1 + 1 = ?
Post merger integration strategies and their role in value creation in
cross-border M&A.
Master thesis
MSc International Business & Management University of Groningen
Faculty of Economics and Business
Master Thesis: MSc International Business & Management Author
P.P. van den Hoven Nicolaas Maesstraat 54-3 1071 RB Amsterdam pp_vdhoven@hotmail.com University of Groningen Faculty of Economic & Business
Department of International Business & Management Landleven 5
9747 AD Groningen
Supervisor: Mr. Drs. H. Ritsema 2nd Supervisor: Prof. dr. L. Karsten
ABSTRACT
This thesis researches how post merger integration (PMI) strategy design can lead to value creation in Dutch cross-border M&A transactions of different strategic intent. The study focuses on growth and efficiency M&A serving as theoretical opposites. A literature review is carried out to zoom in on the three point of interest in this study; strategic intentions, post merger integration and value creation. Based on this literature review, propositions were designed that test the relatedness between strategic intentions and PMI as well as the relatedness between PMI and value creation. Furthermore propositions that test the strategic intention specific PMI design were drawn up. A qualitative case study was designed, researching 8 M&A deals with either growth of efficiency as strategic intention (2 efficiency / 6 growth). Because of this small and uneven sample size the results of this research should be read with care.
The results of the study show that the strategic intention of an M&A deal indeed influences the post merger integration strategy design. Also, relatedness between post merger integration strategies and the creation of value is found. Concerning the propositions dealing with the specific integration design of growth and efficiency M&A, only efficiency M&A is found to follow the theoretical pattern. Growth M&A shows differentiating results. Most remarkable result is the focus of growth M&A on cost advantages.
Comparing growth and efficiency M&A, the sample in this study suggests that efficiency M&A reaps most benefits from the post merger integration process. Commonalities are that growth and efficiency PMI strategies use cross selling as important source of value. Also, leadership in the PMI strategy process seems to be a key issue.
PREFACE
Dear reader,
Before you lay’s the final hurdle in my university years: my master thesis. This research looks in to the effects of post merger integration strategies and their role in value creation in cross-border M&A. It is the result of a process that, more than once, proved to be very challenging both professionally as personally. However, the subject of mergers and acquisition and more specifically post merger integration proved to be so compelling and interesting that it stimulated to keep me going.
This thesis was written under the supervision of Capgemini, Netherlands B.V. Their need for academic research in the field of post merger integration as well as their expertise in the subject proved to be a good match with my wish of performing research that fulfilled both an academic and practical business needs.
I would like to take the opportunity to express my gratitude to everyone that helped me in the process of completing this thesis. First of all, I would like to thank all people of Transformation Consulting, Capgemini Netherlands, for their help and patience as well as providing with a warm and welcoming environment during my internship. I want to explicitly mention and thank Frank Bartels, Hoyte Bokma de Boer and Robert Morsch for their effort in this research project. They provided me with critical and valuable advice and input as well as serving as soundboard for my thoughts.
Second, I would like to thank all interview respondents for their cooperation, openness and honesty in providing, often sensitive, information. This research, relying on interview-data, could not have been done without their valuable information and time. I was very much surprised at the willingness of the respondents to help me with my search for data and the openness in the way they did this. Testing my theoretical ideas ‘in the field’ proved to be the most challenging and fun part of this research.
Third, I would like to thank my examiners Mr. Drs. H. Ritsema and Prof. dr. L. Karsten for providing me with feedback and comments as well as their efforts to keep my thesis readable for the academic community.
Sincerely,
TABLE OF CONTENT
1. INTRODUCTION ... 6
1.1 The Dutch M&A Market...6
1.2 M&A Rationale ...7 1.3 M&A Pitfalls...7 1.4 Integration...8 1.5 Problem Statement ...8 1.6 Overview...9 1.7 Approach ... 10 2. THEORETICAL FRAMEWORK... 11 2.1 Literature review... 11
2.1.1 What is M&A and what are its strategic intentions? ... 11
2.1.2 What is value creation and how does it emerge in M&A? ... 17
2.1.3 What is PMI and how should companies shape their PMI strategy?... 19
2.2 Propositions ... 24
2.3 Conceptual Model... 28
2.4 Relevance... 29
3.1 Research Method... 30
3.2 Case study design ... 31
3.3 Data collection method ... 32
3.4 Sample ... 33
3.5 Quality of the research design... 34
3.6 Limitations of the study... 36
4. DATA ANALYSIS & RESULTS ... 37
4.1 Data Collection Process... 37
4.1.1 Research sample... 37 4.1.2 Interview ... 38 4.2 Analysis Methods... 39 4.2.1 Data preparation... 39 4.2.1 Methods... 40 4.3 Results... 41 4.4 Analysis... 41
4.4.1 Strategic Intention & PMI ... 41
4.4.2 PMI & Value Creation... 44
4.4.3 Growth & Efficiencies... 46
4.4.4 Growth ... 47
4.4.5 Efficiencies ... 51
4.4.6 Comparison Growth & Efficiency M&A... 55
5. CONCLUSION... 57
5.1 Main research question ... 57
5.2 Limitations & Recommendations... 60
1. INTRODUCTION
“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price”
(Warren Buffet).
The ever faster world economy has stimulated organizations worldwide to explore different sources for corporate growth. In the last two decades Mergers and Acquisitions (M&A) has become one of the preferred methods to attain corporate growth (Paulter, 2003). M&A’s are even thought to be critical to the healthy expansion of business firms as they evolve through stages of growth and development (Weston et al., 2001). The practice of M&A is not new. Since the beginning of the 20th century the
business world has experienced several periods with increased M&A activity, the so-called M&A waves (Martynova & Renneboog, 2005, pp 2). These M&A waves seem to appear simultaneously worldwide.
The economic upheaval and low interest rates of the present seem to have set the stage for yet another merger & acquisition wave. With the number of transactions skyrocketing since 2003, ‘the M&A virus seems to have infected many company boards and M&A acquired serious foothold as an essential element of corporate strategy’ (Harbison, 1998, pp. 2). In May 2007, already $2 trillion worth of M&A deals were announced by companies around the globe (The Economist, 2007). Contrary to the M&A wave of the 90’s, the current M&A wave does not seem to be the exclusive domain of one industry (technology-media-telecom) but all industries seem to participate (Martynova & Renneboog, 2005; Het Financieele Dagblad, 2006). Also, the size of the deals is steadily increasing. An ever larger percentage of the M&A deals are pressing through the magical $1 billion in deal value (Bartel, et al. 2002). The M&A waves show an increasing international orientation. No longer does the USA dominate the M&A markets. ‘Europe has caught up and maybe even got ahead of the US in M&A activity and increasingly Asia is showing itself in the world’s M&A arena’ (Bartel et al. 2003, pp 38). Cross-border M&A activity as percentage of the total has risen considerably over the last waves, reflecting the growing globalization of product, services, and capital markets (Martynova & Renneboog, 2005). In 1987 its share was just 2 percent of the total M&A activity, but in the peak year of the previous M&A wave (2000) it reached up to as much as 44.4% percent of the total amount of M&A (UNCTAD world investment report, 2006). Bartel et al. (2002) report that between ’87 and ’99 cross-border M&A activity grew with 20% annually. In Europe as well as the United States, as much as 80% of incoming direct investments are ascribed to mergers and acquisitions. In the current wave as much as 46% of the deals made globally are cross-border transactions (The Economist, 2007).
1.1 The Dutch M&A Market
Expectations are that 2007 will shatter these figures setting even higher M&A volume and value (Annual review of M&A in the Netherlands, 2006; Het Financieel Dagblad, 2006; The Economist, 2007). The international orientation of the M&A wave is also visible in the Netherlands. Despite the impression that Dutch companies are on sale to international parties, the number of acquisitions by Dutch companies has risen from 126 to 216 in the last two years and the foreign takeover of Dutch firms rose from 135 to only 145 (The annual review of M&A in the Netherlands, 2006).
1.2 M&A Rationale
Why do companies engage in M&A deals? Haspeslagh & Jemison (1991, pp. 30) ; Andrade et al. (2001); and Bartel et al. (2002) conclude that the overall reason for all companies to engage in M&A should be to create value for their shareholders. ‘M&A is a tool that companies can use to fulfill the various strategic intentions through which shareholder value is created’ (Andrade et al. 2001, pp. 1). Value is created in an M&A when the net present value of the investment is positive (Weston et al. 2001). This means that the M&A transaction is expected to facilitate lower cost, increased revenue, decreased risk or a combination of these for its strategic intentions. Haspeslagh & Jemison (1991, pp. 15) stress that the M&A decision is based on the belief that ‘the corporate combination will allow the new entity to attain its strategic intentions more quickly and less expensively than on their own conduct’. According to Seth (1990); Haspeslagh & Jemison (1991); Bakker & Helmink (2002); Bartel, et al. (2002); and Kang et al. (2006); and the strategic intentions for conducting M&A, are advantages in:
- Efficiencies - Market Position
- Financials, -Growth, and
- Assets.
Unofficial motives for M&A are often personal motivations from management: personal involvement and personal gain.
1.3 M&A Pitfalls
Despite the enormous activity on the M&A, the results of these deals are much disputed. Research by Datta (1991); Marks (1997); Buono (2002); and Epstein (2005) show rates ranging from 50 up to 80 percent of corporate combinations failing to achieve operational, financial and strategic goals that were set at the offset of the merger or acquisition.They even found the profitability of the target firms and shareholder value seriously declining as a result of merger and acquisition deals (Datta, 1991). Bakker (2003) mentions 6 reasons for failure in mergers and acquisitions;
- Lack of vision and leadership - A poor business model - Personnel difficulties - The price paid for the M&A - The desired M&A results
1.4 Integration
The ability to digest mergers and acquisitions and realize all their synergy potential has become a major strategic asset (Epstein, 2004; Pautler, 2003; and Kostuch et al., 1998). Synergy exists in an acquisition when ‘the value of the combined entity exceeds the sum of the values of the two combining firms’ (Seth, 1990, pp. 3). Expected synergies are realized during the integration of the M&A. ‘Management should create an integration strategy in which the value that is expected at the start of the M&A is actually created; making the M&A a success’ (Haspeslagh & Jemison, 1991, pp. 18). Bakker & Helmink (2002) state that poor integration results in suboptimal performance of the new organization. Larsson and Finkelstein (1999) name integration as one of the most important factors for M&A success. Haspeslagh and Jemison (1991) see integration as key-process for M&A success.
In that respect it is awkward that in many cases the reason for M&A failure is either insufficient attention given to the post-deal path of the newly formed entity after the deal, the so-called Post Merger Integration (PMI), or poor designed PMI strategies that focus on irrelevant issues (Marks, 1997; Mittleton-Kelley, 2006).
‘Post Merger Integration is a business-term used to address all integration efforts after the deal, for both mergers as acquisitions’ (Bakker & Helmink, 2002, pp. 13). The PMI strategy should ensure that the strategic intention of the M&A is fulfilled, resulting in value creation. ‘It is the integration phase in which the actual value of an M&A is created, making the integration process and strategy extremely important for success of a merger or acquisition’ (Haspeslagh & Jemison, 1991, pp. 7).
Bakker and Helmink (2002) state different strategic intentions of M&A deals require different focus of PMI issues. A PMI strategy should address how the company should organize itself to fulfill the prospected advantages of the M&A. Besides this, it should identify tasks and responsibilities as well as speed and level of integration and therefore be aligned with the strategic intent of the M&A. A company organizes its PMI strategy around three integration factors: Organizational structure, Business processes, and Systems (Bakker & Helmink 2002, pp. 89; Bartel et al. 2002, pp. 360 and; Capgemini internal document). Optimal integration and setup of these three factors should lead to the fulfillment of the strategic intent and ultimately result in value creation.
1.5 Problem Statement
It seems that, in pursuit of value creation, companies use M&A as tool to reach their strategic intentions, but have problems unlocking their true value due to post merger integration problems. Due to over-focusing on the pre-deal phase or financial side of the M&A transaction many companies are ignorant or give insufficient attention to the post-deal phase in which the post- merger integration is addressed (Haspeslagh & Jemison, 1991). Companies are unsure how to address and design their PMI strategy in such a way that the strategic motive is fulfilled and that value is created.
M&A performance from the non-financial perspective and uses cultural, strategically and organizational measures to look at M&A performance (Haspeslagh & Jemison, 1991; Larsson & Finkelstein, 1999; and Bakker & Helmink 2002)
This research tries to bridge the gap between these research types by looking at post merger integration strategy from a value creating yet non-financial perspective. To be more precise, the goal of this research is to examine in what way PMI strategies should be designed in order to contribute to value creation in Dutch cross-border M&A deals. It accomplishes this by researching the value creating effects of post merger integration for merger and acquisition with different strategic intent. This leads to the following research question:
Research question: How can post merger integration strategy design lead to value creation in Dutch cross-border M&A transactions of different strategic intent?
This thesis hypothesises that post merger integration is influenced by the strategic intention and that PMI strategy effects value creation in the M&A deals by creating advantages in cost, risk and revenue. The research question points out three areas of interest that form the basis of research in this thesis: M&A’s strategic intent, post merger integration and value creation. Data are gathered by means of 14 interviews at 8 different companies to retrieve information around these three areas of interest. The focus of interest leads to the specification the following sub-questions that serve as guideline to the theoretical framework that deals with the theoretical issues at hand and explains and assess previous research in this subject.
- What is M&A and what are its strategic intentions? - What is value creation and how does it emerge in M&A?
- What is PMI and how should companies shape their post merger integration process?
1.6 Overview
Figure 1: Paths of value creation
1.7 Approach
The research approach of this thesis consists of four stages. The first stage creates a theoretical framework in which the reader is introduced with the theoretical aspects surrounding M&A, value creation and PMI. The framework will examine the M&A practice and developments both worldwide and in the Netherlands. Then it will elaborate on the three central pillars of this thesis:
- Strategic intentions - Value creation and, - Post merger integration
2. THEORETICAL FRAMEWORK
This theoretical framework is intended to put this research in theoretical perspective. It gives theoretical background to the three areas of interest that were lightly introduced in the introduction of this thesis:
1) Strategic intentions 2) Value creation and, 3) Post merger integration
The theoretical framework will be structured along these three areas of interest. Furthermore it introduces the reader with the propositions drawn from this theory; it explains the conceptual model that flows from the literature review; and it discusses the relevance of this research.
2.1 Literature review
The literature review consists of three parts. The first part introduces the concept of M&A and its strategic motives. The second part discusses the concept of value creation. In the last part, post merger introduction and all its elements are discussed.
2.1.1 What is M&A and what are its strategic intentions? 2.1.1.1 Mergers and Acquisitions
Figure 2: M&A volume and trends globally 1997 – 2006 in millions
Source: Internal Publication Capgemini, Dealogic, 2007.
--- Figure 3: Cross border M&A
Source: UNCTAD World Investment Report 2006, pp 14
dominant one’ (Epstein, 2004, pp. 1). Albeit the theoretical idea is different, ‘the academic world does not distinguish between mergers and acquisitions’ (Bartel et al. 2002, pp.37). This thesis will treat mergers and acquisitions accordingly to this concept.
2.1.1.2 Strategic intentions for M&A.
In search for value creation a company assesses its corporate strategy to do so. This corporate strategy is then translated in strategic intentions that are setout for the company to achieve and for which the company can use M&A as a tool for achievement (see figure 1). According to the work of Seth (1990 A&B); Haspeslagh & Jemison (1991); Chatterjee (1992); Bakker & Helmink (2002); Bartel et al. (2002) and; Kang et al. (2006) these strategic intentions are advantages in the following five areas:
1) Efficiencies 2) Financials
3) Growth 4) Market Position and,
5) Assets.
This research only considers the strategic motives growth and efficiencies, reasons for this choice will be disclosed later on in the thesis.
1) Efficiencies
The combination of two or more companies through an M&A transaction can lead to efficiencies that create cost advantages. ‘Economies of scale are created when the combination of the two firms leads to lower fixed cost per unit because of production scale expansion’ (Seth, 1990-B, pp. 101). Economies of scope are created when ‘the corporate combination leads to lower average total cost of production as a result of using resources for the production of product A for the production of product B’ (Seth, 1990-B, pp. 101). Furthermore a rationalization of products, personnel, organization and locations can to a more efficient organization (Bartel, 2002). More detail to this strategic intention is given in paragraph 2.2.5.
2) Financials
Seth (1990-A) stresses financial advantages come in the form of co-insurance (reduced probability of bankruptcy for the combined firm) and financial diversification (risk reduction). Despite being a strategic advantage, ‘financial advantages do not require organizational integration effort’ (Seth, 1990-A, pp.434) and usually they don’t have a strategic rationale (Bartel et al., 2002). Therefore they will not be included as strategic factor of influence on PMI design in this research.
3) Growth
4) Market position
Merging or acquiring a company can greatly affect the market positioning of a firm. For instance, the larger size of the company and combined marketing efforts can enhance market power towards buyers and suppliers (Seth, 1990-A). The larger size of the company and customer base, along with the new business portfolio combined with a more efficient marketing effort can lead to increased market share. Furthermore, M&A can also be a way to attain a more favorable position vis-à-vis competitors and to defend itself against (hostile) takeovers (Bakker & Helmink, 2002).
5) Assets
Last strategic motive for conducting M&A are the access to assets. M&A can be a quick way to give a company an edge in technology, talented personnel, resources, and R&D (Haspeslagh & Jemison, 1991). Technology and R&D are often time consuming and costly projects, therefore access to R&D and Technology is a very important strategic motive for M&A. Also, M&A can be a way to acquire strong brands and goodwill. Last, it can give access to best practices (Bakker & Helmink 2002). 2.1.1.3 Dutch Market
The Dutch M&A market seem to follow the global trend of increasing activity. Figure 4 shows that, in line with global development, the number and size of takeovers experienced steady growth. As can be seen in the figure, the prospects are that this trend will continue for 2007. Results for the first quarter of 2007 prove this estimation to be on the low side as it already saw 178 deals with a total value of EUR 53.4 billion (Rapport 1e Kwartaal, Overfusies.nl, 2007).
Source: Competing for growth, 2007, pp. 13.
Furthermore, also the international orientation of the M&A deals seems to hold for the Dutch market. Figures 5 and 6 show that, outbound as well as inbound cross-border M&A deals grew in both volume and size.
Figure 5: Total volume of M&A deals by buyer type 2003-2006
Source: Competing for Growth 2007, pp 15.
Source: Competing for Growth 2007, pp. 15
Through recent media attention, to many it seemed like Dutch companies were ‘on sale’ to foreign parties, the data shows the opposite. Both the volume and value of outbound cross-border deals is higher.
2.1.1.4 Private Equity
An important development for the Dutch M&A market is the increasing involvement of private equity. Globally there has been an increase over the last century (UNCTAD, 2006) and the Dutch market experiences the same trend (Oudman, 2006). Striking is the value of these deals, out of the top ten deals in value of the period 2005-2006 as many as seven had private equity involvement (Oudman, 2006). Figure 7: Top 10 Dutch M&A Deals 2006
Top 10 Dutch M&A deals
Target Seller Bidder Size € millions Deal type Sector
1 VNU Public Valcon Acquisition 8,683 PE involvement Media 2 Euronext Public NYSE Group 7,473 Strategic Financial 3 NXP Philips Electronics PE Consortium 7,400 PE involvement Industrial 4 Casema PE Consortium Cinven/Warburg Pincus 2,850 PE involvement Utilities 5 Essent Kabelcom Essent Cinven/Warburg Pincus 2,600 PE involvement Utilities 6 Quest International ICI PLC Givaudan SA 1,776 Strategic Pharma 7 Unilever Frozen Foods Unilever Group Permira 1,725 PE involvement FMCG 8 TNT Logistics TNT Apollo Management 1,480 PE involvement Logistics 9 AVR Municipality Rotterdam CVC/KKR/ONG 1,400 PE involvement Utilities 10 Marine Harvest Int Nutreco Pan Fish ASA 1,320 Strategic Food Source: Mergermarket, Last Twelve Months, December 2005 - December 2006, excluding financials
Source: Oudman, 2006, pp. 3
2.1.1.5 M&A type
M&A can be distinguished in two types; financial and strategic M&A. With financial M&A there are no strategic intentions for the M&A but purely financial motivations, in most cases, the companies remain autonomous (Bartel et al. 2002, pp. 168).
With strategic M&A the organization is combined or integrated with another company. The strategic intentions (see paragraph 2.1.1.6) of these actions are strategic in a sense that the M&A is expected to positively influence the companies’ current activities.
Bartel et al. (2002, pp. 168) describe 3 types of strategic M&A. First type is the strategic horizontal M&A. In this type of merger or takeover, two companies with similar activities are combined. The second type of M&A is strategic vertical. We speak of a vertical M&A if a company merges or acquires a company in its own value chain, both upwards as downwards. The third type of M&A is the strategic diversification M&A. In this type of M&A two companies with unrelated activities are combined.
This research will focus on strategic M&A as these transactions require actual integration of activities whereas financial M&A leaves the acquired companies operate as stand-alone companies.
2.1.1.6 M&A Process
decisions earlier on in the process. The first phase is the strategy planning phase. This is the phase in which a company identifies ways to create value for the company and assesses the best tool for this value creation. When M&A is chosen as method to attain the objectives phase 2 starts. Phase 2 is the screening & selection phase in which the company uses the strategic plan and selection criteria to browse for potential candidates. Phase 3 is the pre-deal evaluation phase in which the due diligence is a key element. Due diligence is a critical examination of a company on legal, financial, strategic, operational and cultural areas. The information is extremely important for future value creation (Bartel et al. 2002). Phase 4 is the deal execution, in this phase the actual negotiations take place and financial and structural issues surrounding the deal are attended to. This phase ends with closure of the deal. Phase 5 is the integration phase. In this phase the organizational changes are executed and the physical integration of the company begins. The integration phase is where the actual value is created in the deal.
Figure 8: M&A Process
Source: Parenteau & Weston (2003) and Capgemini internal document
2.1.2 What is value creation and how does it emerge in M&A? 2.1.2.1 Value creation
Literature is very clear on the overall objective for engaging in merger and acquisitions which is: value creation (Seth 1990; Haspeslagh & Jemison, 1991; Chatterjee, 1992; Andrade, 2001; and Bakker & Helmink, 2005). But what exactly is value and how is it created? And for whom should this value be created?
value’ (NPV) method as it is no different than any other capital budgeting problem. ‘The net present value is the present value of all future cash flows discounted at the cost of capital, minus the cost of the investments made over time at the opportunity cost of funds’ (Weston et al., 2001, pp. 229) . A positive NPV would indicate a value creating investment.
To sum up; in the capital markets or shareholder view, value can be created by investing in a positive NPV M&A, in which the value of a company is increased. In the shareholders view this can be done in three ways; by increasing revenue, by lowering cost, and by decreasing risk (Weston et al., 2001 & Bartel et al., 2002).
Second view is the constituent’s view of value creation. This view sees value in terms of employment, benefits, products & services, community presence, etc. (Haspeslagh & Jemison, 1991; Bakker & Helmink, 2002). It is a much broader view than the capital markets view as it includes interests of all stakeholders as opposed to only the shareholder.
Third view is the managerial view of value creation. This is often the consensus between the capital markets view and the constituents view on value creation. In this view value is created in an M&A if the deal is consistent with the companies’ strategic vision and would add to the firms’ capabilities and long term competitive position (Seth, 1990-B; Haspeslagh & Jemison, 1991 and; Bakker & Helmink, 2002).
This thesis uses the shareholders view for value creation in M&A. Therefore, it judges value creation in terms of advantages in cost, risk and revenue. The choice for this view is explained by the unambiguous character of this measure. Revenue creation, cost reduction and the reduction of risk are clearly measurable events that are not susceptible to personnel judgment. This provides a reliable and objective measure of the effect of PMI strategy than with the other views. Furthermore the takeover price paid by the acquiring party is based on the NPV of the investment. It therefore seems logical to judge the value creation using the same standard. Last, the shareholder value vision is easy to understand and well recognized and often used by the academic community (Haspeslagh & Jemison, 1991).
2.1.2.2 Value creation by Revenue & Cost
Value can be created by generating increased revenue or by lowering cost and risk as result of an M&A (Weston et al. 2001). The strategic intention of an M&A creates different sources of value creation having either a revenue effect of a cost effect. The value creating potential of a deal has been introduced while discussing the strategic intention of M&A. Figure 9 in Appendix A shows the benefit logic for M&A activity and value creation. A benefit logic shows how a certain action can lead to benefit, it shows the flows and stages an action has to undertake (the logic) to create a benefit.
pursuing value. Next is the post-merger-integration phase (for elaboration on PMI see paragraph 2.1.3) which should lead to a value effect on either the cost or the revenue side resulting in value creation.
---
Insert figure 9 of Appendix A: Benefit logic value creation flow ---
Value sources that create value through increased revenue are (see figure 9) market power, new market access, market share, restructuring, technology & knowledge, best-practices, talented personnel, brands & goodwill, cross-sell, defensive and restructuring (Seth, 1990 A&B; Haspeslagh & Jemison 1991; Chatterjee, 1992; Bakker & Helmink 2002; Bartel et al. 2002 and; Kang et al. 2006)
Value sources that create value through lowering costs are (see figure 9) economies of scale and scope, rationalization, diversification, co-insurance, technology and knowledge, resources, market power, market share, and restructuring (Seth, 1990 A&B; Haspeslagh & Jemison 1991; Chatterjee, 1992; Bakker & Helmink 2002; Bartel et al. 2002 and; Kang et al. 2006).
2.1.2.3 Risk in M&A
Because of the bad track record trailing mergers and acquisitions, risk is an important factor in M&A decisions. Bartel et al. (2002, pp. 34 & 377) consider the following risk with mergers and acquisitions. First they name the risk of overpaying for an M&A although theoretically this should never happen (see the previous about net present value). Second is low acceptance. When the M&A activity is only supported in management circles and not in by the rest of the company, this could lead to internal problems. Third is cost and time put in by the management of a company preparing the deal itself. Fourth are hidden costs. Hidden M&A costs are less obvious and difficult to anticipate in size and timeframe. Examples of hidden risks are;
- Complexity cost, that are created by having a bigger organization with more management layers and coordination mechanisms,
- Higher rewards, that flow from the bigger responsibilities those managers have, loss of clients that do not longer wish to do business with the new company,
- Loss of key-personnel, M&A’s generally cause a high personnel turnover, and - Post merger drift, a temporary dip in productivity and competitiveness (Bartel et al. 2002, pp. 377).
2.1.3 What is PMI and how should companies shape their PMI strategy?
2.1.3.1 Type of PMI
The framework of Haspeslagh & Jemison (1991 pp. 156-160) gives us a way to classify the type of post merger integration that is executed. It identifies three levels of integration (see figure 10); preservation, symbiosis and, absorption. The levels are divided to their need for organizational autonomy and their need for strategic interdependence. The bottom left position shows [Holding]. In this type of M&A, the company is left to operate as it was and no integration effort is made, therefore it is not discussed.
Figure 10: Types of PMI
Source: Haspeslagh & Jemison (1991, pp. 157)
Consider the following three levels of integration:
1) First, total integration or absorption, in which all company aspects are included in the integration design. This implies full consolidation of operations and organization of both companies which results in a totally new organization. Absorption integration displays a high need for fast strategic interdependence between the companies and a low need for autonomy in order to achieve its strategic intent. This kind of deep integration can be effective creators of scale and scope economies.
Figure 10-A: Total integration / Absorption
Source: Bakker & Helmink (2002, pp. 60)
A
B
2) The second type is partial integration or symbiotic integration, in which some company aspects are combined but not all. Symbiotic integration displays a high need for strategic interdependence but also a high need for organizational autonomy, therefore integration often is a gradual process. This kind of partial integration is used in cases of geographical distance and the type of business activity can call for this type of integration.
Figure 10-B: Symbiosis integration
Source: Bakker & Helmink (2002, pp. 60)
3) Last type is minimal integration or preservation. This means that the two companies remain separate, other than their financial structures so that innovative processes are protected and experience no interference by the M&A transaction. Preservation integration displays a low need for strategic interdependence and a high need for organizational autonomy. This kind of shallow integration is often seen in rising and growing markets in which market share is essential.
Figure 10-C: Preservation integration
Source: Bakker & Helmink (2002, pp. 60)
2.1.3.2 Design factors
When performing a PMI, a design for a new company has to be developed, the so called business model. The first direction to this design is given by the level of integration that is necessary to achieve the strategic intention. Next is the internal design of the new/adapted organization. This internal organization design or business-model is shaped by three so-called design factors; the organizational
A
B
A
B
A
B
structure, the business processes and the systems (see figure 11) (Bakker& Helmink, 2002, pp. 89, Capgemini internal document, Bartel, 2002, pp.360).
Organizational structure is the highest level of design factors. This implies the architecture of the company as a whole. After that come the business processes which imply the various department and activities. Last, are the systems used in the organization. Systems are the enabler and facilitators of companies. ‘The design factors combined (see figure 11) symbolize the business-model of an organization; within these organizational elements, the real integration takes place’ (Bakker & Helmink, 2002, pp. 89). In order for the post merger integration process to succeed, the design factors undergo change processes that result in a new/adapted business-model. The design factors are modified and integrated in such a way that the emerging business-model is optimally shaped for accomplishing its M&A’s strategic intent. This optimal business-model configuration means a differentiating focus and attention for design factors in M&A of different strategic intent.
Figure 11: PMI integration business model
Source: Bakker & Helmink, (2002, pp. 89)
The design factors mentioned in the above, flow from the various sources(Bakker & Helmink 2002, pp. 89, Capgemini internal documents, Bartel, 2002 pp. 359) but are mainly derived from Bakker & Helmink (2002) and are further discussed in the below:
Company X - Organizational structure - Business processes - Systems Company Y - Organizational structure - Business processes - Systems Company New -Organizational structure (Infra-structure, Setup, Legal, Tasks, Business Units, Integration Level, etc.)
- Business processes
(R&D, Production, Logistics, HR, Marketing, Finance, etc.)
- Systems
• Organizational structure
Organizational structure is the shape of an organization; it deals with report lines, department setup but also with location decisions for production, decisions for departments, offices, headquarters etc. Integrating two companies’ implicates a revision of the formal organization to serve the new strategic intent of the M&A. This means that companies have to analyze their overlap and supplementary activities on all fronts and decide what to do with it.
- Infrastructure :geographic locations - Legal form
- Task description - Organization setup
- Level of integration - Business Units
• Business processes
Organizational integration cannot be performed without changing business processes. The newly formed processes hang closely with the strategic intent of the M&A. Business process PMI changes apply for the following processes:
- Logistics - Procurement
- Production - Marketing & Sales
- Research & Development - Financials, and
- Human Resources
• Systems
The integration of two companies creates a need for a management system that controls the new company. Monitoring the integrated company performance on various factors is very important to register problems early. The newly formed company should assess its needs and overlaps in their current systems. An integrated and efficient management system could save costs. The systems can reach from only financial controls to more specialist systems that track employees etc. ICT system integration is one of the most feared subjects in a PMI (Bakker & Helmink, 2002). The ICT systems play a crucial role in PMI project as they often are the tool through which PMI is exercised.
- Management - ICT
- Financial - Logistics
- HR - Incentive
2.1.3.3 Value actions
The business-system elements described in the above, show the elements of interest in a PMI process. However, what remains unclear is how integrating these elements can create value in an M&A deal. For this purpose a list is created with help of literature and Capgemini PMI professionals, stating all so-called value actions possible as result of PMI. These are the actual value enhancing effects that result from integration.
risk and cost. Secondly, within the three value creating areas, the value actions are sorted within each element of the business system. It shows the value actions discriminating in actions taken in organizational structure, business processes and systems described in paragraph 2.1.3.2.
2.2 Propositions
The literature review put the theory on the three focus-points of this thesis; PMI, value creation, and M&A strategic intent, in perspective. The next part of the theoretical framework forms an opinion on the relatedness of the factors described in the theory. Based on the literature certain assumptions can be developed into propositions that serve as guidelines for this research, they are presented in the next paragraph.
2.2.1 Strategic Intent & PMI
Once a company is convinced of the necessity of having a thorough and well designed post merger integration plan the question is how to set it up. However, there is no textbook answer to this question. There is no such thing as a one-size-fits-all success recipe for PMI. Epstein (2004) gives various determinants for merger success as developing aligning measures, effective and frequent communication and the setup of a strong integration team. Kostuch et al. (1998) stress the importance of integration planning and Datta (1991) points to the importance of organizational fit in for instance management styles. Bakker & Helmink (2002) state that M&A differ in its need for integration, depending on the strategic intent for the M&A deal. Despite the enormous amount of scholarly work on this subject the proposed determinants for successful integration remain rather trivial and without any strategy specific indications and directions for the PMI process.
Adolph et al. (2001) stress that the unique characteristics of an M&A deal determines the choice of PMI approach. In order to let the M&A live up to its strategic intent, it is important that the PMI approach is designed to fulfill this strategic motive (Bakker & Helmink, 2001, pp. 51). Bartel et al. (2002, pp. 356) add that the PMI process is the translation of the strategic intention of the M&A into the real-life business situation. The above implies that the strategic motive of an M&A deal should influence the PMI process approach. This relation leads to the following proposition:
Proposition 1: The PMI strategy design is influenced by the strategic intention of the M&A deal.
2.2.2 PMI & Value Creation
It is curious that the integration phase is rather neglected by companies engaging in M&A activity as the integration is identified as the phase that creates value for the organizations involved. This has raised awareness of the need to improve management of the post merger integration process (Marks, 1997).
‘Not until the two companies start integrating their activities successfully, can value be created. A detailed and efficient PMI strategy lays at the basis of every integration process, and increases the chance of a successful M&A considerably’ (Haspeslagh & Jemison, 1991, pp. 115).
The above implies that an effective and efficient PMI should increase the chance the chance of M&A success, this points to a causal relation between post merger integration and value creation in an M&A. This relation leads us to the following question:
Proposition 2: The PMI strategy influences the creation of value in M&A transactions.
2.2.3. Growth and efficiencies
Chapter 2.1.1 gives five strategic motives for M&A activity. However, researching all the strategic motives lies beyond the scope of this research as a result of time and resource limitations. Therefore, this research chooses to focus on two specific strategic motives to research the ‘strategic motive vs. PMI strategy’ relation in depth; growth and efficiencies. The choice for these two strategic motives is explained by the distance between the motives; they appear at different sides of the value creation spectrum (see figure 9), efficiency creation appears on the cost side of value creation and growth appears solely on the revenue side of value creation. Because of the distance, it can be expected that this results in a difference in influence of these strategic intentions on the PMI process. Therefore this thesis works under the assumption that the PMI strategy approaches of efficiency intended M&A on the one side and growth intended M&A on the other side differ. This forms a solid base for comparing and reviewing the influence of strategic motive on PMI process. The following two paragraphs will present the propositions constructed on growth and efficiency pointed M&A.
2.2.4 Growth
The value driver ‘Growth’ expects the advantages of M&A to come from an increase in revenue of the new organization. ‘Through M&A combined with a well managed and designed PMI process, an organization can obtain favorable positions in terms of revenue’ (Bakker and Helmink, 2002, pp 58) (see figure 9 Appendix A).
An M&A directed at growth can lead to advantages in:
- Market-share; increasing market share is a powerful way to attain an improved market position. The new corporate combination can cause a higher market-share, leading to market power, revenue advantages and an enhanced competitive position (Bartel, et al. 2002, pp.170)
- Cross-sell; the newly added customer portfolio opens the possibility for cross-selling. Cross-selling can be an important source of growth and creates an opportunity to increase revenue (Bartel, et al. 2002, pp.185).
- Best Practices; the new organization has to the possibility to choose the best practices from each company. This can lead to growth by higher sales because of better products, better / more effective, marketing & sales, higher production capacity etc. (Haspeslagh & Jemison, 1991, pp. 203).
The advantages flowing from ‘growth’ lead to value creation through increased revenue (see figure 9). The PMI process, if well managed, could lead to growth of revenue by cross-sell, increased market share, best practices and, access to new markets. Growth intended M&A is set to expand and optimize the existing market-portfolio (Bakker & Helmink, 2002). The strategic rationale behind growth M&A is to pursue growth opportunities that could otherwise not be grabbed so quickly and would take years of would be expensive to obtain organically. It therefore seems logical to presume that growth is focused on creating extra revenue as opposed to lowering cost. Growth M&A will pursue opportunities, prospective growth and expansion tactics and thus be less concerned with lowering cost and the creation of synergies.
Bakker & Helmink (2002, pp. 58) stress the importance of assuring a strategic fit in the integration strategy. Therefore advantages are expected to be caught by integrating and changing the organizational structures of a company, as strategic fit is not realized by integrating business processes but by aligning organizations. This makes it plausible to expect that an M&A with the strategic intention to create growth focuses on organizational structure in its PMI process.
Also, companies pursuing growth are expected to require lower levels of integration. To be able to keep market-share and volume, to be able to cope with geographic distance troubles and, to preserve specific capabilities growth M&A is less likely to fully integrate their activities. Often there is one general overlaying strategy for the company, but the business units are allowed to pursue different strategies (Bakker & Helmink, 2002, pp. 59-61). The advantages of the growth M&A would require a preservation or symbiosis PMI approach (Haspeslagh & Jemison, 1991).
This leads us to the following proposition.
Proposition 3a: M&A with the strategic intention of growth will create value by generating extra revenue.
Proposition 3b: M&A with the strategic intention of growth will create value by focusing the PMI strategy on organizational structure.
2.2.5 Efficiencies
The strategic intention ‘Efficiencies’ expects the advantages of M&A to come from a decrease in cost of the new organization. Through M&A combined with a well managed and designed PMI process, an organization can obtain favorable positions in terms of cost (see figure 9 in Appendix A). An M&A directed at cost can lead to advantages in:
- Economies of Scale; in horizontal M&A new combinations can lead to efficiencies that create economies of scale. Scope economies are associated with supply-side changes, such as increasing or decreasing the scale of production, of a single product type (Haspeslagh & Jemison, 1991; Larsson & Finkelstein, 1999; Bakker & Helmink, 2002 and; Bartel et al. 2002).
- Economies of Scope; in vertical M&A new company combinations can lead to economies of scope. Scope economies are associated with efficiencies of different types of products. The newly added product range makes that fixed cost can be shared by all products. Examples are marketing and distribution (Haspeslagh & Jemison, 1991; Larsson & Finkelstein, 1999; Bakker & Helmink, 2002 and; Bartel et al. 2002).
- Rationalization; an M&A directed at efficiencies can lead to rationalization of products, personnel, organizations and locations. Products, locations and personnel can be scrapped by overlap that is caused by the M&A, while organizations can be streamlined and be made more efficient (Bakker & Helmink, 2002).
The advantages flowing from an M&A directed at improving efficiencies, lead to value creation through cost savings (see figure 9 Appendix A). Bakker & Helmink (2002, pp. 56) stress that the PMI process in efficiency directed M&A, if well managed, can lead to economies of scale and scope and rationalization of services / products, personnel and organization by combining production, personnel, financials, procurement and other business functions.
Therefore advantages are expected to be caught by changing and integrating the business processes of a company as economies of scale and scope and rationalization are advantages that are caught in the process side of a company. This makes it plausible to expect that an M&A with the strategic intention to improve efficiencies focuses on business processes in its PMI strategy.
This leads us to the following propositions:
Proposition 4a: M&A with the strategic intention of efficiencies will create value by generating cost advantages.
Proposition 4b: M&A with the strategic intention of efficiencies will create value by focusing the PMI strategy on business processes.
Proposition 4c: M&A with the strategic intention of efficiencies will create value by pursuing symbiosis or absorptional modes of integration.
2.3 Conceptual Model
The conceptual model can be defined as ‘ an abstraction of the way we choose to perceive a specific part, function, property or aspect of reality, it is a representation of a ‘system’ that is intentionally constructed to study some aspect of that system or the system as a whole’ (Jonker and Pennink, 2006, pp. 1).
Following Jonker and Pennink (2006) conceptual models have three functions:
First function of a conceptual model is embedding the proposed research with relevant and existing literature about the subject. The conceptual model reflects the way the researcher look at the phenomenon of research. Second function of the conceptual model is that it can help in visualizing and structuring the research problem as well as identifying relevant factors. The third function is concerned with linking conceptual models with systems theory. ‘In a system the elements are ordered in different zones from fundamental causes to outcomes. The elements of a system are classified and related in such a way that one element causes the second etc., thus demonstrating causality’ (Jonker & Pennink, 2006).
The conceptual model presented below is based on the theory and propositions that are stated in the previous paragraphs of this chapter. It is the abstract version of the benefit logic presented earlier (Figure 9 Appendix A), showing only high level causality links. With this conceptual model the researcher shows how it perceives the research problem. The model tries to show the different elements that are relevant in the research problem of this thesis and creates a visual and structured overview of this problem. The elements are presented in a way that makes it clear how one element causes the next, demonstrating causality.
The model should be read in the following manner:
The literature review states that companies are always in search of value creation with their activities, therefore this model starts with the overall master plan to this value creation: the corporate strategy. Next important step is deciding on a path to attain this value creation, in other words, to decide on a strategic intention that is to serve as path to value creation. This research will focus on only two strategic intentions: growth and efficiency. Having decided how the value creation will take form, the organization has to decide on a tool to reach these goals. This thesis focuses on mergers and acquisitions as tool to reach the strategic intentions and value creation. The use of M&A as tool implies that integration is necessary to attain value creation and, in order to perform this integration a post merger integration strategy is created. This PMI strategy is expected to influence value creation through on of the three sources of value creation: revenue, cost and risk.
This conceptual model implies two influential relations; the first being that the strategic intent of an M&A influences the post merger integration strategy, the second being that the PMI strategy influences value creation. Furthermore it assumes that the approaches for growth and efficiency intended M&A differ.
2.4 Relevance
The merger and acquisition phenomenon is one of the most studied subjects within the business world. Especially the topic of acquisition performance has been at the forefront of academic research in the areas of financial economics and strategic management. Most researchers use empirical research methods like the event-study-method to study the effects of M&A by calculating the abnormal return to shareholders (Datta, 1991).
The topic of Post Merger Integration has been researched through both quantitative (Datta 1991; Kang et al. 2006) and qualitative eyes (Larsson & Finkelstein 1999; Mittleton-Kelley 2006) and through theoretical lenses like the strategic management and the organization theory lens (Larsson & Finkelstein, 1999). This results in rather trivial advice and measures to be taken in PMI strategies. This research tries to examine in what way PMI strategies can contribute to value creation in Dutch cross-border M&A deals, by researching the value creation effects of post merger integration for merger and acquisition with two different strategic intents. This should result in concrete and clear directions in two different strategic intents for M&A.
This study is relevant for the field of International Business and Management because it researches a phenomenon that is very much alive in the business community at present. Looking at cross-border transactions does not only legitimate the international component of this study, it is also of extra interest as cross-border M&A seems to invest more heavily in PMI path and cross-border deals are overshadowing domestic deals in size and impact (Kang et al. 2006, UNCTAD world investment report 2006).
3. METHODOLOGY
3.1 Research Method
The first step in the methodology cycle is the choice of research method. In search for a suitable research method Yin (2003, pp. 3) discusses five different choices (see table 2) that cover the most widespread forms of research methods. Yin (2003, pp. 4) stresses 3 steps in determining the most appropriate method for a certain research problem.
The researcher should base its choice for the research method on: 1) The type of research question
2) The extent of control a researcher has over behavioural events, and 3) The degree of focus on contemporary as opposed to historical events Table 2: Relevant situations for different research strategies
Strategy Form of research question Requires control over behavioral events? Focuses on contemporary events?
Experiment How, Why Yes Yes
Survey
Who, what, where, how
many, how much No Yes
Archival Analysis
Who, what, where, how
many, how much No Yes/No
History How, why No No
Case Study How, why No Yes
Source: Yin (2003) pp. 6 1) The type of research question
The first condition for the choice of research method that Yin (2003) describes is the form and type of the research question that should be answered. The ‘how’ question in the research question: How can
post merger integration strategy design lead to value creation in Dutch cross-border M&A transactions of different strategic intent?, points to the explanatory and descriptive nature of this study.
which should provide insight in PMI areas to focus on in M&A’s with different strategic intentions in order to create value. As can be seen in table 2 ‘how’ and ‘why’ questions are likely to favour the use of case studies, histories, and experiments as research strategies.
2) Extent of control over behavioural events
Having distinguished the first selection in research methods, further distinction between the three remaining possibilities: case studies, histories and experiments is necessary. This is when the second selection criteria: extent over behavioural events comes in to play. In this research the researcher has no control over the behaviour of the phenomenon studied, eliminating the possibility for an experiment. This leaves histories and case study as possible research strategies.
3) Degree of focus on contemporary events
Having eliminated all but two research method possibilities we look at the degree of focus on contemporary event to make a final distinction of suitability of the research strategy. When there is no access to real-life information like events that happened in the ‘dead’-past, histories are the preferred research method. When dealing with contemporary events case studies are the preferred method because the case study equips the researcher with two powerful possibilities for data collection: direct observation and interviewing. This study deals with M&A deals occurring in recent history, qualifying it as a contemporary event, this makes the case study method the preferred research strategy for this study.
3.2 Case study design
Pursuing a qualitative research method like the case study, aims to create an in-depth understanding of a situation. ‘It is designed to tell the researcher how and why things happened and to describe, decode and, translate more or less naturally occurring phenomena in the social world’ (Cooper & Schindler, 2006, pp. 196).
studies are effective to describe an intervention and the real-life situation it occurred in’ (Yin, 2003, pp. 15). Furthermore, case studies are an often used method for researching PMI strategies (Pautler, 2003; Epstein, 2004; Mitleton-Kelly, 2006)
3.2.1 Type of research design
Yin (2003) describes four types of case studies (see table 3) that distinguish between including one or multiple cases in its sample and using single or multiple units of analysis.
Table 3: Basic types of design for case studies Single-case Designs Multiple-case Designs Holistic (single unit
of analysis) Type 1 Type 3
Embedded (multiple
units of
analysis) Type 2 Type 4
Source: Yin (2003), pp. 39.
This research will conduct a multiple case study. It will use multiple M&A deals in its sample. The literature review explained the choice for growth and efficiencies as the strategic motives for M&A that are researched in this study. For this strategic motive a number of cases will be investigated to ensure that the research question is answered for this specific strategic M&A goal. The cases will be selected on their strategic intent; however, as M&A deals will often have more than one strategic motive some other strategic motives will be present in the cases. In paragraph 3.5 the sample criteria are discussed more in more detail.
Not only are multiple cases necessary to compare the different strategic intentions, it also gives this studies distinct ‘advantages in comparison with single-case studies as the evidence is considered stronger and the overall study more robust’ (Yin, 2003, pp. 45). The units of analysis in this research are multiple; it uses the M&A deal, value creation, strategic intent and, post merger integration strategy as units of analysis. The characteristics result in a Type 4 case study the so-called ‘embedded multiple- case study’ approach.
3.3 Data collection method
This research will lean on two sources of data. The main method of data-collection in thesis will be the interview; the second source of data will consist of documentation.
3.3.1 The interview
One of the most important sources of information retrieval in case studies and qualitative research is the interview (Yin 2003, pp. 84; Silverman 2000, pp. 122; Cooper & Schindler 2006, pp. 204; Flick 2006, pp. 155). Yin (2003, pp. 84); Flick (2006, pp. 156); and Cooper & Schindler (2006, pp. 204) identify three main stream interview types; The structured interview in which the researcher follows a detailed questionnaire similar to the survey, The unstructured interview which has an open ended nature with no specific questions or topics set in advance, The semi-structured / focused interview which deal with both open and closed questions.
This interview uses the semi-structured interview approach as this interview style enables the interviewer to target both context and his propositions. This approach deals with three types of questions (Flick 2006, pp. 156). First are open questions that may be answered to provide some of the important context, specifics and, perspective. Second are the theory / proposition driven questions that stem from literature and/or are based on the researcher’s theoretical pre-assumptions. ‘The relations formulated in these questions try to make the interviewee’s implicit knowledge more explicit’ (Flick 2006, pp. 156). Furthermore, with these questions the interview can test whether the theory complies or differs with the views of the interviewee’s. Third, the confrontational questions that test the statements given in the theory/proposition driven questions.
Albeit that the interview is a widespread and often preferred method of data collection one should be cautioned by the pitfalls of this data gathering technique. Weaknesses of the interview as data collection device are the risk of biases by poorly constructed questions, poor recollection of facts, response bias and, reflexivity (Yin, 2003).
The interview is included in appendix C. 3.3.2 Documentation
Documentation will be used to cross-reference the information retrieved in the interviews. The retrievability of relevant documents is expected to be highly limited due to the confidential nature of M&A and integration proceedings. Newspapers are expected to play a big role in the cross-reference as well as some internal documents.
3.4 Sample
thus is on based on theory (Flick 2006, pp. 123, Silverman 2000, pp. 105). ‘This procedure is suitable for analyzing, differentiating and testing assumptions about common features and differences between specific groups’ (Flick 2006, pp. 125).
The sample of cases to investigate was chosen based on the following criteria:
- The merger and acquisition transactions have to be Dutch cross-border deals, meaning that the acquirer, the target or one of the two merging companies settles in the Netherlands and the other party settles outside of the Netherlands.
- The sample of researched M&A deals will consist of at least two ‘growth’ deals and two ‘efficiencies’ deals. With case studies such a sample size is sufficient because of the rich, qualitative data sources (Yin, 2003).
- None of the M&A deals may involve private equity, this means that the buying, or merging companies can not be private equity firms. This criterion ensures that the researched deals show a strategic integration effort.
- The M&A transactions do not necessarily have to be regarded successful by the financial markets. Although a negative reaction of financial markets to an M&A announcement shows that the financial markets does not have faith the M&A will create value (Bartel et al., 2002, pp. 138) it does not mean that the integration is unsuccessful. Furthermore, a lot can be learned by reviewing lessons learnt from unsuccessful integration efforts.
- The M&A transactions have to be closed in the period 1993-2007; the last M&A wave and the current one. The time span ensures that all deals are contemporary and personnel is available that can be interviewed.
- All deals have to bear ‘growth’ or ‘efficiencies’ as main strategic motive for the M&A activity. However, as single strategic intent cases are not likely to occur, overlap in strategic intent is allowed within a case. The strategic intent of the deal will be pre- determined with help of the (company) press releases and experts of Capgemini.
3.5 Quality of the research design
The research design tries to represent a logical framework in which the research goals can be achieved. The quality of research designs are judged by the reliability and validity of the design.
3.5.1 Validity
Validity is defined as ‘the extent to which an account accurately represents the social phenomenon to which it refers’ (Silverman, 2000, pp. 175). Yin (2003) identifies three types of validity; internal, external and construct-validity.
Internal validity
Internal validity will be strengthened by using pattern-matching. Pattern-matching is a technique that compares empirically based pattern with a predicted one (Yin, 2003, pp. 106). The pattern-matching technique in this research will compare the predicted pattern / propositions that were drawn from the literature with the empirical pattern drawn from the interviews. If these patterns coincide this strengthens the internal validity.
External validity
Because the case study method relies on analytical generalization rather than statistical generalization, external validity is one of the major weaknesses of the case study method. The external validity of this research will be assured researching multiple cases and with it creation of replication logic (Yin, 2003). 3.5.2 Reliability
Reliability is defined as ‘the degree of consistency with which instances are assigned to the same category by different observers or by the same observers on different occasions’ (Silverman, 2000, pp.175). The goal is to assure that when another researcher conducts the same research and follows the same steps of this research he/she arrives at the same conclusion.
In this research, reliability of the data are assured by interviewing internal personnel, also when available more than one person was interviewed for every deal. Reliability of the data was enlarged by summarizing the interview in a transcript and letting this transcript be evaluated by the interviewee before use. This way misunderstanding and misinterpretation is minimized. Furthermore detailed steps in the research are documented and explained.
3.6 Limitations of the study
- Limited sample size, the sample will contain only a limited number of cases. This will limit generalizability of the study.
- The strategic intentions, ‘growth’ and ‘efficiencies’ will not be pure intentions, meaning that an M&A deal rarely have only one goal. More likely an M&A has one premium motive and several sub-motives. - Because of the confidential nature of the topics dealt with in this study, cooperating organization valued and required data confidentiality, this mean that all cooperating deals will be referred to in code. This will result in a less transparent research.
- Because of the confidential nature of the information it is difficult to find multiple sources of evidence on the subject of interest. Therefore the study will mainly rely on interview data. This will impact construct validity negatively. Also not all steps in the research can be documented because of confidentiality issues with the participants; therefore reliability of this research is a concern.
4. DATA ANALYSIS & RESULTS
‘Data analysis consists of examining, categorizing, tabulating, or otherwise recombining the evidence to address the initial propositions of a study. Analyzing case study evidence is especially difficult because the strategies and techniques have not been well defined’ (Yin, 2003, pp. 102).
The quote above highlights that the data analysis of case study evidence is a demanding and difficult process. What makes it complicated is that there is no mutual agreed strategy or procedure that can guide a researcher through the analysis process. This chapter will deal with the data analysis and interpretation of the results, it will form the rationale behind the methods that are chosen as well as provide a clear overview of the data.
The chapter consists of five steps:
- First, it will describe the data collection process; it will disclose the final selection of cases and details on the interview and the way they were conducted.
- Second, it will disclose the activities undertaken to prepare and analyze the data, this involves coding, categorizing and labeling the data for preparation and a full description of the pattern matching technique for the analysis.
- Third, the results of the data collection will be presented.
- Fourth, will be the actual analysis of the findings according to the pattern matching method described in step two.
- Fifth and last will be a comparison between the two different strategic intentions; efficiencies and growth.
4.1 Data Collection Process
The following paragraph describes the data collection process of this thesis. The procedure was introduced in the methodological part of this thesis; here the actual process and the results of the collection process will be discussed.
4.1.1 Research sample
The sample was selected according to willingness to cooperate. This initially caused a problem as many of the selected companies refused cooperation due to confidentiality issues or time constraints. The companies that were selected were all approached using telephone and email. This resulted in a final sample consisting of eight cases. The cases that were selected are all Dutch cross-border M&A deals, meaning that either the acquirer or the target is a company that settles in the Netherlands and the other party is foreign. The companies that are included in the sample are active in different industries and all have a deal period that lie between 1993 and 2007.
