FIRMS usually adopt the merger and acquisition (M and A)                                                                                              
strategy as a means of enhancing their competitiveness and                                                                                            
improve their return to shareholders.                                                                                                                 
                                                                                                                                                      
Of late, two major developments have been spurring M and A.                                                                                           
among giant firms in the US, Europe and 'even Asia. One is                                                                                            
globalisation, which stimulates companies to adopt M and A                                                                                            
strategies to achieve economies of scale and strategic                                                                                                
competence in order to compete effectively in fast changing                                                                                           
and cost-sensitive markets and penetrate new markets.                                                                                                 
                                                                                                                                                      
The other is the "Internet fever", which has been driving a                                                                                           
number of acquisitions among information technology (IT)                                                                                              
and telecommunications firms as they scramble to acquire                                                                                              
competencies in the new technology to build competitive                                                                                               
advantage.                                                                                                                                            
                                                                                                                                                      
Among the acquisitions and mergers which have made the                                                                                                
headlines are the merger of Daimler and Chrysler, the                                                                                                 
acquisition of Atlantic Richfield Company by BP Amoco,                                                                                                
Online Inc's acquisition of Time Warner and the recent                                                                                                
Hewlett Packard's acquisition of Compaq Computers.                                                                                                    
                                                                                                                                                      
In Malaysia there have been many acquisition proposals                                                                                                
being made in the financial sector as the companies gear                                                                                              
themselves to meet the entry of giant companies into the                                                                                              
domestic market and the impending relaxation in trade                                                                                                 
restrictions.                                                                                                                                         
                                                                                                                                                      
The shrinking of the number of banks to 10 in Malaysia and                                                                                            
three in Singapore are examples of M and A mania. An                                                                                                  
acquisition strategy seeks to increase competitiveness and                                                                                            
return to shareholders. Therefore, it should only be used                                                                                             
when the acquiring firm is able to use the acquired                                                                                                   
company's assets to increase its own economic value through                                                                                           
ownership of the acquired company.                                                                                                                    
                                                                                                                                                      
However, there are many cases, which show otherwise. For                                                                                              
example, a survey-by KPMG an accounting consulting firm,                                                                                              
showed that about 83 per cent of acquisitions failed to                                                                                               
increase shareholders' value. In fact, 53 per cent of                                                                                                 
acquisitions even showed a reduction in shareholders' value                                                                                           
in acquiring companies.                                                                                                                               
                                                                                                                                                      
Other research studies have also come out with similar                                                                                                
results, i.e. shareholders of acquired firms often obtain                                                                                             
above-average returns from an acquisition but not the                                                                                                 
acquiring company                                                                                                                                     
                                                                                                                                                      
Even investors in the stock market have shown their                                                                                                   
scepticism about acquisitions being able to maintain the                                                                                              
original value of the businesses in question, let alone                                                                                               
increase it. This is understandable in view of the huge                                                                                               
premium paid for acquisitions as shown by the market                                                                                                  
selling down on the shares of companies on news that they                                                                                             
are making an acquisition.                                                                                                                            
                                                                                                                                                      
This poses the question of why some acquisitions succeed                                                                                              
and some fail. Are there factors which account for the                                                                                                
success of the successful ones? Fortunately, there are                                                                                                
research studies which show that there are differences                                                                                                
between successful and unsuccessful acquisition strategies.                                                                                           
                                                                                                                                                      
Also, there is a type of decisions and actions which a firm                                                                                           
can take which may enhance their probability of success in                                                                                            
their acquisition strategies. But before we look into these                                                                                           
decisions and actions, we should perhaps look at the                                                                                                  
specific reasons why firms acquire other firms and the                                                                                                
reasons for the problems arising in some of these                                                                                                     
acquisitions.                                                                                                                                         
                                                                                                                                                      
Firms often use acquisition strategies to increase their                                                                                              
market power, overcome entry barriers to penetrate as well                                                                                            
as speed up entry to new markets, reduce the cost and risk                                                                                            
of developing new products, and reshape their competitive                                                                                             
scope to enhance their competitiveness and return to                                                                                                  
shareholders.                                                                                                                                         
                                                                                                                                                      
PROBLEMS IN ACHIEVING SUCCESS IN ACQUISITIONS                                                                                                         
                                                                                                                                                      
What have been described above are very sound reasons for                                                                                             
the use of acquisition strategies to increase strategic                                                                                               
competitiveness and improve above-average returns. Millions                                                                                           
of dollars and much top-management time are spent to                                                                                                  
implement them.                                                                                                                                       
                                                                                                                                                      
Yet research findings have shown that less than one in five                                                                                           
M and As is successful. What are some of the problems that                                                                                            
cause an acquisition to fail? Are there factors which a                                                                                               
firm must consider beyond the strategic reasons?                                                                                                      
                                                                                                                                                      
Research studies have been made into cases where                                                                                                      
acquisitions made did not result in increasing the                                                                                                    
strategic competitiveness of the acquiring firm and in                                                                                                
shareholders of the acquiring firm earning above-average                                                                                              
returns. They show that the causes for the failure were too                                                                                           
little thought given to selecting the right target,                                                                                                   
determining the appropriate price to pay for the                                                                                                      
acquisition and creating value in the integrating process.                                                                                            
                                                                                                                                                      
The management of the acquiring firm must realise and                                                                                                 
expect that there will be problems and issues to be                                                                                                   
resolved not only in integrating the two companies'                                                                                                   
corporate culture but also in a host of others. These                                                                                                 
include the financial, accounting and IT systems, building                                                                                            
effective working relations between the executives of the                                                                                             
two companies and aligning the compensations, benefits and                                                                                            
status of the acquired company. There must be proper                                                                                                  
attention, adequate resources and preparations made to                                                                                                
address the anticipated problems and issues.                                                                                                          
                                                                                                                                                      
Honeywell and AlliedSignal set a six month time frame to                                                                                              
integrate their operations when they merged. To ensure that                                                                                           
the timetable was met, Honeywell organised a team to be                                                                                               
solely responsible for developing and implementing an                                                                                                 
integration plan. Cisco System's success with its many                                                                                                
acquisitions has been due to the firm's ability to quickly                                                                                            
integrate the acquisitions to, its existing operations.                                                                                               
                                                                                                                                                      
It was so effective that the employees of the acquired firm                                                                                           
have been known to feel as though they have been working                                                                                              
for Cisco for years immediately after the acquisition.                                                                                                
                                                                                                                                                      
Ineffective evaluation of the target company is another                                                                                               
problem which may cause an acquisition to fail.                                                                                                       
                                                                                                                                                      
In order to prevent paying an excessive premium for the                                                                                               
target company, it is crucial that an effective due                                                                                                   
diligence process be carried out in areas such as arranging                                                                                           
effective financing for the acquisition, differences in                                                                                               
cultures, management structure, IT and operating system                                                                                               
between the acquiring and target firms, the tax                                                                                                       
consequences of the acquisition and the decision that will                                                                                            
be required to merge the two firms after the acquisition                                                                                              
transaction is completed. This is to ensure that the                                                                                                  
benefits from the acquisition justify the premium paid.                                                                                               
                                                                                                                                                      
The purchase consideration should be based on a thorough                                                                                              
assessment of where, how and when management can derive                                                                                               
performance gains from the acquired firm and not on the                                                                                               
pricing of comparable acquisitions. For example, the                                                                                                  
premium that Marks & Spencer paid to acquire Brooks                                                                                                   
Brothers~ which work out to 75 times its earnings, worked                                                                                             
against the acquisition becoming a success irrespective of                                                                                            
whatever boom and the hype over the IT companies were                                                                                                 
doomed to failure. Why? Because the premiums being paid                                                                                               
bore no beating to the benefits these acquired firms could                                                                                            
deliver to the acquiring firm.                                                                                                                        
                                                                                                                                                      
In an acquisition strategy, a firm is purported to develop                                                                                            
a competitive advantage through synergy when the                                                                                                      
combination and integration of the acquired and acquiring                                                                                             
firms' assets produce core competence and capabilities                                                                                                
which they cannot produce operating alone or by combining                                                                                             
and integrating either firm's assets with another company.                                                                                            
However, the synergy may be outweighed by the transaction                                                                                             
costs incurred in completing the due diligence and post                                                                                               
acquisition costs such as loss of key managers and                                                                                                    
employees and costs that are required to be incurred to                                                                                               
create expected revenue and cost- based synergy.                                                                                                      
                                                                                                                                                      
When firms acquire businesses to diversify their existing                                                                                             
businesses, it is important that their top management have                                                                                            
the scope and depth of information to understand each                                                                                                 
business unit's objectives and strategy. This will enable                                                                                             
them to use strategic controls to monitor performance.                                                                                                
                                                                                                                                                      
In cases where firms become a conglomerate through using                                                                                              
unrelated diversification, their top management may find                                                                                              
themselves lacking the breadth and depth to understand each                                                                                           
of the businesses they have acquired. As a result, they                                                                                               
rely on financial rather than strategic controls to                                                                                                   
evaluate managerial performance of each unit.                                                                                                         
                                                                                                                                                      
Such a measure of performance will force individual                                                                                                   
business units to focus on short-term results at the                                                                                                  
expense of long-term strategic investments. It Will cause                                                                                             
some of the acquisitions to fail to realise the value they                                                                                            
are supposed to bring to the parent company.                                                                                                          
                                                                                                                                                      
Acquisitions increase the size of a firm which should help                                                                                            
the firm gain economy of scale in various functions and                                                                                               
result in increasing its competitive advantage. However, at                                                                                           
some point of time when the new firm gets too large in                                                                                                
size, the additional costs in managing the larger firm may                                                                                            
exceed the economy-of-scale benefits.                                                                                                                 
                                                                                                                                                      
Also, when the enlarged firm's operations become                                                                                                      
complicated, the firm's top management may install                                                                                                    
bureaucratic controls to achieve consistency in decisions                                                                                             
and actions across different units of the firm. Such                                                                                                  
bureaucratic controls may lead to reduced flexibility and                                                                                             
innovations, which could adversely affect the firm's                                                                                                  
performance in today's rapidly changing environment.                                                                                                  
                                                                                                                                                      
Finally, firms often fail to achieve their acquisition                                                                                                
objective because they overuse debt to finance their                                                                                                  
acquisitions. The result is they suffer negative                                                                                                      
consequences.                                                                                                                                         
                                                                                                                                                      
Among these negative consequences are a reduction in or                                                                                               
even stopping of crucial investments in research and                                                                                                  
development, and marketing and human resources development.                                                                                           
                                                                                                                                                      
                                                                                                                                                      
Or they could even be sued for bankruptcy when they                                                                                                   
encounter an economic downturn forcing them to miss out on                                                                                            
their interest payments and principal repayments when they                                                                                            
fall due. The current debt restructuring exercise being                                                                                               
undertaken by Malaysian companies bears testimony to this                                                                                             
problem.                                                                                                                                              
                                                                                                                                                      
KEY SUCCESS FACTORS                                                                                                                                   
                                                                                                                                                      
There are certain types of decisions and actions firms can                                                                                            
take to improve the chance for acquisition strategy                                                                                                   
success. Research studies also show that there is a pattern                                                                                           
of decisions and actions which firms can take to minimise                                                                                             
failure in their acquisition strategies.                                                                                                              
                                                                                                                                                      
One type of decision that will ensure that competitiveness                                                                                            
is improved is to target a firm whose assets are                                                                                                      
complementary to the acquiring firm's since combining                                                                                                 
complementary assets are likely to produce unique                                                                                                     
capabilities and core competencies that will create                                                                                                   
competitive advantages. Acquiring a firm with complementary                                                                                           
assets will also enable the acquiring firm to continue                                                                                                
focusing on its core businesses and leveraging them with                                                                                              
the complementary assets from the acquired firm.                                                                                                      
                                                                                                                                                      
Targeting firms that have a good working relationship with                                                                                            
the acquiring firm will also improve the chance for                                                                                                   
success. It will ensure their working with commitment and                                                                                             
less resistance to integrate their operations to minimise                                                                                             
integrating costs and secure expected benefits. This being                                                                                            
the case, firms may do well to build and nurture a good                                                                                               
working relationship with a targeted firm prior to                                                                                                    
acquiring it.                                                                                                                                         
                                                                                                                                                      
Establishing a strategic alliance can also be used to gauge                                                                                           
the possibility of working together to achieve mutual                                                                                                 
interests. Corollary to this would be to do friendly                                                                                                  
acquisitions so that positive synergy can be achieved and                                                                                             
loss of key personnel in the acquired firm minimised.                                                                                                 
                                                                                                                                                      
To ensure success, an acquiring firm should also conduct an                                                                                           
effective due diligence to carefully select the target firm                                                                                           
and evaluate the terms of negotiation. It should ensure                                                                                               
that the premium paid for the target firm and other terms                                                                                             
are not onerous and the finances in both the acquiring and                                                                                            
acquired firms are not too tight to allow for long-term                                                                                               
strategic investments and financial stability and                                                                                                     
flexibility in discretional use of cash flow.                                                                                                         
                                                                                                                                                      
In cases where substantial debt is used to acquire a firm,                                                                                            
the acquiring firm should do well to reduce the debt by                                                                                               
selling off assets that are not complementary to the                                                                                                  
acquiring firm businesses or are low performing business.                                                                                             
Also, if the acquiring firm has financial slack it will be                                                                                            
easier and less costly to obtain financing for the                                                                                                    
acquisition.                                                                                                                                          
                                                                                                                                                      
Finally, if the acquiring and acquired firms have managers                                                                                            
who have experiences in managing change and have acquired                                                                                             
skills at adapting their capabilities, they are likely to                                                                                             
be re proficient at integrating the two firm operations.                                                                                              
                                                                                                                                                      
Over the last two decades and even recently there have been                                                                                           
many reports of actions by firms undertaking restructuring                                                                                            
exercises to remedy the failure of a merger or an                                                                                                     
acquisition. They have had to sell off some of their                                                                                                  
acquired business, often at great losses.                                                                                                             
                                                                                                                                                      
This has highlighted the importance for firms contemplating                                                                                           
an acquisition strategy to take heed by doing a thorough                                                                                              
due diligence of its decisions and actions to see that they                                                                                           
satisfy the attributes of successful acquisitions. Failure                                                                                            
to do so may find them poorer by their acquisition                                                                                                    
strategies.