For and Against of Global Mega Mergers
During several past decades an increased number of mergers and acquisitions emerged in the national economies all over the world. Companies from different industries expand their activity to new markets. Increase of their share of operations often comes together with the expansion of goods produced abroad. By this, economic globalization is becoming one of the most peculiar features of the modern world. Hence, industry concentration and emergence of large multinational corporations is an inevitable part of this process. Therefore, large companies that attempt to maintain leading positions on the market get involved into the process of merging with their competitors both within the country and abroad in order to become a global market leader in a particular industry (International Mergers and Acquisitions 2008).
Just before the financial crisis hit the world economy, mergers and acquisitions had reached their peak in the volume of deals. In particular, in 2006 announced mergers and acquisitions deals’ volume accounted for around $3.91 trillion. However, this tremendous number was hit even further when mergers and acquisitions in 2007 accounted for $4.83 trillion. Mergers and acquisitions take place practically in every industry of the economy. Mergers in the financial sector in 2007 constituted up to 15% of the total mergers and acquisitions value, taking place in such vital industries as automobile, electricity, oil, food, real estate, mining, health care, etc. Almost half of all the mergers and acquisitions were cross borders. Moreover, the U.S. has been the most desired and targeted country for foreign acquires (International Mergers and Acquisitions 2008). However, despite being so widespread, efficiency and relative advantages of cross border mergers and acquisitions are still much debated .
On the one hand, mergers are considered to be chaotic and disorganized. Ghemawat & Ghadar (2000) in their article about dubious nature of mergers and acquisitions, make clear arguments that cross border mergers are often chaotic and lead to failures and bankruptcies of the companies involved. They ground their arguments on the basis of the comparative advantage theory of David Ricardo as well as recent Krugman and Obstfeld’s theory of international mergers and acquisitions (2000). According to their ideas, every country is producing those goods and services, in which it has comparative advantage. Hence, the appearance of international mergers and the increase of the number of companies within the industry bring economy to the consolidation within industries, not geographical regions. Contrary to that position, Deans, Kroeger and Zeisel (2002) argue whether consolidation of industries is conventional and beneficial for the economy.
From the economic point of view, cross country mergers, including big size international mergers, bring a set of positive implications for the national economy. International cross border mergers create a number of advantages for local producers and sellers. First of all, getting involved into international mergers, national producers get access to raw materials and labour resources. Being growth oriented, large national companies, tend to merge with the companies in those countries where raw materials as well as labour resources are cheaper. This gives them an opportunity to decrease the average unit cost of production. At the same time, international mergers provide involved companies with the extended market of consumers. Thus, it gives an opportunity to increase volume of sales and profits. From another perspective, international mergers are beneficial for companies as they bring investments and increase their potential of production (International Mergers and Acquisitions 2008).
From the point of view of consumers, international mergers influence goods’ versatility on the market. Due to synergy effects of the international mergers and acquisitions, consumers can enjoy the benefits of decreased prices of goods and services. At the same time, in case merging companies further expand their activity, it will create new working places for people.
On the other hand, international mergers and acquisitions can be rather destructive and not desired for economic development. One of the biggest threats associated with international mergers is the threat of massive lay offs. Sometimes, when companies sign the deal of merger or acquisition, they simultaneously set up an agreement about possible cut of the number of employees, even though opposite scenarios is also possible. Moreover, cross border mergers are inevitably associated with cultural disharmony and potential misunderstandings which are expected to appear in the future cooperation. Even though modern world is becoming more generalized, the importance of culture prevails in the society. Hence, cultural factor may turn out to become a big milestone in the development of the merged corporation (International Mergers and Acquisitions 2008).
To sum up, international mergers and acquisitions are becoming more common for the pattern of modern globalization. They are taking place in every industry and sphere of economic life, including food production, health care, financial sector, energy and oil industry, automobile production, etc. Mergers of large companies from various countries in the key sectors of economy bring a number of positive and negative implications for all the stakeholders involved. International mergers raise a threat to companies’ employees with regard to potential lay offs as well as cultural differences can bring a lot of misunderstandings to the working environment. However, I think that international megamergers are beneficial for economic development and result in a number of advantages. First, they create legal opportunities for companies to outsource their production to the countries with cheaper raw materials and labour resources. This leads to the reduction of price of goods and services. At the same time, synergy effect from the merger of large companies facilitates creation of new working places for people. Moreover, consumers receive an opportunity to enjoy greater variety of goods and services. Hence, international cross borer and large scale mergers of companies are beneficial for producers, consumers, industries in which they operate and economy at large. Synergy effect and benefits associated with it exceed potential costs and misunderstandings of cross border mergers for companies and economy at large. Mergers of big scale companies, like Chrysler and Mercedes deal in the automobile industry, are important and beneficial for economy as big companies have substantial impact on the country’s GDP.
Measures Needed to Reduce the Failure Risk during Merger
One of the biggest challenges that companies face is the evaluation of the volume of merger deals. Large scale companies are becoming more global and force regulations of their activity to be changed hand in hand to keep up with the market development. Therefore, such diligence becomes more complicated and comprises a lot more factors despite the financial performance (International Mergers and Acquisitions 2008). Financial diligence solely does not reveal all the risks associated with a merger, including legislation in the foreign country, cultural differences, labour market peculiarities, foreign country market conditions, etc. Therefore, diligence comprises 1) financial diligence that makes assessments about the size of the market and develops business plan; 2) sales diligence that helps involved business to be sold from a buyer’s point of view; and 3) total performance diligence that is responsible not only for the financial evaluations, but at the same time it incorporates accounting, tax estimations, operational control, governance and management, internal control, etc. Therefore, in order to maximize the value of a merger deal, companies should undertake a set of measures in the pre merger and post merger phases to minimize all the risks and effects of the largest milestones (International Mergers and Acquisitions 2008).
Cross borders mergers have been dominating in the world economy for many years. Fluctuation of the announced volume of deals largely depended on the economic conditions in the countries. Despite the tremendous amounts of announced mergers in trillions of dollars, around 60-75% of all mergers fail, and do not deliver the expected benefits. Therefore, companies should consider several aspects in the pre-merger as well as in the post-merger phases.
In the pre-merger phase, companies and organizations should be careful in selecting an international company and partner. They should attentively evaluate their cultural background in addition to legal and economic state of their current affairs. This cultural evaluation process includes market analysis, obtaining experience of other international companies in performing mergers or outsourcing to a particular country. Once the certainty about merger of companies appears, they should act quickly to identify communicational and cultural factors that can possibly affect the merger process. A team of experts should conduct a comprehensive cultural due diligence and communication audit with the means of interviews, discussions, general observations and surveys to identify potential risks (International Mergers and Acquisitions 2008).
Cultural due diligence includes estimation of several components. Even though manufacturing, financial services delivery, agricultural business or any other kind of activity are all similar in nature, they still have a lot of cultural differences in the approaches to business conduct. Another element is geographical integration. A lot of employees are culturally conditioned and even can leave the company after the merger, unless their national legacy is incorporated. One of the most important elements to be considered in the cultural due diligence is customers integration. Thorough customers’ survey should be undertaken to assess the view of customers about potential integration in general and their personal attitude to the new set up. Also manufacturing and supply chain should be taken into consideration. Personal ties with long time suppliers and employees frequently can make the supply chain rationalization an extremely complicated process. Finally, cultural due diligence includes human integration. Two thirds of the mergers that have failed did not take into consideration the human capital integration factor. It is an important factor for a merger success since management styles, benefits’ system, etc. vary across countries and play a very important role for many people (International Mergers and Acquisitions 2008).
Once a merger is completed, the incorporated company enters the second stage of the merger that includes a certain set of risks as well. Therefore, careful analysis, evaluation and management should take into account new risks of the post merger phase. Cultural integration continues to be an important element of the financial and business incorporation. Hence, cross cultural trainings, coaching, support and consultancy should be undertaken in order to facilitate cultural integration of both companies. Particularly, cross cultural team building trainings and seminars would help in assessing and getting familiar with specific attitudes, cultural values and habits of the new counterparts. Cross cultural leadership seminars would sustain cultural collaboration. Even business language training would be relevant in case the merged companies are located in countries that speak different languages.
After the merger deal is signed, company management should closely monitor the attitude of the employees and their performance in the cross cultural environment. They should identify what incentives work better in the new environment to stimulate their employees for productive work. Administrative and operational systems of the new company should be synchronized quickly and possibly to attain a smooth pattern of activity. Special customers’ education actions should be also undertaken to instruct them about new company, its products and services. At the same time, it is necessary to make regular evaluations of the customers’ attitude to the merged enterprise (International Mergers and Acquisitions 2008).
To sum up, it is clear that mergers are very important for the economic development of the country. At the same time, cross borders mergers and acquisitions foster companies’ growth on the world scene. Mergers of big scale are complicated due to a number of financial, organizational, operational and administrative pitfalls. International megamergers are further complicated by the cultural determinant that is crucial for the success of the cross border merger. Companies from different countries that are aimed at integration into a single organization face many risks at both pre-merger and post-merger phases. In particular, merger team experts should thoroughly assess cultural aspects of management, production, work environment, compensations and stimulation system among employees. Once a merger is completed, a lot of merged companies fail to deliver expected benefits. This can come as a result of cultural aspects neglect as they are the most complicated to be modelled and forecasted precisely. Therefore, the company should conduct regular monitoring of the attitude of employees, customers and managers of the new organization. This would help to identify frustration and dissatisfaction at early stages and develop tools how to eliminate them. At the same time, educational actions targeted to customers and employees about the new organization, its values and strategies would increase public awareness and improve the perception of the merged company.
International Human Resource Management
Human resources account for around 60% of costs in the company. They play a vital role in the business activity, development and growth. Therefore, human resource management is crucial in terms of setting appropriate incentives and introducing the most efficient compensation system to motivate employees work more effectively. On the other hand, human resource management is a complicated process as it directly deals with people, thus cannot be theoretically modelled and is able to predict their behaviour in certain situations and conditions.
Human resource management is even more complicated in the multinational corporations when human resource managers are obliged to control and provide sustainable work of employees in the multicultural background. Human resource managers face a complicated task to coordinate the work of people, who have different cultural values, goals and motivation to work in the company. Therefore, thorough human resource management in the multinational corporation is essential for effective performance and further growth of the organization.
It is mentioned in the management and economic literature that human resource management in the multinational corporations is more complicated and sophisticated. However, at the same time it remains a crucial determinant of the success in the international business. According to Chew (2004) “problems are more complex in the international environment”. He further argues that in case human resource management team fails to communicate and resolve the problems among the employees in the international company, there is a high probability of business failure as well as further crisis. The crises that multinational corporation face usually originate from the failures of the assignments completion as a result of the premature return of expatriates. Therefore, poor expatriate management can seriously threaten performance of the multinational corporation and even bring international business to a deep crisis (Chew 2004).
The expansion of the world economy comes together with the increase of the number of multinational corporations. Staff shortage can become a special problem that multinational corporations come across due to the language barriers as well as numerous cultural differences in management and operations. Therefore, in order to develop control over the overseas subsidiaries as well as to enhance a unified management style, parent companies send some of their employees abroad to accomplish those targets (Edstrom and Galbaith 1977). This process is called an expatriation in the multinational corporations.
Transfers of employees from a parent company abroad are usually costly. Sometimes, the cost of expatriating an employee to a company abroad is two to three times higher than finding a corresponding qualified person on the local market. Companies are willing to pay this amount of financial resources to ensure that company’s values are communicated appropriately and sustained in the foreign counterpart. Hence, once the expatriate fails and prematurely returns home, tremendous financial resources are wasted,endangering the company’s performance (Tzeng 1996).
There are three ways in which multinational corporations can set up their organizational structure. First approach includes adding an international division to the existent organizational system. Second method of organizing multinational corporations incorporates foreign operations into the global product divisions. Finally, overseas subsidiaries can be incorporated into the global areas division of the multinational corporation.
Organizational structure of the multinational organization is essential for the efficiency and career orientation of its expatriates. In particular, when business has only started expanding overseas, in most cases it simply adds its international division to the organizational system of the company. Usually, this kind of international subsidiary is used primarily for outsourcing of the production processes to countries with cheaper raw materials and labour force. In case international business continues expansion of its operations abroad, certain tensions and problems appear in the coordination process. Therefore, in order to integrate international subsidiaries into the multinational corporation, global area division and global product division structures are used. Hence, structural organization of the international business largely affects career development of its expatriates (Tzeng 1996).
Even though an international division structure of the multinational corporation organization creates a set of opportunities for international career development, options for strong hierarchical appeal on behalf of foreign subsidiary are quite limited. Perlmutter (1969) found that global product organizational structure of multinational corporations still keeps the focus on the relevance of domestic market. As a result, this reduces motivation of expatriates to travel abroad and make diligent contribution to the development of the company.
Motivation of career development in the foreign subsidiaries of the multinational corporations is very important for employees, being amajor incentive to accept suggestion of relocating abroad (Miller & Cheng 1976). A great majority of expatriates consider foreign tasks and assignments as a great opportunity to pursue their ambitions in attaining executive positions in the multinational corporation. An opportunity to travel abroad creates necessary conditions for expatriates to improve their communication skills, strategic planning, and operational skills. After successful completion of foreign assignment and returning to the domestic company, expatriates in most cases receive so much desirable promotion in the company.
However, an option to travel abroad and complete a task from the top management of the company is not always eagerly met by employees. Quite often new positions in the overseas subsidiaries open in cases some problems or emergencies come out. These situations force management to come up with the best person for this position in a short period of time in order to minimize the losses. Hence, no or little attention is paid to the individual career paths of employees. At the same time, expatriates are less likely to be considered for the opened positions in the domestic office. Often this leaves them with a feeling of disintegration and isolation and thus reduce their productivity and motivation for effective work (Tzeng 1996).
In the corporate labour market inside the company, foreign assignments and expatriates are often considered to be huge milestones in the career development of people along the corporate line. On the other hand, unique opportunities and job characteristics can become a permanent profession for the company expatriates. Expatriates of the managerial positions are often relatively free and fairly autonomous in their work. Therefore, they can enjoy the benefits of lesser control that can become substantially more tight upon their return to the domestic company (Tzeng 1996).
There is no doubt about the importance and essential role of expatriates in the performance of the multinational corporations. With the help of expatriates multinational organizations spread their values, strategies and ideas in the foreign subsidiaries. Expatriates help in assessing local markets and cultural peculiarities. Hence, delivering necessary motivation for expatriates’ productive and efficient work is an essential task of the human resource management in the multinational corporations.
Premature return of the expatriates to the parent company brings serious problems and implications. There is plentiful evidence in the literature that the lack of motivation, isolation, limitations in the responsibilities are among major reasons of expatriates’ successful completion of foreign assignments . At the same time, researchers find other factors affecting failure of expatriates’ foreign assignments. In particular, according to the study of Black and Gregersen (1997), around 15% of American expatriates prematurely return from the foreign subsidiaries due to their cultural shock and dissatisfaction with the job. Moreover, up to 30% of those who have remained in the foreign country to fulfil their assignment still don’t manage to deliver and complete the assignment at their full capacity. Therefore, human resource managers have developed a set of methods issued to eliminate the consequences of the expatriates’ crises as well as their reduction at all. In particular, these initiatives include thorough planning of the length of the expatriates’ staying in the foreign subsidiary, special training courses for expatriates, guarantee of the return of expatriate to the parent company, as well as corresponding compensation and promotion system for people that agree to travel abroad and fulfil foreign assignments (Chew 2004).
In addition to the direct cost loss of premature expatiates’ return to the domestic company such as salary loss, training costs that company paid, relocation and travel expenses, multinational corporation is also facing a set of indirect costs. These are associated with the premature return of the expatriates to the domestic company and include potential reduction of the market share, legal difficulties and demands to replace positions by the foreign country representatives instead of the domestic.
There is a consensus in the literature that the major reason of expatriates’ failure in the multinational corporations is the premature return of expatriates to the parent company. Massive expatriates’ premature return to the parent company can turn into a severe crisis and even failure of the multinational corporation (Riusala 2000).
At the same time, numerous studies have found that failure of the expatriates’ foreign assignment completion can be caused by the failure and error made in the process of expatriates’ selection (Arthur & Bennet 1995). On average, most of the expatriates’ selective processes are based on their technical qualifications. This approach neglects an important role of interpersonal qualities and characteristics of a person. For example, one of the most relevant skills that a potential expatriate should possess is an ability to adjust quickly to the new cultural environment. The neglect of this characteristic in the process of expatriates’ selection substantially increases chances of the expatriates’ premature return and the failure of foreign assignment.
Moreover, the process of adjustment to the new cultural environment and life in the country is strongly affected by the fact whether the expatriate’s family is relocating together with him. In the situations when expatriates are forced to live abroad for a long periods of time and leave their spouses at home, there is no doubt in the foreign assignment failure and the premature returning to the parent company. It is a very important aspect of the expatriate policy and it should be taken into thorough consideration by international human resource managers.
To sum up, human resource management is an important element in the effective and successful performance of any company. Human resource management plays an increasingly important role in the success of the multinational corporations. One of the most crucial threats that international business faces is the threat of cultural dissatisfaction and disintegration. There is an evidence in the literature that most mergers and international businesses fail because of inability of companies’ management to capture cultural differences and incorporate them into the values of the integrated organization. Due to the international organizational form of the business, there is a need for companies to send their employees from domestic company abroad in order to facilitate and ensure the spread of company’s values and strategies in the foreign country. However, completion of foreign assignments by expatriates frequently fails and results in premature return to the parent company. This may bring severe direct and indirect consequences for the multinational corporations, failures and crises. There are various reasons for the expatriates’ premature return. One of the most obvious reasons is human resource mismanagement. International human resource managers often do not take into consideration personal skills and qualities of the person to adjust to the foreign cultural environment. Hence, effective international management largely depends on the successful management and appropriate approach to the selection of the expatriates for the company. At the same time, in the multinational corporations a special policy and family related issues of the expatriates should be considered and further developed to incorporate compensations for expatriates, , ensuring that company employees face the minimal possible discomfort and deliver maximal effort on their work abroad.