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9.2. Subjective Motivational Factors

If you Google the track record of corporate takeovers world wide, the literature reveals that its failure rate is substantial, characterised by mediocre acquisitions undertaken by inept management. Even at the millennium after a long bull run (before the dot.com and banking crises kicked in) Lane, Stewart and Francis (2001) reveal that post-merger indicators of investment performance, such as the return earned by shareholders from cash dividends and capital gains, are frequently worse than the average performance of other firms in respective industries.

A significant factor in determining the success of acquisitions is the establishment of a corporate strategy and a rigorous acquisition plan. Historically, a lack of pre-planning alongside a reluctance to quantify the benefits expected to be gained from a merger is a common theme throughout the literature.

For these reasons, a prerequisite for any acquisition strategy should be a rational consideration of the objective motivation based on shareholder wealth maximisation. However, a variety of other managerial motives exist that are not derived from commercial considerations. They are termed subjective, yet may be supported by an elaborate rationale

Subjective Managerial Motives for Acquisition or Takeover

Figure 9.2: Subjective Managerial Motives for Acquisition or Takeover

As Figure 9.2 reveals, two such motives relate to fear and obsolescence. The former is premised on the belief that unless the company expands or diversifies, larger companies will destroy it. This sets in motion a process of accretion. Obsolescence is connected with ageing organizations that display increasingly rigid and systematized bureaucracies. The scope for individual initiative and spontaneity are stifled, which results in both an obsolescent organization and an obsolescent management. One solution to the problem that can be traced back over decades is to buy in management through corporate acquisition, if only for its Chief Executive.

Unfortunately, both fear and obsolescence carry with them unconscious underlying attitudes. Fear initially leads to a denial of being afraid and then an attempt to "tighten up" the company and to turn it around. Obsolescence produces a defensive attitude of superiority, typically based on the firm's longevity and to a redoubling of effort. The effect of these underlying attitudes (and the fact that in a merger the acquiring company will be the dominant party) tends to produce a condescending attitude toward the acquired company and efforts to manipulate and to control it.

Controlling behaviour is the pivotal issue. The dominant organization believes that it must incorporate the same processes and procedures in all of its components. But the imposed control systems may well stifle the very qualities of initiative and spontaneity that lay behind the initial acquisition. What may emerge is resentment, contempt and loss of innovative personnel, all of which necessitates buying in yet another completely new management group. However, the replacement executive might be more bureaucratic, given that their brief will be to re-control the organization. This control focus on the part of the host organization is therefore self-defeating.

Of course, fear and obsolescence are only partial explanations of the quest for corporate growth. As causal factors, they only apply to those companies who react to the growth of others. They do not explain the preoccupation with growth for its own sake, characterised by the "fast track" corporate sector associated with global conglomerate mergers, management buy-outs (MBO's) and the leveraged buy-outs (LBO's) of mature public companies by venture capitalists since the 1980s. Here, the desire for growth is premised on the belief that "size matters". Diversification through participation in several industries increases the chance of success. However, the downside is that without serious commercial considerations, diversification also increases the possibility of failure.

Given the separation of ownership from control and a lack of corporate governance, takeovers may also be instigated by management without shareholder consultation (a breakdown of the agent-principle relationship). Again, predatory management may be motivated primarily by growth for its own sake measured by size criteria (such as sales turnover, assets and number of employees) and a perception of increased power, prestige and security which this brings. Their concern for growth in earnings may be secondary or diluted by other personal and group goals, which leads to satisfying profit behaviour. On the other hand, responsible management who behave optimally should only be interested in shareholder wealth maximisation, evidenced by the growth of corporate stock values through improved earnings and hence dividends and capital gains.

Thus, power, size and prestige are intermingled managerial goals, which may be achieved in the short-term by a policy of acquisitions. But they may conflict with the security provided by the pursuit of shareholders' long-term financial objectives. Nor is this a recent phenomenon. As Maldanado and Saunders observed way back in 1981, acquisitions often fail because management satisfy their own interests, rather than those of shareholders.

A subject we shall reconsider in our final Chanter.

Summary and Conclusions

Subjective managerial motivational factors may be supported by an elaborate rationale. However, they are no substitute for normative objective goals based on a comprehensive analysis of a company's strategic commercial considerations. This should precede any acquisition to satisfy shareholder expectations post-takeover.

If a takeover is not part of a carefully conceived strategic corporate plan that reflects commercial factors other than earnings potential (for example asset stripping) the predatory company may inherit a poor return on investment, just like takeovers premised upon the subjective managerial goals of growth, prestige and security outlined earlier. As a consequence, investor confidence will evaporate rapidly and equity prices will tumble.

Selected References

1) Lane, K., Stewart, R. and Francis, S., "Merger and Acquisitions: What the Stock Market Wants to Know About a Merger", Strategic Merger and Acquisition Practice of Price, Waterhouse and Cooper (Philadelphia) 2001.

2) Maldanado, R. and Saunders, A., "International Portfolio Diversification and the Intemporal Stability of International Stock Market Relationships", Financial Management, Autumn, 1981.

 
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