Challenges and Theories of Merger and Acquisition: A Case Study of DeWaal Pharmaceuticals and BioHealth Labs

This report discusses the challenges and theories of merger and acquisition using a case study of DeWaal Pharmaceuticals and BioHealth Labs. It identifies the integration process, challenges, and theories such as efficiency theory, inefficient management theory, synergy gain theory, diversification theory, strategic realignment theory, and market power theory. It provides recommendations to resolve the conflict values and enhance business value.

Running Head: CONTEMPORARY MANAGEMENT
Contemporary management
September 22
2018

CONTEMPORARY MANAGEMENT 1
Executive summary
Merger and acquisition of organization in the global market are becoming more effective to
enhance the business value in several contexts. Organizations adapt the strategy of merger or
acquisition in with a thinking that value of two different organizations will be more in
together. Therefore, organizations acquire relatively small business and merge with
competitive business. In this process there both the acquired as well as acquirer get to
enhance their business value to make their business more efficient and profitable. In this
manner there are different theories to explain the process of merger or acquisition which are
categorised based on the purpose of merger or acquisition. In this report there is a case of
merger of two pharmaceutical businesses to enhance their business value in the same market
using their individual’s strengths. In such cases there are issue arrived in the process to affect
the effectiveness of the process. These issues have to be resolved to make it effective
otherwise such processes may give negative impact as well. This report identifies and
resolves such merger or acquisition issues arrived in the merger process of these two
businesses.

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Table of Contents
Introduction................................................................................................................................3
Literature review....................................................................................................................3
Case........................................................................................................................................4
Integration process.....................................................................................................................4
Challenges..............................................................................................................................5
Theories..................................................................................................................................5
Efficiency theory................................................................................................................5
Inefficient management theory..........................................................................................6
Synergy gain theory...........................................................................................................7
Diversification theory.........................................................................................................7
Strategic realignment theory..............................................................................................8
Market power theory..........................................................................................................8
Recommendations to resolve the conflict values.......................................................................9
Recommendations....................................................................................................................10
Conclusion................................................................................................................................11
References................................................................................................................................12

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Introduction
In the concept of corporate restructuring, Merger and Acquisition commonly referred as
M&A is an important part (Aitken, Berndt, Cutler, Kleinrock, & Maini, 2016). The basic
concept of merger and acquisition is that the value of two organizations together is more than
that of the value of the same companies separately (Sarala, Junni, Cooper, & Tarba, 2016).
Such a merger or acquisition is basically a consolidation (Weston, Mitchel, Mulherin, &
Salwan, 2010). Today in the globalizing world there is news in the newspaper and on
television channels about merger and acquisition of companies. Some of the most common
mergers or acquisition taking place is finance, chemicals, pharmaceuticals,
telecommunication, oil, and many more (Wolfe, Stressman, & Manfredo, 2011).
In the given case scenario there is a merger of two pharmaceutical organizations namely,
DeWaal Pharmaceuticals and BioHealth Labs. In this merger both the organization faced so
many challenges during the process. This report identifies and critically evaluates those
challenges with the help of theories and model defined for the M&A process. At the end of
this report, both the organization will be able to understand their problems and will also get
some help to control these challenges with the help of theories made in the literature work for
the similar situations.
Literature review
Initially, in the past decades, merger and acquisition were only for financial transactions to
control the overvalued assent of companies. At that time, the main motive of mergers was the
cash flow for debt repayments (Galpin, Timothy & Mark Herndon, 2010). Today, this typical
process of merger and acquisition is more strategic and operational as well (Mignani, Huber,
Tomas, Rodrigues, & Majoral, 2016). With the advanced research work available for such

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steps organization emphasizes the strategic planning for such actions and this has become a
strategic tool for business success (Jorge Correia de Sousa, & van Dierendonck, 2014).
Case
In this scenario two pharmaceutical companies namely, DeWaal Pharmaceuticals and
BioHealth Labs merged together. DeWaal is a Netherland based well established European
drug-maker. On the other hand, BioHealth Labs is headquartered in the North of New York
City. It has been observed that in recent years both the companies had manufactured and sold
a wide range of drugs from a pain reliever to that of the AIDS medication and became
competitive in the highest tier market of pharmacy. After the merger, they named their new
organization as DeWaal BioHealth. The main motive behind this merger is to utilize their
plants and staff for distributing more products through their joint distribution channel.
Integration process
An integration process that Steve and Kasper were using was very confusing as both of them
are confused over some decision for making a top layer management team for the new
venture. In this process, both of them were discussing over a lunch meeting and thought that
they are making the right decisions that are best for their venture. But both of them were
wrong at some points. Some of the critical points, at which both of them were wrong, are:
odds of speed, objective decision making, and fairness of business.
In the first case, Kaspar was unconcerned about the pace that they need for the new
adventure. On the other hand, Steve was feeling an urgency of this top management team. He
thought that senior team is short time task that has to be done as soon as possible to start
working. But at the same time, both of them were missing that poor decision for the top
management selection will impact the organization in long-term. The second factor of
objective decision making was lacking in the integration process as both of them were

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making decisions on their own without any objective analysis of sales, quality, cost, and
service. In the process of making decisions for new management, leaders have to use data
like, employee experience, their service, quality work, cost, and many similar factors about
the employees as well as an organization (Ogada, Achoki, & Njuguna, 2017).
Challenges
In this merger, instead of acting as a CEO of the company, Steve was trying to making it
happen himself. He was indulged into regulatory work for two months. In these two months
of the merger, CEO Steve started facing problems while clearing the regulatory hurdles
presented by Federal Trade Commission and European Commission. After this, there were so
many challenges for him. One of those challenges was bringing two completely different
cultures together to work as one. In addition to this Steve has to make the top layer
management team. And selecting this team among the top employees of two different
organizations is going to be very tough for Steve. The top management team formation
negotiation also created another challenge of retaining senior talented employees of DeWaal.
Theories
In order to execute a successful merger and acquisition, there are a number of theories and
models available in the literature work done on such practices. Some of these theories are,
Differential efficiency theory, Inefficient management theory, Synergy theory, Pure
diversification theory, Strategic realignment, Market power, and many more (Krug, Wright,
& Kroll, 2014).
Efficiency theory
Through the process of merger and acquisition, more efficiency can be achieved by the
organizations. In this practice, the enhancement of efficiency is done by taking an advantage
of some specialized skills or target market and management, sharing technology, eliminating

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competitive hurdles, and promoting a product which is complimentary for both the
companies (Wolfe, et al., 2011). This theory suggests that the merger and acquisition occur as
both the firms or organizations have different strengths and weaknesses defining their
different efficiencies in the same market. That is why this theory is also known as differential
efficiency theory. In such practices, superior managers use their experience in some particular
activities (Weston, Mitchel, Mulherin, & Salwan, 2010). There are evidence of mergers
showing a clear motive of enhancing the efficiency of an organization such as: Holicim Ltd.
acquired ACC Ltd. in 2007 and Facebook Acquired Little Eye Labs in 2014. These are the
perfect examples defining the efficiency theory of merger and acquisition. It is not necessary
that each time such process enhance the efficiency in a positive aspect only. There are
evidences in the literature showing the failure of efficiency theory. In the given case study
both the drug manufactures can use their individual efficiency as one single power to get a
huge market growth to compete with other companies.
Inefficient management theory
Inefficient management theory is another variant of efficiency theory that us related to the
lack of abilities of managers in one company. This variant of efficiency theory suggests that
Merger and Acquisition of two companies enhance the efficiency through the removal of the
inefficient management. Studies also support the inefficient management hypothesis. These
studies agree that a merger of companies provides an easy mechanism to remove the
inefficient managers to enhance the overall efficiency of the company (Gagnon, & Volesky,
2017). Theory suggests that however, managers might have the potential for high efficiency
but they are not using their potential in a productive way (Weston, Mitchel, Mulherin, &
Salwan, 2010). In this case both the companies are efficient enough to make business but
they are not using their full efficiency just to compete with each other. Their own competition
is dragging them behind from using their full efficiency. Sometimes, such process may

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enhance the inefficient management showing a negative impact. Such failure may occur due
to lot of confusion related to the management system which may fail to effectively manage
the management system of both the firms.
Synergy gain theory
Most of the mergers and acquisitions are done to utilize the synergistic benefits of both the
companies together. In such mergers, the size or value o is likely to be more than that of the
acquirer and target firm separately. This synergistic gain arises from the financial or
operational synergies through economies of different operational scales. Increasing the size
of companies has been the main motive of most of the mergers and this is possible only when
both the organizations get merge to utilize the benefits of their economies of scope and scale
(Fiorentino, & Garzella, 2015). Synergistic theory may fails in cases where the acquired
business is much weak to handle the situation. In such cases the acquiring business may lost
its efficiency in order to manage the acquired business alone. This makes it important for
acquiring business to understand the feasibility of process with the business to be acquired.
Given case scenario is the best example to showcase their synergy in the form of a group
effort.
Diversification theory
In this theory, the term diversification means their expansion in terms of their geography,
product range or both. This theory states that diversification and its benefits like reputation
benefits preserve the reputational capital and fulfill the demand for diversification by the
employees and managers from both the companies (André, et al., 2017). In studies, mergers
and acquisitions are considered as a better way of diversification than that of the internal
growth. For example, EID Parry Acquired Nutraceuticals Co, Valensa International in 2008
and Raymond Ltd. with Raymond Calitri Denim Ltd. in 2000 are the mergers focused on
diversification. Steve and Kaspar can diversify their business with the help of their merge.

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After this merger, they will save enough time to expand their business as partners in other
nations.
Strategic realignment theory
Today, the economic environment is very dynamic in nature therefore companies need to
realize their strategic planning for the sustainability of their business depending upon the
changing environment. Such an uncertain environment is one of the main reasons of mergers.
Researches show that mergers and acquisitions might occur because of a strategic
realignment of companies due to uncertain changes in the economic environment (Zhang, et
al., 2015). Mergers for strategic realignment cab be done for several goals like, acquiring
managerial skills for the change in environment, utilize the economic scale at that particular
time period, and many more. This motive can be seen in the mergers and acquisition of Tata
Motors Ltd. with Tata Finance Ltd. in 2005 and acquisition of Apar Industries Ltd. by Shinny
Ltd in 2006. While adapting strategies like this acquiring business must understand the profit
level that it may get from the acquired business. If an organization acquires a business which
is not enough to learn something from then this may result in negative impact of the process
and acquiring business may also lose its own management efficiency.
Market power theory
Another thought on the merger strategy states that mergers are done to increase the market
value of individual organizations. Enhanced market shares due to such mergers would yield
more power to the acquirer organization. But increment in the market share is not always
accepted in mergers as sometimes it may lead firms to the concentration in the industry
(Graebner, Heimeriks, Huy, & Vaara, 2017). For such mergers, the intense competition of
market occurs between largest companies for their outputs, price, quality or products,
services, and type of products. Himadri Chemicals and Industries Ltd. acquired Team
Paramount Ltd. in 2006 and Ultratech Cement Ltd. merged with Samruddhi Cements Ltd in

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2009 with their main motive of strengthening their market within the industry. This is the best
suitable theory for this merger. Both the companies can strengthen their market power by
helping each other. At the same time inefficient merger or acquisition may weaken the
market as well. Evidences show that mergers in order to strengthen the market power,
acquiring organization must understand its efficiency to handle the market that it is going to
acquire otherwise it may lose the control over its existing market as well.
In this case, the merger of two drug manufacturing companies took place to power their
market with collaborative efforts and making the best use of their joint market strengths. In
this manner, both the executives were not making decisions objectively. Their way of
forming the top management layer of the new company was not theoretically right. They are
deciding their top management employees on their own without any statistical analysis or
objective comparison of their employees’ performance.
Recommendations to resolve the conflict values
This merger of DeWaal Pharmaceuticals and BioHealth Labs to for DeWaal BioHelath, has
to be carried out in a proper process of merging. There are different practices or process
through with a successful merger can be done easily (Thompson, Scott, & Boiani, 2016). In
this case, both the senior executives are having a number of conflicts in process of new
merger. One conflict was about inefficient task allocation for the process of merger. As Steve
was dealing with the regulatory work instead of handing it over some agency and guiding
them for organization suitability. In this process, he could have been appointing some
executive to deal with all the regulatory work of merger and must guide him for the same.
Another conflict between both the senior executives is their selection process for top layer
management candidates. Both the executives are selecting their top management candidates
on their own behalf. To make this selection decision more effective and objective, the

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selection process of their top management layer candidates must be based on an objective
evaluation. In this process, first the candidates eligible from both the organization are
selected. After this, all the factors affecting their position and performance in the past has to
be evaluated based on their past experience in the respective organization along with their
statistical data analysis related to their performance. Doing so will select the best candidate
for the organization that is practically fit for the position based on their statistics. In this case,
Steve and Kaspar are selecting their top management candidates as per their comfort and
influenced by their relationship with their respective parental organizations. In this process,
they may select the wrong candidate that will impact their organization in long-term. There
are theories and models to help in resolving conflicts of a merger or acquisition. Such
theories can be utilized by both the executives to resolve some common conflicts they are
facing in this merge.
Recommendations
From the above case study analysis and theories available in the literature or merger and
acquisition process, seeing the market stand and strengths of both the companies market
power theory suits best for this merger. As per this theory both the organization can enhance
their market power within the industry. In this process, their individual distribution networks
operating in the same cities can be used for new products or new distribution. Given the case
study shows that DeWaal Pharmaceutical has established its strong network in European
market whereas, BioHealth is operating from New York City only. Therefore, DeWaal’s
distribution network can be used for drugs manufactured by BioHealth and similarly DeWaal
can use the manufactured products of BioHealth to increase its sales and profit margin.
Along with this HR team of the organization must assess the employees from the cultural
point of view and manage their organization working suitably to overcome the cultural issues

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that might be faced by the employees switching their culture. In this process, HR executives
have to understand the cultural difference of both the organization and prepare a common
strategic plan to manage these3 cultural differences. For this HR executive of respective
organizations can help each other to save their time for identifying the cultural differences.
Also, the HR executives have to assign tasks to particular individuals to make the process
more effective and efficient as well.
From the above analysis, it is highly recommended to both the senior executives to adopt at
least one strategy for the process planning. This will help them to execute their merger with
more efficiency. Without any strategic planning, they won’t be able to work out their new
venture together. Strategic planning means they have to choose an objective approach to
implementing their merge effectively. Also, the theories discussed in the above report are
recommended to both the executives to be used for a better implementation of the merge.
Utilizing a suitable theory like the market power they can understand the ultimate goal of
their merge and can work on that particular segment.
Conclusion
The above analysis of the give case study and its relation with the discussed theories and
process it is concluded that merge and acquisition must be carried out in a systematic way.
This will resolve most of the common conflicts that any merger or acquisition faces. In the
above report, the theories of merger and acquisition motives are helpful for organizations to
clear their objective of the merger or acquisition.

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