BMW and Rover Group: Undoing a deal you can't fix
A presentation by: Srishty Suman (25) Pulkit Mishra (20) Kushagra Jain(13)
Sometimes when the range or intensity of post-deal problems indicates a fundamental flaw in the portfolio strategy itself, the best response may be to undo the deal. For executives who build their reputations on the deals they do, backing out can be one of the toughest decisions of all.
A case in point is BMW's1.7 billion acquisition of the U.K.'s Rover Group in 1994. The deal shows just how badly things can go when a poor investment thesis is coupled with hasty due diligence.
The problems began with a faulty philosophy:
In the early 1990s, conventional wisdom held that only car companies able to produce around two million cars a year would survive. According to this argument, any company producing fewer cars would fail to achieve the necessary economies of scale and so would lose its independence to a larger automaker. This struck a chord with Bernd Pischetsrieder, then chairman of BMW's management board, who aspired to grow BMW into the ranks of the auto industry superpowers and to expand its range of product offerings. Given the premium positioning of the BMW brand, Pischetsrieder was convinced that BMW had no choice but to expand, either by building its own new brand or by acquiring a ready-made mass producer. The first option was dismissed as being too expensive and time-consuming. Rover was"the only alternative left in terms of size, suggested or perceived price, and presence in the necessary market areas, geographically as well as in terms of market segmentation.
After a breathtaking round of clandestine meetings between the two parties, Rover's managers physically handed over all the information BMW needed to value the company on January 16, 1994. Just ten days later the automakers signed the deal at the offices of BMW's lawyers in London. BMW's abbreviated due diligence had failed to discover that Rover was a dog of a deal. BMW's next mistake was to ignore the warning lights that were flashing for the better part of six years. Somewhat cowed by the howls of indignation that went up from the British public after the takeover, BMW tiptoed around this sleepy hound instead of tacking the problems Rover had head-on.
Rover was in the habit of reaching only 80% of the targets set. Walter Hasselkus, the German manager of Rover after the merger, was respectful of the Rover's existing culture that he failed to impose the much stricter BMW ethos, and, ultimately lost his position. BMW invested 2.8 billion in acquiring Rover and kept losing 360,000 annually. the first combined product was the Rover 75, which competed directly with existing BMW mid-range models. The other, existing Rover cars were out of date and uncompetitive, and the job of replacing them was left far too late. Another fly in the ointment was that the stated profits that Rover had supposedly enjoyed were subsequently seen as illusory. Subjected to BMWs accounting principles, they were turned into losses. BMW had failed in the exercise of 'due diligence'. BMW paid only 800 million for Rover, but invested 2 billion in factories and outlets, but not in developing products MW hitherto had concentrated quite successfully on executive cars produced in smaller numbers. They obviously felt vulnerable in an industry dominated by large, volume producers of cars.
BMW sold most of Rover to another company for just 10 (as the price included all of Rover's debts too).
hey kept one part that they felt could be profitable for them and could fit in their niche of upmarket sports cars: Mini (still owned by BMW today).
they had separated another part, Land Rover (who made off-road vehicles and 4x4s) and later sold that to Ford for 1.8 billion. (Today Land Rover is owned by Tata.) Taking everything into consideration, BMW lost a lot of money from their ownership of Rover, but at least they prevented losing even more money.
