The Three-Stage Model in Mergers and Acquisitions

By: Together Abroad 11-01-2017 3:43 PM
Categories: ** HR Change Management,

In the realm of big business, mergers and acquisitions (M&As) are commonly used to strengthen a company’s position and viability in the marketplace. M&As represent a profound change for a business and throw up a lot of challenges, which must be tackled before a merger or acquisition can be successful. These include financial, strategic and legal issues, as well as those relating to HR. As with most forms of organizational restructuring, M&As incur a human cost, affecting not only the employees of the companies in question, but also their stakeholders. Failure to address these challenges can lead to serious difficulties and even prevent a successful M&A altogether. It is therefore vital to understand the challenges related to M&As in advance. One of the models that help to explain the M&A process is known as the “Three Stage Model”.

Before going into detail on the Three Stage Model, it is first important to clarify the difference between mergers and acquisitions. In a merger, two companies join together in order to create a new legal entity, ideally incorporating the best elements of the two original companies. In an acquisition, one company buys out another if it suits their needs. There are many reasons why a company will decide to merge or acquire. They can include a desire for market dominance, leading to economies of scale and reduced competition. There can also be issues related to diversification, whereby the buyer assumes that acquiring a diverse business is a less risky means to diversify its stock portfolio.

The Three Stage Model for M&As has been presented in detail by Habeck et al (1999). The three stages in question are pre-combination, combination (involving the integration of companies) and solidification and advancement (which forms the new entity). Pre-combinationrefers to processes that take place before the M&A is completely legal. A justification is presented, as well as a plan on looking for partners in the venture, searching for possible alternatives, and finalising how the M&A will take place. This stage sets the foundations for all activities carried out in stages 2 and 3. Planning is key. As discussed in Habeck et al (1999), underperforming M&As result from poor planning in stage 1 in about 80% of cases. Stage 2 is focused on combining and integrating the companies. Schuler et al (2004) outlines four approaches involved in this stage: portfolio, blending, new creation and assimilation. In the portfolio approach, the managers in the original companies retain a large degree of autonomy. Things carry on largely as they did before the M&A, with the acquired company functioning as an autonomous subsidiary. Blending incorporates the best features of each individual company and forms a new unified organization. New creation involves the formation of a new company that is completely different than the original partners. Finally, assimilation refers to the complete takeover and control of the target company, an approach typified by General Electric and Siemens. Stage 3 involves solidification and assessment of the new entity. This stage includes fine-tuning as the M&A takes shape.

HR is crucial in all three stages. According to Mitchel Lee Marks, a management consultant based on San Francisco, “Many CEOs gloss over softer HR issues, including potential cultural problems, only to realize later that they have made a huge mistake”. Often, the major reason for an M&A is the acquisition of new talent in the first place. Successful M&As take place in the context of a knowledge pool relating to the M&A process, which must be distributed among employees to have to the biggest impact. During Stage 2 (integration)the most important HR issue for the success of the integration is the integration manager. Projects handled by the integration manager retained a higher level of the acquired company’s employees and achieved business-related goals earlier.

The Three Stage Model for mergers and acquisitions is a simplified model describing the often-complex activities involved in both endeavours. However, it still provides a useful lens through which to formalise the M&A process. The ability to structure a complex process in a clear and systematic way allows others to focus on the necessary conditions for successful M&As, which stage they belong to, and to look at case studies to see what companies did at each stage and in what way. Employees working in HR, as we have seen, play a crucial role throughout all 3 stages of the M&A process. More focus is needed to ensure their value is accepted and utilized in future M&As.

Adam Watson

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