A merger is the combining of two companies where one corporation is completely absorbed by another corporation.

Mergers are classified under two categories namely; horizontal mergers and vertical mergers. A horizontal merger takes place when two companies competing in the same market merge or join together. e.g Ford and Volvo. Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.

The success of mergers depends on how well the deal makers can integrate two companies while maintaining day-to-day operations. Each deal has its own downside which are influenced by various factors such as human capital component and the leadership.

Much of it depends on the company’s leadership and the ability to retain people who are key to the company’s ongoing success.

Recent research shows that many companies are going in for mergers and acquisitions (M&A) without conducting a proper due diligence. M&A may help the parent company in increasing its market share, lowering the cost of production, increasing competitiveness and improving the profit, but contrary to popular perception this is not always the case.

According to the survey conducted by Mckinsey and Company, nearly 61% of the M&A fail as the companies are not able to meet the set targets. M&A fail because of over estimating the value of the Target Company, debts and when shareholders and employees interest are overlooked.

In 1998 the German auto car maker Damlier Benz merged with Chrysler Group for a value of $36 billion However, after a few years, the value of Chrysler fell to a mere $7.4 billion. The merger proved to be a failure. Damlier Benz never conducted a proper due diligence before it merged with Chrysler.

M&A are feared amongst the employees because of job loss. Some employees are laid off to enable the company to have some a breathing space on its balance sheet. The merger between UBS and SBS in Switzerland led to a job loss of 1,385 employees.

The cultural aspect highly affects companies during M&A. No two companies can do business in same way. The working and organization culture of every company is different.

A company may be different from the other on the basis of the way they project themselves in the market, how they treat customers, suppliers and employees, how much freedom is given to the employees and so on.

The merger or acquisition between two culturally different companies eventually leads to lower productivity if this issue is not addressed by the management right from the beginning.

M&A also fail because parent companies sometimes neglect the interest of employees and the shareholders. The shareholders who are being taken over often feel hostile.

M&A make the employees shift their focus from productive work to issues related to conflicts, layoff, compensation etc. It also puts a huge question mark in the minds of the employees regarding their job security.

Most of the big companies these days are indulging in M&A and in the coming years this process is only going to get bigger. As mentioned earlier, most M&A are not successful. It is of utmost need that the success rate of M&A be improved.

This can only be done if all the aspects involved in M&A are given proper attention. Before a merger or an acquisition actually takes place, a thorough due diligence of the target company should be done. Based on that result, the parent company should decide whether to go ahead with the merger or acquisition or not.

Happy E. Mukama is a Lawyer