This chapter discusses the main issues of the dissertation. The hypotheses and arguments will be discussed in the following sections: Section 3.1 will offer the introduction of the role which relative size plays in M&A deals. Section 3.2 will define what relative size of combing firms is. Section 3.3 will discuss the issue of relative size which relates to short-run (i.e. post-integration stage as the 4th stage in 5-S model) post-merger performance. Section 3.4 will discuss the arguments of relative size relating to long-run (the 5th stage in 5-S model) post-merger performance.
Section 3.5 will provide the summary of this chapter.
3.1 Relative Size of the Combining Firms in M&A Deals
Organization size shapes the structure design of company and plays an important in culture composition (Greenburg 1999). It could be inferred that different organization sizes would result in different cultures. Therefore, talking about mergers and acquisitions, two combing firms with different organization sizes might yield culture integration problems. Poor culture fit or incompatibility is likely to result in considerable fragmentation, uncertainty and cultural ambiguity, which may be experienced as stressful by organization members. Such stressful experience may lead to their loss of morale, loss of commitment, confusion and helplessness, and may have a dysfunctional impact on organizational performance (Carey 2000).
Relative firm size between two firms is also connected to the relative power of competition and cooperation. Intuitively speaking, when one power is largely greater than the other, the relatively smaller power might be integrated into the large one
effectively might be harder.
The well-known merger example can be taken by the case of Daimler-Benz and Chrysler, which took place in 1998, however, did not turn out to be very successful.
The major issue behind this merger case is believed to be the culture conflicts between two almost equal firms combining into one. The nine-year merger ended up with the Germany Daimler group selling 80.1% shares of Chrysler to a private equity group in the middle of May, 2007 (Carnews 2007).
Different from Daimler-Chrysler, the example of Cisco turns out to be a successful one. Cisco has acquired 125 companies since 1993, and is expected to acquire more in the future. The most acquired companies are relatively much smaller than Cisco. With acquiring those smaller firms, the net sales of Cisco have been grown from $2 billion in 1995 to its fourteen-times, $28.5 billion, in 2006 (Cisco 2007).
The two extremely different cases above might have released some information about the issue of relative size: though both mergers and acquisitions are combinations of companies, the results can be very different. Relative size of the combined firms could be assumed as a probable factor for post-M&A performance, because different sizes of combinations would lead to different levels of culture integration conflicts.
3.2 The Definition of Relative Size
Relative size of the combining firms refers to the relative firm size between an acquiring company and its target company.
Agrawal et al. (1992) argued that the acquisition of a relatively large target is likely to be a more important economic event for the acquirer than is the acquisition of a
relatively small target. Thus, if the post-merger underperformance reflects the impact of the merger, underperformance should be greater when the target is relatively large.
However, their investigation was only based on market assessment by measuring the share returns. Therefore, in this dissertation, the investigation would be further extent by using both market and operating performance assessments. In addition, the relatives size issue will be invested both in the short-term and long-term, seeing how relative size between combining firms influence the post-M&A performance.
In the short-term, the investigation would focus on relative size between combining firms and its connection to the performance percentage change comparing to the pre-merger stages of the newly combined firms. In the long-term, the investigation would be extent to how different relative size between combining firms would influence the long-term post-merger performance. Moreover, the impact of the relative size would also be observed by seeing if there is a trend as the merger integration time goes by. The following sections will lead more detailed discussion of the investigation.
3.3 The Impact of Relative Size on Post-merger Performance in the Short-Run
This section is divided into two subsections, where section 3.3.1 will develop the first argument of the post-merger performance in the short-run, and section 3.3.2 will develop the argument of the relative size issue connects to post-merger performance in the short-term.
3.3.1 The Argument for the Overall Short-run Post-merger Performance
Post-M&A integration is such a big deal because organizations have different
personalities and attitudes of dealing things just like people (Drennan 1992). When it comes to M&A, culture differences between combining organizations become one of the most critical issues in corporate integration. Two reasons explain the hard points of integration: First, the compositions of culture are very complex. An organization’s culture is embodied in its collective value system, beliefs, norms, ideologies, myths and rituals. They motivate people and become valuable sources of efficiency and effectiveness (Sudarsanam 2003). Hence, there are so many dimensions have to be taken in to consideration for integrating two different entities well. Second, most employees resist change. Once employees having been used to one culture are forced to adjust or adapt to another culture, the culture change become stress and will negatively reduce employees’ performance (DuBrin 2005). Since the compositions of culture are very complex, and most people resist change, to completely integrate two organizations well takes numerous time and efforts.
Due to necessary time and efforts for complete integration, it could be implied that at the beginning of post-M&A stages, the new start integration might be in an anarchical condition, and this kind of condition could influence performance of the combined firms. It is pointed out by Angwin (2004) that the first 100 days is a critical period for post-M&A success, because most integration actions are launched at the time.
Combing the arguments of the probable anarchical condition and the critical period of the first 100 days, the first issue in this dissertation is to investigate post-M&A performance of newly combined firms in the first quarter, seeing if the phenomenon of relatively negative performance exists in those firms.
3.3.2 Connecting the Relative Size Issue to Short-run Post-merger Performance
As mentioned in section 3.1, relative firm size between two firms is connected to the
relative power of competition and cooperation. Thus, if the post-merger underperformance reflects the impact of the merger, underperformance should be greater when the target is relatively large (Agrawal et al. 1992). Due to the argument above, the investigation would be done by seeing the relation between relative size and post-merger performance in the short-term.
In addition to the issue of relative size between combining firms, ‘absolute size’
would also be discussed at the same time. The absolute sizes here refer to the size of an acquirer. The reason for discussing the absolute size is that though relative size between combing firms, representing the relative power between two entities, might play an important role in post-merger integration, the absolute size of the acquirer might also influence the integration results because larger acquirers might have much more sources and integrating ability than smaller acquirers, so that the results that how synergies are realized might be different. After all, to consider both relative size and absolute in merger deals make the overall discussion more completed and robust.
3.4 The Impact of Relative Size on Post-merger Performance in the Long-Run
In the investigation of post-merger performance in the long-run, two main aims are presented in this section.
Firstly, because the empirical evidence of the overall post-merger performance is still controversial as discussed in the previous chapter, the dissertation aims to analyze how firms perform after mergers within five years.
Secondly, to continue the investigation of relative size in the short-run, the dissertation aims to investigate how the impact of relative firm size changes (if any) in
the long-run.
Through the investigation of both short-run and long-run, the issue of relative firm size can be more completely analyzed and discussed.
3.5 Summary and Conclusion
Chapter 3 discusses the main issues of the dissertation- Does relative size between combining firms matter? Because organization size shapes the structure design of company and plays an important role in culture composition, combining companies with different sizes in M&A deals might lead to different post-merger performance.
Therefore, this dissertation assumes relative size of the combined firms to be a likely factor for post-M&A performance.
In order to verify the arguments above, the main investigating objectives in this dissertation are to:
1. Analyze the short-run post-merger performance for the first quarter, seeing if the performance is relatively negative due to the anarchical condition of the newly combination.
2. Analyze whether relative size of the combining firms is a factor for short-run performance change.
3. In addition to relative size, analyze whether absolute size of the acquiring firms is a factor for short-run performance change.
4. Analyze the long-run post-merger performance for up to five years after mergers, seeing how the selected companies in this dissertation had performed.
5. Analyze whether relative size of the combining firms is a factor for long-run performance change.
After generalizing the main objectives of the dissertation, next chapter is going to provide suitable research method and data selection criterion.