The factors influencing the success of takeovers and mergers

http://www.communicaid.com/news.php?newsId=101
http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR313.htm
http://www.kyc360.com/hot_topic/show/187?set=1
http://www.bbc.co.uk/news/business-18250315

Takeovers and mergers are a way in which a business can expand rapidly, as a result of this, many problems could occur such as having a lack of knowledge of the target company because of inability to conduct due diligence accurately. More problems could be difficulty of integrating businesses successfully because of the different cultures and the possible power conflict between management. These issues could affect the overall performance of the business by impacting the morale of employees thus reducing their productivity and impact sales and consequently lowering profit.

One factor that could influence the success of a takeover/merger is the firm’s ability to recognise cultural differences. Culture refers to the way a business does things and a set of values, beliefs and assumptions shared by members. Each company has their own cultures therefore when they merge/takeover, they need to be aware of these differences and in order to be successful, they need to find ways of integrating both companies. One example that integrated cultures successfully is Tata and Jaguar/Land Rover. Tata is an Indian based company that operates globally whereas Jaguar/Land Rover is a British company. As these are two different cultures, there will inevitably be similarities and differences in working practices therefore this will allow any difficulties to be dealt with quickly and effectively. Tata bought Land Rover /Jaguar for £1.1bn from Ford and with this has boosted global sales by 26% to 244,000 vehicles. Their ability to gain these sales implies that the two companies would have incorporated culture effectively in order to be so successful. Ways in which this could happen may be a result of the business utilising effective strategies such as Kotter’s 8-step change model, for example, establishing a vision for change. The impact of this allows people from both businesses to integrate concepts and ideas therefore overall, they will be more open to surrendering their culture and adapting to the others. To do this, communication is essential and needs to be open and honest therefore morale levels such as concern and anxieties would be lowered thus making employees more productive that will lead to increased sales and profits. However this also depends on the style of leadership that top management utilise, for example, evidence behind how quickly and effectively the integration began may suggest their leadership style is autocratic as autocratic style enforce strict obedience and have a clear hierarchy with a clear chain of command that allow decisions to made rapidly. This style is evidently effective as there were few disruptions with the takeover.

Another aspect that can influence the success of a business is their ability to plan effectively. Due diligence is the act of investigating into the target business which will allow the acquiring company to establish the other company is worth acquiring and appropriately priced. Certain investigation may involve evaluation of financial accounts, competitive position and whether the two companies would be compatible in terms of products, markets, culture, management style and corporate structure. One company that did this well was Kraft when they acquired Cadbury. Due diligence was conducted thoroughly and this is reinforced by the idea that Kraft and Cadbury are still performing together and have not gone into administration despite not improving profits significantly but rather making a loss to previous years such as the net profit for the fourth quarter falling 24% to $540m due to integration costs rather than a loss of sales.

In conclusion there are many factors influencing the success of a business, some more than others such as conducting due diligence and an organisations ability to recognise cultural differences. Statistics show that the main problem, up to 80% behind the failure of takeovers/mergers is due to lack of planning and investigation into the target business. The impact of this means that cultural audits are recommended in order to find out useful information about the two companies that help evaluate the similarities and differences in working practices.

                                                                              

The problems of Takeovers and Mergers including difficulties integrating businesses successfully

Many business organisations will engage in a takeover or merger in the belief that they will benefit in the future from increased profits. However, there may be some problems that are purely transitional such as integrating operations like HRM and marketing that will eventually be resolved. Despite this, they can also be major problems that could ultimately end up in business failure, one example is a corporate culture clash. An organisational culture is ‘the way things are done’ within a business that are a set of values, beliefs and assumptions shared by members of a firm. If two firms that want to merge but have cultural differences, this could lead to big problems for the company and may affect the overall performance. One notorious failed merger is Daimler Benz and Chrysler in 1998. A merger was established in the hope that Daimler Benz would be able to increase their presence within the American market as they only reached less than 1% whereas in the European market, they were already well known. As well as this, Chrysler earned $2.8 billion in annual profits, had remarkable efficiency, low design costs, and an extensive American dealership network that DB could use to expand their markets. The two firms announced they would come together in a ‘merger of equals’ in a $37 billion stock-swap deal. Together, their market capitalisation approached $100 billion. However, problems began to arise, especially between employees of the two companies. Due to the nature of each firm, Chrysler adopting a strict cost management style with an informal, free form, relaxed and flexible culture and Daimler Benz which is an innovator with rich engineering and quality heritage, not to mention a formal, traditional and bureaucratic culture; this inevitably caused a culture clash. These disagreements and misunderstandings contributed towards the ultimate fail of the merger. For example, the alleged ‘merger of equals’ was anything but equal as Daimler Benz was said to be the most dominant partner. As a result of this, employees at Chrysler developed a growing resistance against Daimler Benz as they were unwilling to surrender their own culture and adopt theirs. The result of this meant that there were communication problems, difficulties in personal relationships and mistaken assumptions that lead to conflicts. This is represented by post merger statistics showing the market capitalisation fell to $44 billion, roughly the same value that Daimler Benz had before the takeover. This highlights the reduced productivity that has occurred since and during the takeover. Along with this, it also emphasises the lack of synergies that the merger failed to create. For example, a synergy is where combined results produce a better rate of return than would do by using the same resources independently. As both firms had an unwillingness to ‘join together’, this affected their overall business performance which again is reinforced by the market capitalisation that fell to $44 billion.

Another potential problem of takeovers and mergers is that it will be difficult to measure the performance of the overall company. This is important as it will allow the business to identify which areas of the business are performing well and which areas are weak that need development in order to make the business more efficient. To do this, an investigation into the target business should be conducted in order to establish the facts and circumstances of the transaction in order to gain complete understanding; this should be done with the shareholders best interest at heart, therefore it is essential that they get all the relevant facts. Additionally, this is known as due diligence. For example, conducting due diligence can establish whether the two firms will result in a cost synergy, extra growth or an increase in shareholder value. One example where due diligence was not carried out thoroughly was the acquisition of ABN Amro by the Royal Bank of Scotland (RBS). This was due to many reasons such as a bid from a competitor who was also interested in acquiring ABN Amro, this impact of this established an urgency for the takeover by RBS, this lead to a bidding war between RBS and Barclays which resulted in RBS playing three times the book value of ABN Amro. This reinforces the problem of time where windows of opportunity are present but may be limited, consequently encourages a firm to make quick decisions which may be ill-informed as there is a lack of knowledge of the target company and end up impacting the firm in the long term. This failure of this takeover is highlighted by the fact that without government intervention, the bank would have collapsed thus damaging the economy and society which was already suffering due to the banking crisis in the USA that was transmitted to the UK thus exposing the bank to substantial risks.

In conclusion, businesses will face many problems during an integration of firms, the extent of these problems depend on a number of factors such as the amount of planning (due diligence), management styles and the willingness of employees from both firms to compromise on their cultures thus integrate successfully. Regardless of these problems that takeovers can face, there have also been successful takeovers such as the takeover of Land Rover by Tata. The success of this takeover is shown by quarterly figures of £559m pre tax profit compared to the same period in the previous year of £300m.

http://www.thinkingmanagers.com/management/takeovers.php

http://www.articlesbase.com/automotive-articles/how-daimler-chrysler-merger-failed-149797.html

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http://www.wsws.org/articles/1998/may1998/mzzg-m08.shtml

http://news.cnet.com/8301-13555_3-9796296-34.html

Government intervention on Takeovers and Mergers

 UK governments believe in a supported free enterprise operating in the market system therefore two companies have the right to join in a take over or merger. Despite this, there have been incidents where problems have arisen within the market system which can only be resolved by government intervention for example, there may be market failure through no fault of their own mistakes such as failure through inefficiency. 



One example where the government have intervened to support a merger is in order to prevent business failure that could potentially harm the UK economy and society. Halifax Bank of Scotland (HBOS) was a bank that was accountable for up to four fifths of the national bad banks debts within the recent financial crisis. In order to rescue HBOS along with the investment and savings of over 22million customers, a takeover by Lloyds TSB was heavily imposed by customers, shareholders and the government. To support this take over, the government did not try to prevent it and additionally supplied Lloyds TSB with £5.5bn and HBOS with £11.5bn grant money with hope that it would alleviate some of the debts incurred by HBOS and relieve some of the integration costs. With this, share prices would increase thus pumping more capital back into the economy. Despite Lloyds and HBOS being two giants within the high street, the merging of both companies would create a ‘super bank’ which would dominate the market. Despite this, there is a danger for consumers that the loss of competition in the mortgage and savings market will ultimately lead to higher interest rates and less generous mortgage deals. HBOS was the market leader holding a third of UK mortgage and savings. This grant was important for the two banks and economy due to the implications that it would of caused. For example, employees would be affected as the banks would not be able to pay out wages thus introducing redundancies and contribute to the already rising unemployment. With this, redundancy payments need to be high, if they can afford to pay out any at all. This would lead to a lower amount of disposable income for people to spend on luxury items/non necessities,  therefore businesses and local small businesses would experience lower sales thus lower profits and possibly go bust, consequently affecting the national economy, especially in areas of high HBOS employment. 

Another example where the government have intervened within a merger is to prevent two merging companies becoming a monopoly. For example, there was an attempted takeover of BskyB by Newscorp, owned by Rupert Murdoch. BskyB and Newscorp are mass media corporations that distribute news through wesbites, TV channels and newspapers. Rupert Murdoch already owned the majority of BskyB and wanted to takeover/merge entirely however this was prevented by the government as there were fears of Newscorp abusing their powers if they became a monopoly such as price wars where the company could undercut any competitors through cost saving through economies of scale or utilising joint capital to fund innovation or acquire, integrate and use the best possible technology. As Newscorp wanted to purchase the remaining shares of BskyB, an unusually strict investigation by competition commission took place with referral from the government, this was due to the potential abuse the integration could have undertook from lack of competition as Newscorp and BskyB were already two giants in the media industry. During this occurrence, a public scandal involving one of Rupert Murdoch’s media companies eluded which imposed even more pressure on the investigation and the government felt they needed to protect the public and represent their views as media is a naturally sensitive sector and should be unbiased. Due to this scandal, it was questionable whether this takeover should be followed through. For example, the scandal triggered a public outrage and they would have been dissatisfied if Murdoch was allowed to go through with this takeover. With this public outcry, shares in Newscorp depleted which drove them to pull out of their bid thus averting the takeover. A statement from the Newscorp deputy chairman stated the bid was ‘too difficult to progress in this climate’, suggesting that the only reason they pulled out of their bid was due to the scandal.

Overall, government intervention was important during the HBOS takeover by Lloyds as at the time, the UK financial system was in a crisis therefore to keep the public interest in mind and to avoid further bank collapses which could harm the public and economy, they did not try to prevent the takeover but instead, supported it and helped by supplying grants. On the other hand, the government did slightly intervene with Newscorp’s attempt to takeover BskyB by referring the action over to the competition commission. This may have been due to the problems with competition to the market if the merger was to go ahead. There has to be particular reasons that determine whether the government do or do not intervene, for example, it may depend on the current economic position which affects everybody within the public. Therefore, the government have to weigh up the positives and negatives of a merger whether it was to happen. Despite this, even though the merge between Lloyds and HBOS will create a monopoly that could damage the competition for the overall market, they may employ certain strategies such as breaking up the company and selling it off in the long term to allow other small companies to become more competitive. 

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Impact on Stakeholders essay

The impact on, and reaction of, stakeholders to takeover and mergers

A stakeholder if an individual or group of individuals that is affected by/able to influence on a business organisation. They can be internal (shareholders, managers, employees) or external (suppliers, customers, lenders).

Shareholders

A shareholder is a very important stakeholder, they are internal and therefore any decisions can affect them directly, especially in a takeover. A shareholder’s main priority is that the company is making profit which in turn will give them high dividends. During the takeover of Cadbury, the shareholders played a main part as Kraft needed 51% of shareholders to accept an offer in order for Kraft to gain control of Cadbury. To attract shareholders, Kraft offered 840p-a-share bid, sweetened by a previously promised 10p "special dividend", this was a 3.3% on the original share price of 761p. In the short term, this would keep the present Cadbury shareholders happy as this would enable them to sell shares at a premium price above market value allowing the shareholder to make a profit. On the other hand, in the short term current Kraft shareholder may not benefit as much due to the rising costs of integration thus the company may not be able to pay them high dividends. However, there is an opportunity for Kraft shareholders to sell their shares if not satisfied, but this may affect them in the long term as they will no longer be more receiving any future dividends.   

Employees

Employees are also an internal stakeholders and will be affected by changing cultures between the two firms, new aims and objectives and new organisational structures. The main issue that concerns employees whilst undergoing a takeover/merge is their job security, amongst other aspects such as high pay, job enrichment and promotional opportunities. Additionally, integration costs are very high up to $1.5million, therefore the company may consider ways of cutting costs such as making redundancies through retrenchment. Retrenchment is where a firm cuts back on its scale of operation in order to cut costs which can be accomplished through many strategies.  For example, before the takeover, Cadbury employed around 7,000 people across 8 UK sites. Even so, after the acquisition, there were growing fears that Kraft would cut jobs in order to save costs. Fear increased amongst the employees and affected them in many ways such as motivation and production. Employees may have felt undervalued therefore believing they should not put as much effort into work as the firm does not deserve it. Additionally, due to rising anxiety for their job, trade unions sparked concerns thus introduced many protests consequently stopping production which would lead to even more increased costs. There was confirmation of retrenchment with the closer of the Somerdale factory hence the loss of 400 jobs. As redundancies have already been made, this has understandably affected the morale of other present employees. However, cutting back costs are essential for a merger/takeover whether it be through redundancies or closure of factories in order for the firm to be more efficient. Not only this put Kraft were forced to pay high redundancy payments to employees for their whole time at Cadbury rather just for when Kraft took over.

Customers
Customers are an external stakeholder, due to the nature of the product, customers play a crucial part. A change of ownership by a takeover/merger may affect the customers, as the nature of the product may change as operations and production would alter thus increasing the likelihood of a drop in sales. For example, Kraft Foods are an American firm that was originally known for cheese, acquired Cadbury, a large British confectionary company. This act faced a widespread disapproval from the British public as well as prominent trade unions. Despite protests and public outcry, the acquisition still occurred which may have affected the reputation of Cadbury after the takeover thus a result in loss of sales. This is shown by the fourth quarter net profit that fell 24%. Furthermore, Cadbury was a heritage brand and the change of ownership implies that there may be a change in recipe thus reinforces the likelihood of fewer purchases within the UK market. Not only this, customers are also concerned with the price. An initial reason for a takeover is for rapid growth, a result of this is economies of scale which the company can benefit greatly can it can lower unit costs that the customers can also benefit from as price reductions can be passed on.
In conclusion, during a takeover many people will be affected whether they are from within or outside of the firm, however some people such as shareholders and employees will be more affected than others. Shareholders invest within the company therefore without their investment, the firm would receive no extra capital other than selling its products. Shareholders are the most powerful stakeholders as each own a part of the firm, they need to be satisfied as this can help improve the reputation of the company thus encouraging more investment from others that the firm can use in thing such as research and development. In the short term, Kraft shareholders may not have been pleased about the takeover as there was high integration costs thus taking away the capital that could have been paid through dividends. However in the long term, as profits start to rise and there a fewer costs to cover, they may benefit greatly through high dividends in the future. Cadbury shareholders benefited from a higher share price of 840p plus special dividends. This clearly satisfied them as the offer was taken and the hostile takeover followed through. Despite this, stakeholders such as employees and customers were not as satisfied. Employees suffered fear from losing their job as Kraft made cuts through redundancies in order to lower costs of taking over. Furthermore, customers were bitter about the takeover as they felt as though their British heritage was being threatened.  

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Motives for a takeover

Takeovers and mergers are a way of growing externally, this can be done through reaching an agreement between the management and shareholders of two businesses or when one business controls the stakes in another company by purchasing 50% or more of their share capital. The alternative to this is organic growth, this is through increasing outputs and sales and then reinvesting to buy new outlets or to fund research and development. However, this method takes longer for a business to grow.

One possible motive for a takeover is to gain access new geographical markets that the company had not reached, this may be due to survival from recession or already saturated domestic markets. For example, Kraft took over Cadbury which already has an established presence in many markets such as the UK but most importantly one of the BRIC countries – emerging markets such as India. Cadbury set up in India over 60 years ago and become the country’s largest confectioner, as a result of fast growth in this country, India represented 40% of sales where Cadbury gained the majority of its revenue. As well as this, India’s resilient market has a growth of 20% with profits growing at 30%. After the takeover, Kraft gained access to more markets which Cadbury already had a foot in thus being able to reach more customers and develop a bigger chance of sales leading to increased revenues and profits without taking the risk of entering completely new markets where neither firm had knowledge of. Additionally, as the market is growing, the company can spread the risk amongst current markets if they are becoming more saturated. However this depends on whether the hostile takeover that Kraft carried out has damaged their reputation within the emerging markets. During the takeover, Kraft received heavy amounts of negative press concerning their hostile takeover as they were accused of taking away Britain’s Heritage. In addition to this, there were rumours of closing down factories despite making public pledges, this could ruin their credibility and reputation therefore could potentially damage sales within the new markets.

Another possible motive for a takeover could be to acquire new products or services. For example, before the takeover, Cadbury’s had 26% of the chewing gum market whereas competitor Mars, owned 35%. Cadbury’s popular gum brands such as Stride or Trident can allow the little expertise that Kraft have in the chewing gum market to expand and evolve therefore the combination of Kraft and Cadbury’s can allow the market to result in a proportion similar to Mars/Wrigleys. As expertise from Cadbury will already be present, Kraft will be able to save costs of recruitment and training thus being able to spend more capital on research and development or recouping integration costs.  The success of this depends on whether expertise from both Kraft and Cadbury’s is sufficient and innovative enough. As well as this, it relies on both firms working together to produce gum products that tailor to the markets wants and needs, therefore Kraft have to be vigilant when making redundancies.

A final possible motive for a takeover is to increase their market share thus reducing competition. If Kraft were to gain the most market share, they would become the market leader therefore they can increase their competitiveness by charging premium prices and benefit from economies of scale. Further benefit allows the company to compete more closely and so Kraft/Cadburys have a chance of holding the position of market leader. This dominant position will allow the firm to be more competitive as they have the potential of being price leaders thus setting the boundaries. As the firm can take advantage of economies of scale, this can enable them to lower costs, especially with the bonus of charging higher prices, this can results in wider profit margins. Furthermore, being market leader means there are barriers to entry for new entrants. After the purchase of Cadbury, Kraft increased their market share to 14.8% of the global candy and gum market. Competitor’s Mars follows closely behind with 14.% whilst Nestle has 7.8%, this evidence shows that Kraft was successful in gaining market share by taking over Cadbury.

In conclusion, the main motive behind takeovers and mergers is to access high levels of profits by combining the revenues of both companies. Although in the short term there will be high integrations costs around £430million, in the long term the combined profits from both companies will be large. This will benefit both the company and shareholder value as shareholders will be able to receive high returns for their investment in the form of dividends once all the costs are paid.

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