluate the increase or decrease in the new company sales compared to the sales before the merge for the two companies or compared to the anticipated sales. Sales increase demonstrate trend to success while sales decline demonstrates operational failure which would require to be addressed. Mergers normally involve the combination of the company’s assets, and thus it is normal to have increase in number of assets. However, the compatibility may be too low such that the new company may be force to dispose some assets which will no longer be useful. The merger success should be measured on whether the assets continue to increase after the merger or to decrease (Adolph, 2006).
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