Merger and Acquisition

A highly controversial corporate strategy is merger and acquisition, referred to as M&A. The two terms are usually used together to refer to the legal and financial joining together of two separate organizational entities. However, the two terms, merger and acquisition, have different connotations.

Acquisition is an unfriendly or hostile takeover of one organization by another. In a sense, a larger fish swallows a smaller fish. The parent organization maintains control over[Page 369] the child organization, as measured by number of board seats in the new organization occupied by board members from the parent organization, or as measured by members of the top management team of the parent organization maintaining executive positions in the combined organization. The converse is true for the child organization in that former board members are in a minority in the combined board, and some executives are terminated or demoted. Frequently, after the acquisition the organizational name of the parent is used in place of the organizational name of the child organization.

A merger is the friendly joining together of two organizations as in a corporate marriage. In a merger, scrupulous attention is paid to power sharing between board members from the two old organizations, and between executives from the two old organizations. In a merger of equals, terminations and demotions are rare. Often a single new organizational name is assumed by both former organizations.

Whether a friendly merger or a hostile acquisition, M&A is controversial for at least three reasons. First, the resources involved are huge, sometimes reaching into several billion of dollars, and several thousand jobs. Second, the survival of the organization as currently known to management, employees, and customers is at stake. Third, the control, future direction, and ability of the organization to serve current customers are at stake.

In addition to short-term gain, there are other reasons why organizations are involved in M&A. It can be a way to implement other strategies. An organization might try to concentrate its market power by buying its competitors if government regulators will permit it. Alternatively, an organization might pursue diversification by acquiring an organization with different products and services from its own. M&A is an instant way to gain presence in an industry versus new product development or new market development. There may be a built-in bias toward M&A if executives are compensated in part on the basis of organizational growth or organizational size.

Good examples of M&A in the health care industry were found in the pharmaceutical industry in the mid 1990s. Per the Wall Street Journal, Eli Lilly acquired PCS Health Systems for $4 billion, Merck acquired Medco for $6.6 billion, and Glaxo acquired Wellcome Pharmaceuticals for $14.9 billion. Indeed, the amounts are substantial.

Unfortunately, M&A does not usually have a happy ending. Slightly more than 50% of acquisitions end in subsequent divestiture, just as slightly more than 50% of marriages end in subsequent divorce. Because the corporate divestiture and marital divorce rate are about the same, there may be unmet expectations and power issues in both situations.