Mn498mergers Final

ME RG ER S| AC QU ISI TI ON S
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C a
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n d
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i d
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a t
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e n
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u m
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b e
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r -
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4 3
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9 7
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N u
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m b
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e r
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o f
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w o
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r d
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s -
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2 0
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8 8
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Intr odu
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ctio n
In busin ess there is one
51
simpl e rule: grow or die. Merg ers
52
and acqui sition s play an impor tant role
53
on both sides of this cycle i.e. enabli
54
ng stron g comp anies to grow faster
55
than their comp etitor s there by ensur
56
ing that the incom peten t ones are
57
absor bed efficie ntly (Sher man, A.J, 2006)
58
This paper will first descri be how merg
59
ers are differ ent from acqui sition s and
60
then go onto discu ssing why merg ers
61
and acqui sition s take place and then discu
62
ss two cases . First is the case of Akzo
63
Nobel , which was a succe ssful merg er,
64
follow ed by the case of BMW and Rover
65
, which was an unsuc cessf ul Merg
66
er, and then discu ssing what differ entiat
67
es a succe ssful from an unsuc cessf ul
68
Merg er and Acqui sition.
Defi n
69
i n g M e
70
r g e r s
71
a n d A c
72
q u i s i t
73
i o n s
The
74
terms merg ers and acqui sition s are often
75
perce ived in the same light. This howe ver, is
76
incorr ect. They are simila r as far as the
77
main idea that surro unds them is pertai
78
ned. That being that by combi ning two
79
or more busin ess entiti es; the result
80
ing entity unit is more powe rful than the
81
adde d effect produ ced by the indivi
82
dual entiti es. That being said, the differi
83
ng factor s are the path that is follow
84
ed and the shape of the final result . A
85
merg er is a combi natio n of two or
86
more comp anies in which the asset s and
87
liabilit ies of the sellin g firm(s ) are absor
88
bed by the buyin g firm (Bern stein, P.L,
89
1998) . An acqui sition is the purch ase of an
90
asset such as a plant, a divisi on or even
91
an entire comp any. (Scott , D.L, 2006) .
92
Rea son s for occ urre
93
nce of Mer ger s and
94
Acq uisit ions

There are a numb er of
95
reaso ns that merg ers and acqui sition
96
s occur . These issue s gener ally
97
relate to busin ess conce rns such as
98
comp etitio n, efficie ncy, mark eting, produ
99
ct, resou rce, and tax issue s.
100
An impor tant reaso n often cited is a
101
corpo rate greed to acqui re every thing.
102
The econo mic expla natio n for this is that
103
the prima ry objec tive of a firm is to
104
maxi mize profit s and there by maxi mizin
105
g share holde rs wealt h (Milto n
106
Fried man). Anoth er impor tant reaso n that
107
comp anies combi ne is to elimin ate comp
108
etitio n as acqui ring a comp etitor is an excell
109
ent way to impro ve a firms positi on in
110
the mark etpla ce. Comp anies, like huma
111
ns have an innat e drive towar ds
112
supre macy and theref ore strive to outpe
113
rform them selve s and their comp etitor s in
114
every sense . An intere sting analo gy is dedu
115
ced that a comp any thoug h perfor ming
116
well overa ll, does not mana ge to do
117
the same in all spher es of its opera tions.
118
Comb ining two such units wher e one excel
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s in a hypot hetic al spher e A and the
120
other in B would give rise to a unit that
121
could possi bly excel in both at the same
122
time. This would help it achie ve a stron
123
g comp etitiv e adva ntage over the
124
comp etitio n and lead to incre ased benef
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its due to the syner gies. M&A s also
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reduc e comp etitio n and allow the acqui
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ring firm to use the target s resou
128
rces and exper tise. They impro ve cost
129
efficie ncies and reduc e the long run avera
130
ge costs. Gener ally, the assu mptio n is
131
that larger firms are more costeffect ive
132
than are small er firms (i.e., that larger
133
firms exhibi t econo mies of scale when
134
comp ared to small er firms) (Besa nko
135
and et al, Econo mics of Strate gy, 2007)
136
.If the comp anies are appro ximat ely the
137
same size and have appro ximat ely the
138
same sales, then by mergi ng, they can
139
elimin ate the seaso nal insta bility. Often
140
merg ers occur simpl y becau se one
141
firm is in a mark et that anoth er wants
142
to enter. All of the target firms exper ience
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and resou rces (the empl oyees exper
144
tise, busin ess relati onshi ps, etc.) are
145
availa ble by buyin g the target ed firm.
146
(Mulli ns, G.E, 2001) .
Akz o
147
Nob el Cas e
The sum
148
mer of 2007 turne d out to be quite an
149
event ful one for the Paint indus try.
150
Akzo Nobel , a Dutch congl omer ate of Jurass
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ic propo rtions had just finish ed sellin
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g its phar mace utical busin ess, Orga non
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for a consi derati on of 11 billion . There
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fore this was the right time to scope
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for intelli gent ways to invest their newly
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acqui red wealt h. Akzo Nobel appro ached
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the mana geme nt of the Imper ial Chem
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ical Indus tries and offere d to buy their
159
centu ry old decor ative paint s busin ess.
160
After two failed attem pts by Akzo relati
161
ng to the price of the deal, the overa ll
162
consi derati on of the deal worke d out to be
163
8.1 billion . By the time this acqui sition
164
would be compl ete, Akzo Nobel would be
165
the world s large st Paint manu factur
166
er. The share holde rs of Akzo were skepti
167
cal about their side of the barga in as the
168
price of the deal accor ding to some was
169
too high and could enda nger the share
170
holde r value. Strat egic fit is not
171
enou gh by itself. The right asset at the wron
172
g price can have disast rous conse quen
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ces for share holde rs, TPGAxon, a US
174
based holde r of 3.4 % of Akzo, (Fina
175
ncial Times , Londo n). Later, a revel
176
ation was made Akzo decid ed to sell the
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adhes ives and electr onic comp onent s
178
busin ess of ICI to Henk el for 2.7 billion as
179
part of a side deal. This made the overa
180
ll net worth of the deal 5.4 billion .
181
Akzo share holde rs were not happ y with
182
the price of the deal, but later got on
183
board when they were given a lucrat ive
184
rise in divide nds (45% as per Finan cial
185
Times ) and buyb ack promi se. With the
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acqui sition, they had hopes of achie ving
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cost syner gies due to the simila r natur
188
e of their opera tions. They expec ted pre-
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tax cost savin gs of 190 millio n 85%
190
of which would be realiz ed in the first 3
191
years . (Fina ncial Times ) ICIs
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mana geme nt was know n to be skille
193
d and comp etent in the indus try and Akzo
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noble had its eyes on them to be a part
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of their mana geme nt. ICIs decor ative
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busin ess was widel y sprea d in the
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devel oping Asian mark ets and their produ
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cts were much in dema nd. This enabl
199
ed Akzo Nobel to enter new geogr aphic
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boun darie s with ease. (Fina ncial Times ,
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Londo n) The succe ss of an acqui
202
sition depe nds largel y on the efficie ncy of
203
the integr ation betw een the two busin
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esses . Man agers who have been involv
205
ed in merg ers and acqui sition s know
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the odds of a painle ss integr ation are
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low. Rarel y, it seem s, does combi ning
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two organ izatio ns go smoo thly, at least
209
in the short term. (Hei merik s, k and Gates
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, The Secre ts of Succe ssful Acqui sition s,
211
2008) . Due to the simila r natur e of their
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opera tions, the integr ation was seaml ess
213
and took less than the stipul ated amou
214
nt of time. Visibl e benef its form
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the deal could not be seen due to the
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wake of the Globa l econo mic crisis in
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2008. But still, reduc tion could be seen
218
in the costs incurr ed by the paint giant. The
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bursti ng of the housi ng bubbl e direct
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ly affect ed the real estat e mark
221
et. This in turn had a spillo ver effect
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on the raw mater ial mark ets of real
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estat e. This mean t that the newly acqui
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red decor ative paint s busin ess could
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not perfor m as per the expec tation s and
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hence the succe ss of the acqui sition remai
227
ned to be seen. They had to delay
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their share buyb ack progr am and the
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comp any decid ed to lay off 3500 empl
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oyees as a part of their plans to reduc
231
e costs in order to achie ve result
232
s durin g the crisis. This had a negat ive
233
effect on the minds et of the existi ng
234
empl oyees . (Fina ncial Times ) Howe
235
ver, as the mark ets starte d showi
236
ng a some what upwa rd trend, the succe
237
ss of this has starte d surfa cing. Even
238
thoug h the reven ue show ed a down ward
239
trend, the overa ll profit for the share
240
holde rs did rise.
241
2010 0
2009 9
242
Amou nts in GBP (milli ons) (Akzo Nobel
243
annu al repor t, 2010)
This
244
clearl y show s that the acqui sition was a
245
financ ial succe ss or at least on the
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path of being one as the succe ss of
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such a big acqui sition in the prese nt mark
248
et condi tions canno t be fatho med in a
249
small perio d of 2 years .
BM
250
W and Rov er Cas e
251
Buyi ng anoth er busin ess is easy but
252
maki ng the merg er a succe ss is full of
253
pitfall s Rober t Heller . Such was
254
the case of the BMW and Rover that joined
255
hands in 1994 and had its demis e in 6
256
years time. It is often said that combi ning
257
two busin esses is an easy task if mana ged
258
prope rly. Howe ver if the mana geme nt
259
wron gly interp rets the end of such
260
a merg er, it is unlike ly that the
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merg er would succe ed. Prior to the
262
merg er, BMW opera ted small top portio
263
n of the custo mer pyra mid. It had a
264
very small yet presti gious produ ct portfo
265
lio. They crafte d each car with utmo
266
st care and precis ion as they had an 8-
267
decad e brand value to live up to. With
268
the integr ation of the world auto mobil e
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indus try, it was beco ming incre asingl y
270
imper ative for the Bavar ian auto mobil
271
e make r to manu factur e medi um to
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lowend vehicl es and achie ve mass
273
produ ction at that. BMW had to be caref
274
ul as to how to do this as a manu factur
275
er like that would lose a lot of brand value
276
if its produ cing low end cars. There fore
277
BMW went for buyin g an auto mobil e
278
manu factur er that would give it this comp
279
etitiv e edge. Rover came out to be
280
the perfe ct candi date for BMW s
281
future plans. It was able to impre ss the mana
282
geme nt with its qualit y that was as
283
good as BMW, if not better in certai n
284
aspec ts. BMW want ed to introd uce cars
285
that were inexp ensiv e and hence had a mass
286
appe al. This worke d in favor of BMW
287
as none of Rover s cars direct ly comp
288
eted with those of BMW excep t the Rang
289
e Rover and the Mini brand , which
290
had a niche mark et of their own. Britis
291
h Aeros pace happi ly sold its 80%
292
stake in the comp any for 800 millio n.
293
The merg er turne d out to be a cunni
294
ng move on BMWs part as their comp
295
etitor and owne r of the remai ning 20%,
296
Hond a, was set back after dissol ving
297
its share . The deal was a recip e for succe
298
ss but still was one of the bigge st disast
299
ers in the auto mobil e merg ers histor
300
y. It was specu lated that BMW enter
301
ed the deal prima rily in order to get its
302
hands on techn ology of the Rover group .
303
Accor ding to an articl e writte n by Leslie
304
Butto n, BMW want ed to get its hands
305
on the 4x4 wheel drive techn ology of the
306
Rover group that curre ntly powe rs its X5
307
varia nt. As soon as it had this techn ologic
308
al know how, it was ready to dump Rover
309
. It also sheds light on the facts that
310
BMW made very caref ul and calcul ated
311
invest ment s durin g their marri age,
312
such that when the time came for the
313
divor ce, it would retain all that they had
314
invest ed in or sell it for a consi derab le
315
gain. Anoth er intere sting fact is that in the
316
5 years that they were toget her, only
317
one new mode l of Rover 75 was devel
318
oped under BMW. This car posse ssed the
319
same diesel engin e that powe red the 5 and
320
the 7 series , howe ver it was tuned down
321
to push it down, as they did not
322
want it to comp ete with 5s and 7s.
323
There fore trend s over the years of
324
their assoc iation have show n a some what
325
distur bing imag e. It show s that since the
326
merg er, the sales of BMW have been
327
rising at a const ant rate, while those of
328
Rover fallin g in its home mark ets. It was
329
argue d that BMW did not evolv e the Rover
330
produ cts exclu ding Rang e Rover and
331
Mini durin g their time toget her and
332
this lead to the downf all in Rover s sales.
333
It was gettin g hard for BMW to sustai
334
n the loss maki ng entity , which was
335
reduc ing the overa ll profit of BMW
336
by 33%, and hence their 6year long
337
came to a bitter end. BMW sold Rover to
338
ford for a consi derati on of 1.8 Billion , 1
339
Billion more than what it had purch ased it for.
340
Con clus ion

We have some
341
thing to learn from each of these cases
342
. From Azko Nobel we learn is that
343
the timin g of the merg er and cost
344
syner gies that are very impor tant. Awar
345
eness of cultur al differ ences , in terms
346
of comp any cultur es i.e. the differ ences
347
betw een phar mace utical s, coati ngs
348
and chemi cals as well as natio nal
349
cultur es; Britis h, Swedi sh, Germ an
350
and Dutch . Also a recon ciliati on of intere
351
sts of vario us stake holde rs needs .
352
Even in a mone ydrive n, hectic acqui
353
sition proce ss, the focus at the end of the
354
day is on the qualit y of peopl e, interp
355
erson al relati onshi ps, com muni catio
356
n, etc., as the way to make merg
357
ers work. What we learn about an
358
unsuc cessf ul acqui sition from the BMW
359
and rover case is that there is no halfw
360
ay house . Either merg e with a mass-
361
mark et busin ess or remai n alone ,
362
stead fastly devel oping distin ctive produ cts.
363
But do not think that the magic of
364
your core busin ess will auto matic ally
365
trans mit itself to a weak er acqui sition.
366
(Fina ncial Times (Lond on), (BMW Rover ),
367
(01/0 1/99) Merg ers and acqui sition
368
succe ss is not an exact scien ce but is
369
achie vable with the right appro ach. Most
370
Merg ers and acqui sition s fail for two
371
basic reaso ns the first one being failur
372
e to asses s the poten tial impac t of attem
373
pting to merg e and integr ate cultur es of
374
the comp anies involv ed and failur e to
375
plan for syste mic and syste matic and
376
efficie nt integr ation of those cultur es (J.
377
Rober t Carlet on and Claud e S. Lineb
378
erry, 2001) . The ability to contr ol and
379
coordin ate all aspec ts of the comp
380
anys opera tions, so that they are simul
381
taneo usly enga ged in enha ncing a
382
comp etitiv e adva ntage is an impor tant
383
reaso n for succe ss (Clau sewit z, 1982)
384
Refe renc es
385
1. A k z o N o b
386
e l , a n n u
387
a l r e p o r
388
t ; [ o n l i
389
n e ] ( A v a i
390
l a b l e a t
391
: h t t p : /
392
/ r e p o r t .
393
a k z o n o b e
394
l . c o m / 2 0
395
1 0 / a r / s e
396
r v i c e p a g
397
e s / w e l c o
398
m e . h t m l ]
399
[ a c c e s s
400
e d o n 0 4
401
/ 0 5 / 1 1 ]
402
2. B e r n s t e i
403
n , P . L ,
404
( 1 9 9 8 ) .
405
I n v e s t m e
406
n t m a n a g
407
e m e n t 3. Besa nk
408
o, D, Dr an ov e, D, Sh
409
anl ey, M, an d Sc ha ffe
410
r, S (2 00 7), Ec on o
411
mi cs of Str at eg y
412
4. B . L e s l i
413
e , [ o n l i
414
n e ] ( A v a i
415
l a b l e a t
416
: h t t p : /
417
/ w w w . a r o
418
n l i n e . c o
419
m ] [ A c c e
420
s s e d o n
421
2 / 0 5
/
1 1 ]
422
5.
Claus ew itz, Ka rl vo n (1
423
98 2) firs t pu bli sh ed
424
18 32 ) On wa r (tr an
425
s. Co l. Gr ah a m 19
426
08 :1 98 2 edi te d by
427
A.r ap ap ort ), Lo nd on,
428
Pe ng uin . 6. Finaci al Ti
429
m es 7. H e l l e
430
r R . T a k
431
e o v e r s ,
432
a c q u i s i t
433
i o n s a n d
434
m e r g e r s
435
: b u y i n g
436
a n o t h e r
437
b u s i n e s
438
s i s e a s
439
y b u t m a
440
k i n g t h e
441
m e r g e r
442
a s u c c e s
443
s i s f u l
444
l o f p i t
445
f a l l s [ o
446
n l i n e ] .
447
A v a i l a b l
448
e a t u r l
449
, h t t p : /
450
/ w w w . t h i
451
n k i n g m a n
452
a g e r s . c o
453
m / m a n a g e
454
m e n t / t a k
455
e o v e r s . p
456
h p ( a c c e
457
s s e d 0 7 /
458
0 5 / 1 1 ) 8. J
459
. R o b e r t
460
C a r l e t o
461
n , C l a u d
462
e S . L i n
463
e b e r r y ,
464
( 2 0 0 1 ) .
465
A c h i e v i n
466
g p o s t m
467
e r g e r s u
468
c c e s s 9. G a
469
t e s , S a
470
n d Z o l l o
471
, M . ( 2 0
472
0 8 ) . T h e
473
s e c r e t s
474
o f s u c c
475
e s s f u l a
476
c q u i s i t i
477
o n s . S l o
478
a n M a n a g
479
e m e n t R e
480
v i e w , B u
481
s i n e s s I
482
n s i g h t (
483
W S J ) . R 9
484
( 1 ) 10 . M
485
u l l i n s ,
486
G . E , ( 2 0
487
0 1 ) . M e r
488
g e r s a n d
489
A c q u i s i
490
t i o n s : B
491
o o n o r B
492
a n e 11 . S c o
493
t t , D . L ,
494
( 2 0 0 6 ) .
495
W a l l S t
496
r e e t w o r
497
d s : a n A
498
t o Z g u
499
i d e t o i
500
n v e s t m e n
501
t t e r m s
502
f o r t o d a
503
y ' s i n v e
504
s t o r 1 2. Sher
505
man, A.J, 2006. Merg ers and Acqui sition
506
s from A to Z

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ME RG ER S| AC QU ISI TI ON S

simpl e rule: grow or die. Merg ers

and acqui sition s play an impor tant role

on both sides of this cycle i.e. enabli

ng stron g comp anies to grow faster

than their comp etitor s there by ensur

ing that the incom peten t ones are

absor bed efficie ntly (Sher man, A.J, 2006)

This paper will first descri be how merg

ers are differ ent from acqui sition s and

then go onto discu ssing why merg ers

and acqui sition s take place and then discu

ss two cases . First is the case of Akzo

Nobel , which was a succe ssful merg er,

follow ed by the case of BMW and Rover

, which was an unsuc cessf ul Merg

er, and then discu ssing what differ entiat

es a succe ssful from an unsuc cessf ul

Merg er and Acqui sition.

terms merg ers and acqui sition s are often

perce ived in the same light. This howe ver, is

incorr ect. They are simila r as far as the

main idea that surro unds them is pertai

ned. That being that by combi ning two

or more busin ess entiti es; the result

ing entity unit is more powe rful than the

adde d effect produ ced by the indivi

dual entiti es. That being said, the differi

ng factor s are the path that is follow

ed and the shape of the final result . A

merg er is a combi natio n of two or

more comp anies in which the asset s and

liabilit ies of the sellin g firm(s ) are absor

bed by the buyin g firm (Bern stein, P.L,

1998) . An acqui sition is the purch ase of an

asset such as a plant, a divisi on or even

an entire comp any. (Scott , D.L, 2006) .

Rea son s for occ urre

nce of Mer ger s and

Acq uisit ions

reaso ns that merg ers and acqui sition

s occur . These issue s gener ally

relate to busin ess conce rns such as

comp etitio n, efficie ncy, mark eting, produ

ct, resou rce, and tax issue s.

An impor tant reaso n often cited is a

corpo rate greed to acqui re every thing.

The econo mic expla natio n for this is that

the prima ry objec tive of a firm is to

maxi mize profit s and there by maxi mizin

g share holde rs wealt h (Milto n

Fried man). Anoth er impor tant reaso n that

comp anies combi ne is to elimin ate comp

etitio n as acqui ring a comp etitor is an excell

ent way to impro ve a firms positi on in

the mark etpla ce. Comp anies, like huma

ns have an innat e drive towar ds

supre macy and theref ore strive to outpe

rform them selve s and their comp etitor s in

every sense . An intere sting analo gy is dedu

ced that a comp any thoug h perfor ming

well overa ll, does not mana ge to do

the same in all spher es of its opera tions.

Comb ining two such units wher e one excel