Mergers and acquisitions integration process, the case of a

company in the petroleum industry

Thesis proposal – Paper C

Name: Filip Sofia

Student number: 11881771
Thesis supervisor:
Date: January 15, 2018
Word count: 2920, 0
MSc Accountancy & Control, specialization: Accountancy
Faculty of Economics and Business, University of Amsterdam
 Statement of Originality

This document is written by student Sofia Filip who declares to take full responsibility for the
contents of this document.

I declare that the text and the work presented in this document is original and that no sources
other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of
completion of the work, not for the contents.

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Contents

1 Introduction ........................................................................................................................................ 4

2 Literature review .........................................................................Error! Bookmark not defined.

3 Theoretical framework .................................................................................................................... 9

4 Research method ............................................................................................................................. 10

References ................................................................................................................................................. 13

Appendices ................................................................................................................................................ 14

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1 Introduction
Merger and acquisition strategy has been used for many years and it’s still a popular trend
in business, despite the fact that in a large number of cases it failed to produce the promised
results. Reasons for that could be numerous:

 too high premium paid for the acquired company;

 integration problems;
 lack of capabilities or experience on the part of the executives;
 cultural incompatibility and unrelated businesses (Hitt et al, 2009).

Even if the rate of M&A failures is higher than the successful cases, this fact hasn’t
stopped companies from following this strategy.

The motives behind M&A resonate with company’s desire to create:

 value;
 increase diversification;
 enhance innovation;
 achieve integration; and
 expand in new markets (Hitt et al, 2009).

Even though it’s risky, the created synergy between the acquiring and the target allow the
firm to grow and pursue value creation.

Nevertheless, the complexity of the post-acquisition integration process represents a

challenge for most of the companies because of such factors as:

 acquisition type;
 motives; or
 industry context.

But the main thing about integration is to coordinate and control the activities of
combining organizations at all levels of the company:

 technological;
 informational;
 social; and
 cultural.

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 This will enhance the probability of acquisition implementation success and further
development.

The need to understand the specifics of the complex M&A motivated the research question
for this study. The question given by the author to herself is as follows:

How the integration process of mergers and acquisitions takes place in the petroleum
industry and how it is being influenced by the decisions made by key management?

There are several reasons for undertaking this study.

First, mergers and acquisitions continue to be a method, which replaces organic growth for
many companies. That is why understanding how and why managers pursue this strategy is
highly important.

Second, the post-acquisition integration is a complex process, which requires

comprehension of the sub-processes involved and delineating the impact of managerial
actions on the acquiring and acquired companies.

Third, value creation, which is derived from this integration process, results from
important and impactful synergies at more than one levels, such as:

 cultural;
 economic; and
 technological.

The levels mentioned above benefit and ensure value creation not only for internal users
but also external, such as:

 clients;
 suppliers;
 creditors;
 state;
 employees; and
 shareholders.

Speaking of the employees and the managers, they largely contribute to value creation,
and their understanding of this concept is important because after a M&A;

 the organizational context changes;

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  their work environment changes in terms of procedures, tasks, targets, team-work,
new people, new information systems requirements; and
 it’s actually them who build the value creation process within company.

This study offers the following contributions.

First, it addresses the calls for greater research focusing on:

 acquisition implementation and effective integration (Angwin, 2000; Haspeslagh

and Jemison, 1991;);
 calls to go into the field and do prolonged studies in M&A integration, with
observation and interviews as the primary methods of data collection (Meglio and
Risberg, 2010).

Second, this study expands the literature on the integration process of mergers and
acquisitions by providing new insights of this multiple-layer process impregnated with
particularities of the petroleum industry.

Third, existing research provides only a limited and insufficient understanding of this
multidimensional phenomenon, so this investigation will fill this gap in the literature.

This study is structured as follows.

 The next section provides an overview of the literature regarding the integration
process of mergers and acquisitions.
 Then, it is followed by the presentation of the theoretical framework of the paper,
which will explain how efficiency gain are connected to M&AS. The following
section describes the research method and design used to investigate this topic.
 This is succeeded by the case and the case findings discussion.
 The study concludes with a summary of the main ideas and several suggestions for
future research.

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2 Literature review
There is a growing body of literature and academic research on the topic of mergers and
acquisitions. Given that this strategy is seen as a solution for further growth and development
of a company, it’s important to understand the integration process through which a company
attains its goals and enhances value creation in short and long term.

Mergers and acquisitions are described as processual approaches, which

 can provide new insights into the dynamics of organizational change;

 historical developmental perspective; and
 sequences of incidents and activities (Van de Ven and Huber, 1990).

Value creation is not static. It takes place not just after the announcement of M&A or
when the deal is closed, but also during the post-acquisition phase. What happens in the
organization during the integration and how people experience the process are questions
which will be asked in this study.

The strategic literature highlights the need for post-acquisition organizational fit, which has
two dimensions:

 strategic interdependence;
 and organizational autonomy (Haspeslagh and Jemison, 1991).

The first concept is connected to capability transfer and resource sharing, while the second
is concerned with the extent to which an organization’s culture is maintained or dissolved in
terms of target discretion over decision-making (Angwin and Meadows, 2014)

Haspeslagh and Jemison (1991) identified three post-acquisition integration approaches.

First is preservation, which is characterized by low interdependence and high autonomy;

the result is that the acquired company preserves its way of doing business.

Second are symbiotic acquisitions, which are described by high interdependence and high
autonomy which facilitate co-existence.

Third is the absorption acquisition which refers to low level of autonomy and high level of
strategic interdependence and the acquirer absorbs the acquired business completely and
incorporates it.

Sometimes these approaches can be combined in one integration process, depending on:

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  motives;
 industry sector; and
 company characteristics.

The primary source of value creation doesn’t consist of physical or financial assets, but is
achieved from intangibles and knowledge-based resources.

For example, in technological settings, where the emphasis is on know-hows and

innovative capabilities, a hybrid post-acquisition integration approach is suited as this transfer
of knowledge doesn’t simply consist in acquiring the technology, but this technology should
be implemented, integrated in order to boost productivity and profitability (Schweizer, 2005).

The concept of capabilities integration relates also to human expertise, skills, interaction
and relationships which allow the assimilation of specialized knowledge within a company
(Ranft and Lord, 2002). Therefore, highly skilled human capital can be considered one of the
most valuable resources.

Chang et al (2014) present a post-M&A perspective of information systems integration,

which underlines the efficiency of operational business procedures in order to improve
resource allocation decision and evaluation of acquired companies. Standardization of
information systems is not a priority during the integration process; on the contrary some
unique procedures of the systems are kept to avoid the resistance from IT personnel.

Company’s relatedness is also relevant in assessing integration process. It refers to:

 similar production technologies;

 similar science-based research; and
 similar products or markets.

The research found evidence that acquisitions which are related in product/market or
technological terms create higher value than unrelated acquisitions (Singh, Montgomery,
1987).

While relatedness between the target and the acquiring firms is important, research has
shown that synergy is created largely by complementary capabilities. The success of an
acquisitions consist in the fact that acquiring firm learns new and valuable knowledge from
the acquired firms and absorb and integrate the new knowledge in order to build new
capabilities (Hitt et al, 2009).

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 Some authors articulate that in the period of integration it is highly recommended to take
control and integrate rapidly the acquisitions in order to avoid the post-merger drift (Bower,
2001). This phenomenon reflects the downturn in organizational productivity because the
managers are more concerned with M&A integration tasks and pay less attention to decision
making and investment processes.

In the same time, there are contradictory views which conclude that hurrying up this
process, will harm the employees and the ability to learn from the acquired company
(Haspeslagh and Jemison 1991).

That is why a slow, more cautious acquisition and implementation allowed the acquirer to
learn gradually about the acquired companies’ capabilities and potential.

A subsequent series of investigations suggest that cultural differences can create

considerable obstacles in achieving integration benefits, while other studies show that the
differences in culture between acquiring and target firm can be a source of value creation and
learning. In spite of these mixed results, it is critical to understand that integration process
affect M&A performance.

There are two aspects of the integration process that are of great importance for synergy
realization:

 sociocultural integration; and

 task integration (Stahl and Voigt, 2008).

Social integration refers to developing a sense of shared identity and positive attitudes and
trust toward the new organization, which help to build a more comprehensive integration in
terms of organizational culture convergence and mutual respect (Birkinshaw et al, 2000).

Task integration is more about capability transfer, resource sharing and learning. That’s
why these two components are fundamental in understanding synergy realization and further
shareholder value creation.

The research is also focused on one substantial aspect in post-deal integration, which is the
retention of key employees with valued tacit knowledge. Their departures from the company
are related not only to the loss of precious individual skills, but also to the weakening of
teams or groups. To motivate these people to stay in company, the management provided
financial incentives, a higher degree of autonomy, and leading functions in new combined
companies (Ranft and Lord, 2002).

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 In summary, the literature suggests that the post-integration process of M&A is of great
complexity, including a range of sub-processes: technological and information systems
integration, informational integration (knowledge transfer), employee integration and cultural
integration between the acquiring and the target firm.

Following the study of Birkinshaw et al (2000) and Quah and Young (2005), I would like
to develop a conceptual post-acquisition management framework which will best characterize
the integration process undertaken by the company I will be analyzing for this research and
understand the phases which defined the particularities of their success.

On the other hand, I would also like to describe how this company overcomes the
obstacles and difficulties in its path towards integration and value creation.

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3 Theoretical framework

There are many explanatory theories of mergers and acquisitions, but most of the time the
management initiating M&A’s follow the idea of improving economic efficiency of the
company through expanding and acquiring other firms.

One of the main theories in the field is referred to as Efficiency Gains Theory. The key
points of the study reflect how the benefits from mergers and acquisitions are not one-
dimensional gains. It emphasizes on the increase in economic efficiency mainly through a
very important issue during the pre and post M&A phase, mentioned in the chapter above.

The synergy between the acquiring and the target company often define how the key
personnel approach the M&A process, mainly because they will influence, in the short and
long run:

 the shareholder’s value;

 profitability; and
 productivity.

Also, the resulting and strived synergy defines how the value creation process will
manifest. Cooperation is the key term here, because both of the parties involved, in the end
have the incentive to register an increase in the current value compared to the prior one
(Sehleanu, 2015).

As considered and accepted in the field, there are three types of effective synergies that
usually occur in a merger and acquisition process:

 financial,
 operational; and
 managerial.

The financial synergies can take multiple forms:

 increasing the maximum capacity of indebtedness of the resulting entity;

 decreasing the level of company’s exposure to risk;
 increasing cash-flow stability; (Lewellen, 1971)
 decreasing the probability of bankruptcy;
 minimizing the cost of access to capital markets; and
 reducing the cost of capital through increasing the size of the company.

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 Operational synergies are a result of the companies merging all the operational activities
into a newly formed institution. The key points here are that the merging companies striving
to achieve the following:

 achieve economies of scale and scope;

 eliminate duplicate/conflicting activities, products and services;
 renegotiate key contracts with common or future suppliers;
 reduce transaction costs.

Compared to other types of synergies, which have the same scope, as revenue enhancing
of cost reducing synergies, the operational synergies, as proven by the Empirical studies,
provide the biggest and most material gains.

The managerial synergies mainly focus on the professional competency of the key
personnel from the entities involved and all the related sub-processes, such as:

 organic transfer of skills;

 preserving of key market and industry knowledge;
 transfer of know-how;
 ensuring that the technological capabilities are transferred between the entities.

Additionally, this type of synergy proves to be particularly useful when there are problems
of organizational of strategic nature, in which the companies can help each other.

In the next chapter, the above described theory will be polished after processing of the
interviews, because in qualitative research theory is deducted from the information collected.

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4. Research method and design
Qualitative research is a method of data collection, which is characterized by emphasis on
understanding, observations and measurements in the natural setting, explorative orientation,
and process oriented. Miles and Huberman (1994) suggested that researchers should use
qualitative research designs when there is a clear need for:

 deep understanding;
 local contextualization;
 causal inference; and
 exposing the points of view of the people under study.

Case studies are particularly appropriate for the study of M&A integration, given the need
for detailed, contextual descriptions of very sensitive data. Therefore, the research method
chosen for this paper is a case study, because it better addresses the ‘how’ question and will
provide new insights into the process of integration. The case study will be an explanatory
one, trying to uncover all the reasons in a cause-effect relationship.

Interview provides a great opportunity for the researcher and participants to interact. It is
often considered as the best data collection method according to (Ghauri & Gronhaug 2005,
p. 132). Semi-structured interview deals with a situation where the topics and issues to be
covered, sample sizes, people to be interviewed and questions to be asked have been
determined beforehand (Ghauri & Gronhaug 2005, p. 132).

The participants to the interviews are going to be: managers and key employees involved
in pre-acquisition decisions and post-acquisition implementation processes and working in
different departments of the company. I intend to interview approximately 15 people, but this
depends of their availability and desire to participate in the research.

For the questions which shall be asked during the interviews, please refer to the
Appendices 1. Please consider that the questions listed still need revision and may be subject
to future changes.

I will use triangulation of data, meaning the use of multiple sources of evidence in order to
avoid subjectivity as much as possible. This study will be based on semi-structured
interviews, participant observation and documentary analysis (annual reports and other
documents provided by the company) in order to achieve triangulation. The semi-structured
interviews will allow some sort of flexibility and the interviewees will feel more conformable

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to express their thoughts, and even deepen some ideas important for a better understanding of
the research question. Field notes will also be taken during the period when I’ll get to know
the company.

Regarding the analysis of interview answers, the first part of the data analysis will be
transcribing of the fully taped interviews. To increase the quality, I had interviewees review
the transcripts and amend them if necessary. Through cyclic reading and rereading, I will
structure each interview and coded it to facilitate within case as well as subsequent cross-case
analysis, in line with grounded theory research (Miles & Huberman, 1994), the analysis will
result in the identification of common themes and topics.

In order to get access to the above mentioned data, I will have my internship at a big oil
company in Romania with the headquarters in Bucharest. It is a large listed company with
more than 1000 employees in the administrative building. This company meets the conditions
concerning the mergers and acquisitions. At its turn, it had already passed through two
successful acquisitions, so the integration process as perceived by managers and employees
can be in-depth investigated.

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References

Angwin, D. N., Meadows, M. (2015) New integration strategies for post-acquisition

management, Long Range Planning, 48, pp. 235-251.

Birkinshaw, J., Bresman, H., Hakanson, L. (2000) Managing the post-acquisition integration
process: how the human integration and task integration processes interact to foster value
creation, Journal of Management Studies, 37 (3), pp.395-425.

Bower, J. L. (2001) Not all M&A are alike—and that matters, Harvard Business Review,
79(3), pp. 93–101.

Chang, S., Chang, C., Wang, T. (2014) Information systems integration after merger and
acquisition, Industrial Management & Data Systems, 114 (1), pp.37-52.

Ghauri, P., Gronhaug, K. (2005) Research Method in Business Studies. A Practical Guide
(3rd ed.), United Kingdom: Prentice Hall /Financial Times.

Haspeslagh, P. C, Jemison, D. B. (1991) Managing acquisitions: Creating value through

corporate renewal, New York: Free Press.

Hitt, M. A., King, D., Krishnan, H., Makri, M., Schijven, M., Shimizu, K. and Zhu, H. (2009)
Mergers and acquisitions: Overcoming pitfalls, building synergy and creating value,
Business Horizons, 52, pp. 523-529.

Lewellen, W.G. (1971) A Pure Financial Rationale for the Conglomerate Merger, Journal of
Finance, 26 (1), pp.521-537.

Quah, P., Young, S. (2005) Post-acquisition management: a phases approach for cross-border
M&As, European Management Journal, 23(1), pp.65-75.

Meglio, O., Risberg, A. (2010) Mergers and acquisitions – time for a methodological
rejuvenation of the field?, Scandinavian Journal of Management, 26, pp. 87-95.

Miles, M. B., Huberman, A. M. (1994) Qualitative data analysis. An expanded sourcebook,

(2nd ed.). Beverly Hills, CA: Sage.

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Ranft, A. L., Lord, M. D. (2002) Acquiring new technologies and capabilities: a grounded
model of acquisition implementation, Organization Science, 13(4), pp.420-441.

Schweizer, L. (2005) Organizational integration of acquired biotechnology companies into

pharmaceutical companies: the need for a hybrid approach, The Academy of
Management Journal, 48(6), pp. 1051-1074.

Sehleanu, M. (2015) Creating or destroying value through mergers and acquisitions? Annals
of the University of Oradea: Economic Science, 25(1), pp.593-600.

Singh, H., Montgomery, C. A. (1987) Corporate acquisition strategies and economic

performance, Strategic Management Journal, 8, pp. 377-386.

Stahl, G. K., Voigt, A. (2008) Do cultural differences matter in mergers and acquisitions? A
tentative model and examination, Organization Science, 19 (1), pp. 160.

Van de Ven, A. H., Huber, G. P. (1990) Longitudinal field research methods for studying
processes of organizational change, Organization Science, 1(3), pp. 213—219.

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Appendices

Questions for interview:

1) Why did you decide to acquire this company? What are the short-term/ long-term
motives?
2) What post-acquisition integration strategy has been used?
3) What do you value the most in the acquired company?
4) What are the main differences between the acquired and the acquiring firm?
5) Could you describe how the integration process was organized?
6) So far do you consider this acquisition a success?
7)

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