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October 5, 2013

Essay on Mergers and Acquisition in Medical Industry

Introduction

            Mergers and acquisitions are a common activity in the corporate world irrespective of the industry in which they occur. Much similar is the case when we talk about and discuss the different dynamics related to mergers and acquisitions taking place in the medical industry. During the course of this discussion we would be shedding light upon some of the trends exhibited by the pharmaceutical and medical device manufacturing industry in terms of consolidation and business amalgamation.
Apart from medical device the segments of consumer health and generics are also some important fragments of global medical industry. It is important to mention here that in all three segments the number of consolidation and mergers that have taken place in European and Japanese markets are the most prominent and greatest in number at the same time. In addition to this it is also necessary to notify here that the number of drugs that have been approved by FDA has also increased from 18 in 2007 to 21 in the year 2008.
Experts believe that the increase in the number of drug approval by the FDA is an indirect indication encouraging the facilitation of greater number of mergers and acquisitions in the medical industry. The increasing number of mergers that are taking place due to various reasons in which low patent of research and development and economic downturn are the most prominent has coerced companies to diversify their areas of interest from manufacturing to service providing sides of the business.
However despite of the capricious twists the economic landscape of global economies seems to be taking, some huge leaps by major kingpins of the pharma industry have also been observed.Some of these strategic moves are worth mentioning. Roche in the year 2008 offered $44 billion for the acquisition of Genentech and upon refusal it raised its bid to $47 billion in 2009. Similarly the $68 billion bid made by Pfizer for the merger of Wyeth and Merck yet again aggravated the field of M&A in the pharmaceutical industry.
 It is also a direct indication for medium and small scale companies dealing and specializing in medical services that they need to hasten their speed of growth or else they will be acquired and merged. The strategy and move of mergers and acquisitions gains pace and momentum whenever the economy begins to move southwards, this is primarily because it is the best time they have to redefine and restructure market dynamics that corresponds with their own financial and managerial interests and simultaneously provides them with the opportunity to shift market from competitive to monopolistic lines, restricting the scope of competition among new players only.

Background of study

            Before getting into greater dynamics of merger and acquisition and the contexts in which they are applied in the medical industry it is first and foremost important to have some background information and introduction towards the dynamics of M&A. A merger is defined as the combination of two similar in terms of sizes (asset valuation) for the creation of completely new organizational entity. In comparison to this acquisition occurs when one organization purchases another company and becomes the owner of the purchased one.
The entire process leading to merger and acquisition comprises of a series of high level negotiations that are conducted between the executive level officials of both organizations as well as other legal and corporate formalities that need to be fulfilled before the venture is completely materialized. According to a survey that was conducted by Watson Wyatt found out that out of all the projects which undergo mergers and acquisitions it is only 33% that were successful enough to cross the break-even point and enter profit making.
In addition to this there were 46% who after undergoing the merger were only able to meet their expenditure requirements whereas the remaining proportion could not even meet that particular point. Along with this crucial as well as vital point that we need to understand here is that M&A basically involves the synergywhich is just not limited to resources and infrastructure but extends to the creation of new ideas, innovative product making and initiating a new series of competitive advantage between different players of the industry.
Hence in order to materialize all these objectives it is important that the management of the company takes complete interest in the decision making that takes place at each level before the entire merger is finalized. It is needless to mention that the leadership of any organization undergoing M&A can play an extremelypivotal role in dictating the success or failure of the entire venture. (Mayrhofer, 2000)
However all these steps which have been mentioned above do not take place in every merger deal that takes place in the pharmaceutical industry and hence it is important that the substantial percentage of such ventures that end up in failure are provided considerable attention so that we can develop a better understanding of the reasons due to which such projects do not triumph. This will also help us in looking into areas which need to be provided utmost attention before any such deal is properly materialized.

Problem Statement

            On the basis of the some of the reasons we have devised regarding the failure of acquisitions and merger projects in the pharmaceutical industry, it can easily be deduced that some of the most important reasons which lead to its failure are the lack of interest shown by senior members of the management and the cultural differences that prevail between the decorumof the two organizations.
During the course of this discussion we would be investigating the effects of these reasons and the subsequent impact that each of these reasons has upon the merger and acquisition ventures when taking place in a pharmaceutical industry.

Purpose of the study

            The key purpose of the study would be to investigate the different reasons on the basis of which any venture related to M&A can be declared a success or a failure. The study with the help of qualitative approaches will also assess the different categories of reasons on the basis of which any merger turns out to be a failure. With the help of these reasons we would be in a better position to understand the different reasons in which a merger experiences a failure in the pharmaceutical industry.
In addition to this these reasons would also help us in comprehending the complications that the pharma industry is confronted with and the different corporate strategies it needs to formulatein order to resolve these problems. It is also important to mention here that with the downturn affecting almost all segments of economy small scale pharma companies are feeling the pinch of surviving in this highly competitive industry.
The only solution they eye is in the form of consolidating themselves with other companies. With the help of this study we would also be able to shed light upon the various ways on the basis of which the process of business amalgamation can take place in the most transparent and legitimate way possible.

Objectives of the study

·         To investigate the different reasons leading to the failure of merger and acquisition operations in the pharmaceutical industry
·         Highlighting the ways in which the process can be completed in the most convenient way possible
·         Authenticating the hypothesis as to whether managerial indifference and cultural differences lead to the failure of merger and acquisition in this particular industry

Research questions

            Some of the research questions which will be discussed during the course of this discussion would comprise of the following:
1.      Why does a merger and acquisition operation fail?
2.      What steps must be taken to prevent the failure of a merger in a pharmaceutical industry
3.      While conducting a merger which departments of the organization along with its workforce should be integrated first and what are the ethical implications applied upon the employees of the company which is undergoing amalgamation?

Significance of Study

            When we talk about mergers in corporate mainstream their application and usage is much more similar to marriages in normal life. It is more or less the fusion of two or more organizations which like marriage will only be able to last long if the key stakeholders of the pact perform their roles and duties with utmost dedication and show mutual respect towards each other.
Even if one of them refrains from implementing upon his responsibilities it would become very difficult for the relationship to last long. The key significance of this study would be to understand the ways and procedures due to which this relationship undergoes a decline to the brink of extinction.
Furthermore with the help of this study we would also be in a better position to develop an understanding regarding the different ways which play their respective roles in leading to the failure of the merger. Also, with the help of this study we would be able to develop a clear view regarding the corporate practices and procedures which need to be applied in order to prevent the materialization of causes that may lead to the failure in the most effective way possible.
Since the early 1980s, the operations of M & A significantly evolved not only at American or European level but all over the world. After the dramatic rise in the number of merger and acquisitions in the second half of the 1980s, the 1990s saw a robust surge in cross-border mergers coupled with a rise in deal value. The phenomenon of M&A is gradually expanding to a broader set of companies and countries (Angwin, 1997). In 2000, the value of cross-border M&A exceeded a trillion dollars, of which over half was made by European companies. If they have long preferred cooperative forms reconciliation (strategic alliances, joint ventures, etc), they now also show a growing interest in mergers and acquisitions.(Dussauge and Garrette, 2000).
Available studies reveal that the failure rate of M &A is comparatively higher since one operation of two has been recorder an uneventful and unsuccessful experience (House, 2000, Habeck et al., 2001). The risk of failure is further highlighted in cross-border dealings because in such a process the cultural differences occur only undermine the integration process. (Franck, 2000).
At the outset, it goes without saying that necessary tools should be in place that would prove beneficial and favorable to the integration process of the cross-border mergers. Before examining the concepts and practices intercultural management, it is necessary to highlight the specificities of international mergers and acquisitions.
Mergers and acquisitions may be explained as agreements struck between two or more major companies who opt to share their resources (technological, production, trade, etc) to reach some common goals. It should be kept in mind that this kind of agreement is always of strategic nature. Of course, the company does not merge out of its will-to-volunteer. Rather the merger always has a productive purpose and value of profitability. 
 As opposed to cooperative agreements, mergers and acquisitions eventuate in the integration of related entities which somehow also causes the loss of independence for at least one of the actor. However, each case of merger is different in nature. As a result of merger, actors risk their existing heritage to see the possibility of new avenues of productivity inherent in the process of merger and acquisition. In simple words, one firm takes full control of another entity integrates the latter within it.   
Mergers and acquisition can also bring two arch-rival companies. The condition is that they both should be targeting certain markets with the same products. For example, a bank can take hold of another bank which is on the brink of bankruptcy.  Likewise, they can bring together the business entities of the same nationality (domestic agreements) or players of another nationality (international agreements). (Mayrhofer, 2000)
M & A transactions can be said to be powerful and effective both in terms of capital and operations. It is incumbent on the combined or say recently merged entities to identify and allocate shares to the existing shareholders.
The intercultural management practices play a pivotal role in the process of mergers and acquisitions provided that the activities of the company are in harmony and well-coordinated. As seen in any other form of reconciliation, the pre-requisite for the search of synergies is that both should be reorganize and gelled in together.  (Feldman and Spratt, 2000, Habeck et al. 2001)
The accomplishment is becomes even more a compounded process when there are involved two players belonging to different nationalities.  (Guth, 1998; Mayrhofer, 2001).Cross-border alliances in the process of integration are frequently complicated, chiefly due to the differences between actors. The cross-border alliances typically leave an impact on the practices of business management and accentuates the differences between organizational cultures (Bollinger, 1987). In this regard, it must be kept in mind that the problems of cultural incongruity leave a negative impact on the outcomes ofM & A (Chatterjee et al., 1992) and the acquisitions generally do not come up to the expectations of the investors. This is quite pertinent to specific operations that are characterized by great cultural distance between actors. (Datta and Puia,1995).
The success of a merger or acquisition commonly hinges on the presence of a development project and a common yet effective human resource management. Thus, it is important that stakeholders understand the benefits of consolidation andstrive to achieve all the objectives. At the social and human management level, it is vital to foresee and recognize the changes necessary to make the operation a success.
The creation of the new venture demands the creation of joint teams and striking  a balance in the opus of working groups,  the division of responsibilitiesand assignments of employees. Keeping in mind the interests of different actors, the role of communication is of utmost value. The communication must be progressive having an inherent ability to gauge and facilitate the success of the progress. Afterwards, there must come about the cultural changes as each party seeks to ameliorate its methods, tools and the style of management.  (Mutabazi et al.1994).
The formation of a new corporate culture that tends to assimilate the positives of each culture works well in avoiding conflicts. In this perspective, the business association of different nationalityrent is an additional source of difficulties. Differences in cultures are internal andcompounded by cultural differences among countries (Egg, 2000).
Given the fact that culture is usually seen as an impediment to the success of mergers and acquisitions, only an effective management style can play its part in making these operations a big success. (Feldman and Spratt, 2000).
Effective use of cross-cultural management tools is indeed likely to improve the performance of mergers and acquisitions.The discipline of intercultural management stems from the United States in the late 1970s on the basis of international management and management (Harris and Moran, 1993). The empirical study conducted by G. Hofstede on national culture and corporate culture has very much contributed to its increase in the field of management science (Hofstede, 2001). Unlike the international management (which brings into consideration all the essential functional activities of the business) and management, intercultural management lays an emphasis on organizational behavior and human resources (Adler, 1991).
The intercultural management lays stress more particularly on the influence of culture (national and organizational) on the perceptions, interpretations and actions of actors. This system has been learned duringthe socialization process. As this socialization takes place in a specific context, national culture, that reflects the values, thoughts and behaviorsof a company, plays an important role, despite the Universalist discourse of globalization. In terms ofmanagement, the cultural system provides to individual scognitive abilities and specific methodsto solve problems. As a result, employees from other countries are likely to find different solutions facing the same problem.
Research focuses on intercultural management study the interactions of actors from systemsdifferent. Various researches are interested in finding "critical incidents" which exist because of the cultural differences (Barmeyer, 2000). Critical incidents often take place due to of communication and cooperation when expectations and behavior of actors diverge and result in cultural conflicts (Batchelder, 1993).
Issues associated with intercultural management are important in the context of mergers and acquisitions where employees of several countries bound to coexist professionally. Nevertheless, the differences between systems that might result in misunderstandings and conflicts are recurrently taken too lightly.
This underestimation of the cultural factor can appear to be surprising due to the fact that a business combination is basically a settlement of men. These are the people who create, follow or divert the rules and structures of companiesand that make the organization live, work and conductsprofits, it is their ideas, strategies, thoughts anddecisions that turn into actions (Chanlat, 1990) and contribute to the success or failure of any particular merger or acquisition.
For a number of decades, there have been various researches conducted on the issue of cross-border mergers issue of convergence or divergence, because it determines to a large extent the strategy of alliance (Adler, 1991& Child, 1981). A strategy that assumes the convergence advocates diffusion or strong harmonization of different systems. The differences between the organizations and actors are unimportant; they will approach through a "common culture" and to find a "compromise"for the operation of the newly formed company. Conversely, the strategic approach marked by the design of the divergence takes into account the cultural diversity and the stability of particular systems.
In mergers and acquisitions, convergence vs. dialectics, divergence relates more particularly to three areas: organization, culturebusiness and human resource management. The overestimation of culturecan lead to misunderstandings may be the main elementand conflict to explain the problems encountered by the management. Methods of management areuniversal and can be strongly influenced by their culturetransferred and applied in home and meet with resistance within different contexts when applied in othercontexts
M &A and cultures are intermingled cultures that usually resist changeand spread. Therefore, we must generatestronger influence, adaptations and trade-offs through the implementation of intercultural management.





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