Saturday, 12 May 2012

First Draft of (2)


(2) The problems of takeovers and mergers including difficulties integrating businesses successfully



Takeovers and Mergers involve the change in ownership of two companies since increasing profit is always the ultimate objectives of most businesses. Business belief by engage in takeovers and mergers will lead to benefits such as growth, higher competitive, synergies to be lower cost to anticipate increasing in more profit. However there may be problems concerned with the takeovers and mergers to achieve what the T&M leads to, as a T&M would have huge impact on two businesses, some cases may be only problems with transition and solve in a short time, in other cases could be problems that lead to a false move put business at risk such as resulting business failure. Integrating means the fusing of business operations such as manufacturing, HRM, and marketing. It does not occur instantly, but over a number of years, therefore the benefits of T&M will be realized only after years. This essay would analyze various problems that a T&M might have and the difficulties to integrate businesses successfully.



The first problem I would like to discuss is Corporate Culture Clash. Firstly, organizational culture is commonly defined as the attitudes, values, beliefs, norms and customs which distinguish an organization from others, it formed by the organizations history like the life cycle of the company, also the company characteristics like size, complexity and formation such as rules. As mentioned, a T&M involve two businesses which have different cultures, therefore problems may occur, there might be resistance, the doubtfulness of the culture to be adopted, and the effect could only be seen after the T&M.

Take Daimler-Chrysler as example, On May 7th, 1998, it was announced that Chrysler would merge with Daimler-Benz, moreover it’s a mergers of equal which the new company, with 442,000 employees and a market capitalization approaching $100 billion, would take advantage of synergy savings in retail sales, purchasing, distribution, product design, and research and development. However, it leads to the result of three years later DaimlerChrysler's market capitalization stands at $44 billion, roughly equal to the value of Daimler-Benz before the merger. Its stock has been banished from the S&P 500, and Chrysler Group's share value has declined by one-third relative to pre-merger values. It was because of the culture clashes, much of this clash was intrinsic to a union between two companies which had such different wage structures, corporate hierarchies and values, such as Chrysler's image was one of American excess, and its brand value lay in its assertiveness and risk-taking. Mercedes-Benz, in contrast, exuded disciplined German engineering coupled with uncompromising quality, therefore if they share the same platform would lose out their value, they both have different ways of doing things, now they are merger of equal, with opposite of value, it would have problem on decision making while both would have different perspective on behalf Daimler-Benz remained committed to its founding credo of "quality at any cost", while Chrysler aimed to produce price-targeted vehicles, this unwillingness to ‘join together’ lack of synergies, besides as culture has a big impact on employee morale and motivation hence the productivity and the quality of service provided, therefore this culture clashes impact on the employees would lead to poor efficiency, productivity, communication and employee turnover which are time and money costly also would lead to lower sales unit eventually lead to the above figures of significant fall in profit and total worth, put both companies at risk.

In addition, the successful of T&M on this behalf depends on the planning ahead, did they recognized the culture differences, and what they plan to try to understand the cultural values and strengths of the acquiring workforce and allow it change or integrate the business to achieve their aims of T&M. For DaimlerChrysler, synergy savings are only achieved when two companies can produce and distribute their wares more efficiently than when they were apart. Owing to culture clash and a poorly integrated management structure, DaimlerChrysler is unable to accomplish what its forbears took for granted three years ago: profitable automotive production. On the other hand, Tata taken over Jaguar Land Rover was successful due to the embracing the culture of the takeover target which leads to them enjoying a net profit of 430million USD a quarter, which a year ago were net loss of 61 million.



Another one would be the problems in assessing the performance of the target business. T&M is a way of growth for the Business hence it is a large investment, which should require investment appraisal, in T&M there should be a due diligence investigation on the target business, this will investigate the target business allow T&M firm to have fully understand of the business, ensure whether the T&M could assess the benefits as they expected such as cost synergies or growth. Therefore its essential to undertake for analyze before they make the T&M decision. However, there is problem firstly it’s the problem of time, as the window of opportunity could be limited, often other companies or competitor could be interested as well since it could be a competitive market as free market. Therefore, there could be limited of time to make the decision hence the investigation could not be complete or accurate due to the urgency, which could possible lead to false influence on decision making and make a bad decision for the long term performance; like an example of Royal Bank of Scotland acquire ABN Amro, RBS engaged a budding war with Barclays to but ABN Amro, although they had done a due diligence, however they hadn’t done a DD after the start of the banking crisis, as a result this decision exposed RBS to substantial risks, clearly it was a mistake, since without government intervention the bank would have collapsed, would cause more damage to the economy and society. Although they have been successful (Taken over of NatWest)This was a mistake from the RBS senior management ambition for growth and had been over optimistic about the economic situation lead to this terrible T&M resulting putting RBS as risk and damage the reputation and the faithful from the stakeholders.



In conclusion, difficulties integrating businesses successfully can arise from a number of things including clash of organizational cultures, management personality clashes, poor planning, and lack of experience in managing integration. The success depends on the willingness of organizational members to surrender their own culture, and at the same time perceive that the other culture is attractive and thereby worth adopting; there is much doubt whether new leaders can change a well-established corporation culture. There is no ideal or appropriate culture any culture can be effective. Therefore it really depends on the leadership style and the skill of the owner and directors are they ready for T&M and the planning before it. In short term, business should retain the workforce, longer it takes, greater uncertainty, the greater the risk losing talented employees. T&M benefits or failure can be seen after years, during that period the success very depends on it, I recommend business use the Kotter’s 8 step change model. Despite obvious importance, little value is given to integrating cultures, like in Tata Land Rover helps identify the importance. Overall, Success is possible.

              Moreover, also some external factors could influence the success of the T&M, such as the economics environment, whether it’s the slump or Boom, which would have big impact on most Businesses hence the T&M success, the ability that they survive, overcome or take advantage of is by their leadership, the ability to deal with uncertainty.







Thursday, 3 May 2012

First Draft of (6)


                (6) Reasons why government might support or intervene in takeovers and mergers

               

                Mergers and Takeovers refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity, two companies together are more valuable than two separate companies strong companies will act to buy other companies to create a more competitive, cost-efficient company. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. And it often has a big impact on the business market, economies and affect the society.  

On the other hand, the government is expected to be concerned the impacts of business decisions on the wider community, UK is an economic systtem that allows supply and demand to regulate prices, wages, etc. rather than government policy. However, if the mergers would disrupt the market to produces an unsatisfactory outcome(market failure), then governments should step in to correct the failure. Market failures remain one of the best reasons for government intervention within an economy on moral and economic grounds, arguably, in the best interest of the public. Intervention can take two opposing form; the government might encourage or promote a takeovers or merger, or in some cases, the intervention is to prevent a takeover or merger going through. This essay is to discuss the reasons why the government intervenes either promoting or preventing a Mergers and takeovers.

Firstly, one of the reason government supports for takeovers and mergers is to prevent a business failure that would harm the UK economy and society. An example to demonstrate this point is the recent year takeover, on 19th January 2009 Lloyds Bank takeover of HBOS. Lloyds TSB has agreed to pay £9.8bn for HBOS which only was worth £6.4bn. Initially, HBOS’s level of bad debts on mortgages and unsecured lending has risen in just two months. Since September2008, the charge for mortgage customers has risen from £400m to £700m and for customers with unsecured loans arrears reached £1bn, up from £800m.      HBOS’s Mortgage losses were running at £50m per month to September 2008 but this jumped to £150m per month in Oct and Nov 08, HBOS corporate division losses of £6.7bn in 2008.  With the profit warning, this has draws the government concerns, HBOS has occupied a recognized presence in the UK banking market, the UK government could not have let HBOS collapse, labeling the merger as in public interest for ensuring stability in the UK financial system and UK economy, otherwise would damage the economy lead to further increase unemployment during the slump in the Economy cycle at that time. If HBOS alone fails UK banking will sizeably suffer, by creation of this exceptionally gigantic bank, the government would be compelled to protect it at any cost if an unaffordable mass run on this finance giant occurs. In other words, the government will be irrevocably tied to this banking mammoth. The consequence being that the entity will have ascendancy or pre-eminence even in political matters with the government.

This doesn’t happen often, very rare indeed a government intervene as support for a potentially lessen competitive company, according to the Enterprise Act 2002, Office of Fair Trading can review mergers and takeovers to investigate whether there is a realistic prospect that they will lead to a substantial lessening in competition with the criteria; the value of the UK turnover of the enterprise acquired (or to be acquired) exceeds £70 million (the turnover test); or the share of supply of goods or services in the UK or in a substantial part of the UK held (or to be held) by the merged enterprise is at least 25 %(the share of supply test). With HBOS combined with Lloyds, the new group's branch network will jump to 3,000 and its mortgage market share will jump to 28%. The group would run a third of all the current accounts in the UK, have 140,000 staff and retail deposits worth £321bn. One of the reason this takeover is allowed is under the Enterprise Act 2002 to detrimental effect on consumers is an important factor, as the Act main concerns is the consumers’ whether the combined company would uses its market power to control the prices, evaluate this takeover, this takeover would save HBOS hence its customers and future, it was designed to shore up HBOS and protect the millions of savers who hold a combined total of £243bn in their accounts.

On the other hand, government could also intervene to stop a merger or takeovers. I would use the News Corporation-BSkyB as an example, the main reason is because abuse of monopolistic powers. Firstly, the impact of monopolistic powers is the danger and harm to the economy and customers, while the business can raise prices due to the power of price leader, no competition leads to a reduction in efficiency hence higher prices, and neglect of innovation, which is all negative impact on the consumers and the suppliers as well because of the exploitation; A mergers or takeovers of large company likely to produce a dominant firm situation and lead to above consequences, therefore the state – in the form of the competition authorities might act to prevent a mergers or takeover, if it is considered harmful to the economy and to consumers such as The Office of Fair Trading (OFT) and Competition commission (CC).

Looking at the News Corporation-BSkyB takeovers, News Corporation had already owned 39.1% of BSkyB, in early June 2010, News Corporation for offers 675p for the 69% of BSkyB that it doesn’t own. the combined might of the company – the largest media group ever seen in British history, hence an alliance of media companies opposed to the News Corp/Sky merger – including BT, Channel 4 and the publishers of the Guardian, Daily Mirror, Daily Mail and Daily Telegraph said it could have serious and far-reaching consequences for media plurality. Yet, although on 21 Dec 2010 has the European Commission to approve the takeovers, it still need the approval from the UK Competitor Commission.

However, a scandal of British journalists working for Rupert Murdoch's News of the World are accused of hiring private detectives to hack illegally into the voice mails of thousands of people, ranging from top politicians and celebrities to murder victims and the families of fallen troops. There are also allegations that journalists bribed police to get private details about people, including members of the royal family. This scandal has concerned by the government, and it has triggered the intervene from the government to start investigating the takeovers, for the reason that if the takeovers went through this would give a fear News Corp would abuse the monopolistic power based on the grounds of the scandal, as a result, CC has given a more strict test and investigation on this mergers, which created a negative media attention for the News Corp, leads to fall in value of shares and unsettle shareholders, eventually, News Corp withdraw the offers.

                In Conclusion, Government and Business have different views and goals; from Lloyds-HBOS takeovers, the only reason government encouraged Lloyds-HBOS because of it would save the economies of UK, even though it would breach the competition law, to prevent the chain of bad debt which would require government to further cover, nevertheless, a business normally do Mergers or takeovers because of growth to lead to generating more revenue and profit. After the takeovers, Lloyds realized it was a bad move for them, not only it worth a lot less than it paid, also came with problem of HBOS such as the bad debt levels because they didn’t do a full investigation of what HBOS worth and bad debt they had. Therefore, we can see that having the government support doesn’t necessary having a perfect good impact on the Business, as least in the view of the government, they did save the economies and customers of HBOS in a short term, however for Lloyds not necessary having a good impact in short term and long term as they need to resolve and cover all the losses because of taken over of HBOS. As for the News Corporation-BSkyB, if it was taken over, News Corporation in 2011 will see a jump of about £200m (24% increase) in operating profits as the investments wash through and BSkyB embarks on a high growth trajectory expected to yield a further increase in profits in the order of £650m between 2011 and 2015, the takeover will make News Corp easily the most powerful single media owner in the UK in modern times, enjoying almost double the income of the BBC, However these are all numbers and hypnosis if it would happen. In the view of Business, not only has lose the opportunity cost, but with all the scandal that negative media attention goes along leads to fall in value of shares and unsettle shareholders.












Sunday, 22 April 2012

First Draft of (5)



        (5) The impact on, and reaction of, stakeholders to takeovers and mergers

                Stakeholder is an individual or group with a direct interest in the activities and performance of an organization. They all have different levels of interest and power to affect the business or they can be affected by the business, they exert their influence to the organization depends on their power. Takeovers and Merger involves a change in an ownership of a business organization, as for a takeover it could be friendly or hostile. This essay will look at how this business integration has impact on, and the reaction of these stakeholders.

                Shareholder is the main stakeholders in a business, they are the internal stakeholders, which their decisions will have direct impact on the Business. Shareholders main aims normally want the firm to achieve high profit leads to high dividends to be paid, so their concerns would be the share price and the firm’s performance of the grounds of mergers and takeovers. An example is the proposed merger of Glencore and Xstrata. This Glencore proposed a  ‘merger of equal’ deal to Xstrata to going to form the world largest zinc producer, controlling 15% of the global market, and control 32% of the trade in thermal coal, which fuels power stations. The proposed share-based deal will offer Xstrata shareholders 2.8 new shares in Glencore. Despite being described as a "merger of equals", the deal values Xstrata at £39.1bn, a premium of almost 28% to its average price for the three months prior to the bid approach. Glencore already holds a 34% stake in Xstrata. However, Xstrata’s shareholders are not happy with the deal, looking at the figures, Glencore has 28.4bn of market capitalisation while Xstrata has 31.7bn, they will lose out in the short term due to the share price as they thought its undervalues.  Assuming they do merged together, the impact of shareholder would measure by the dividends and share price, yet if they will have the choice of selling or exchanging their shares. In a long term, shareholders would benefit in dividend if it perform well, which in this case, Xstrata and Glencore merger rather focus on the long term benefits which is likely to perform better than separated.  Nevertheless, if it performs badly, shareholders would suffer with lower value of shares, which will have a negative impact on the shareholders’ funds.

                Secondly, although employees are the internal stakeholder, their opinion is not involved in the mergers and takeovers, most of the time they will be worried about the impact of takeovers and mergers on their job, could possibly change their salary, holidays, working conditions, even redundancies as it happens follow with the M&A. Take Kraft takeover Cadburys as examples, the workers of Cadbury fears that Kraft will cut pay and conditions hence the Union demand a pay rise for the 6,000 staffs also to assure that will not cut pay for irregular hours and benefits.  As the workers of Cadburys already worried as Kraft has already gone back on the promise it made before it bought Cadbury to keep open the company's Somerset factory. Days after agreeing the deal, Kraft went ahead with Cadbury's plans to close the factory, with the loss of about 400 jobs. Moreover Kraft had a proven track record of slashing jobs to help it pay off debt: cutting 19,000 jobs and closing 35 sites between 2004 and 2008. These all evidence first would damage Kraft’s reputation in the United Kingdom and has soured its relationship with Cadbury employees, then would leads to reduced motivation, hence their productivity, lateness and absenteeism and result with rising cost, and if it is serious could lead to strike action, political campaigns. All of above will have a negative for the acquiring company. However, these redundancies are sometimes essential to the business follow with the mergers and acquisition as to save costs and elimination of duplication to cut cost in order to generate more profit and to be more efficiency. Depends on how they offer the terms, to save cost the same time and damage their reputation as much.

Another stakeholders would be customers. A firm change of ownership would have a big impact on the customers, because the nature of the product might change which is not the same it used to after being takeover, therefore could easily link with falling in sales as the customer loyalty comes to test. As the Boston Matrix would see:  to change a cow into a dog. Take Cadburys and Kraft as example, a British company taken over by a American Company which is known for sales of cheese, one of the USP of Cadbury is the British history, as now being taken over, it might lose its reputation and could lead to disappointing the customer that take prides of the British chocolates, hence Kraft might change the product as its might not have the necessary knowledge of the taste and market in the UK.  However, the main concern for the customer would be the price of the product, a merger or takeovers more often to have a benefit of Economics of scale such as bulk buying and it would leads to save costs which would allow the firms to drop the selling price to attract more customers and gain more sales. This is likely to benefit the customers as they can pay less for the product, or afford to purchase more.

In conclusion, a mergers or takeovers often cannot satisfy all the stakeholders, often to have a negative impact on the stakeholders, the traditional shareholder approach showed that a mergers and takeovers often set priority with the shareholders impact which is shareholder values, profit and dividends. With this approach might lose out in the long term due to other needs of the stakeholders cannot be satisfied like for the employees fear of job losing and loss of customers loyalty.











Friday, 23 March 2012

First Draft of (1)


(1)  The Motives for Takeovers and Mergers and How These Link with Corporate Strategy

           

Behind every merger and takeover, there are motives and reasons to it. Initially, a Business has two methods to growth, either internally (organic) growth or external growth; Takeovers and Mergers are two main ways for external growth. Moreover, the factors that influence a business owner or corporation to make a decision whether to growth by takeovers and mergers is Corporate Objectives, different companies have different objectives hence the corporate strategy which is a medium to long term or course of action required to achieve the business’s corporate objectives. Two common objectives for big firms are profit motive and shareholder.

A merger or takeover allows a business to access in a new geographical market. According to the Ansoff Matrix, accessing new market are market development and Diversification, one big advantage of new markets is to spread risk and gain more revenue from another market. One factor to look at is the market conditions, a rapid growth market would attract business to emerge.(Expand)  Emerge to a developing geographical area, for example BRICS, Brazil, Russia, India, China and South Africa were among the fastest growing emerging markets, it has an estimated average growth of 25% of GDP. Take the Kraft takeover of Cadbury as example, Kraft intended to start making Tang powdered beverage and chocolate in a developing country, the strategy is to use Cadbury’s strength in those regions, Cadbury already has the opportunity to its expands its global operations, new market with new product of which are limited in particular region, such as Cadbury India was attempting to increase the inclining market for chocolate with innovation. Statically, Cadbury India is said to be growing at Compounded Annual Growth Rate (CAGR) of 20% and due to this, Kraft will also make good market in India for their products.  As the result Kraft now gets about 1/4 of it’s almost $50 billion USD in sales from emerging markets because of takeover Cadbury. The takeovers showed a huge benefit for Kraft to expand in a growing market, get a foothold in the emerging market, broaden the access to a fast-growing market and enjoy the huge benefit of the market growth in these growing markets. Hence by using takeovers to get in a new geographical market would decrease the barriers to entry, opportunity cost applied which would possible save the company time and money to research and try to reduce the barrier there would been. However, according to Ansoff’s Matrix, although market development has a high reward, it has a high risk as well, two companies might have different ways of operation and marketing, by integrating therefore it might change the marketing strategy to the new markets, it depends on do they share the same knowledge to the new market, and how they coordinate with the knowledge they have got and also depends on the time to adjust to the new geographical market.

Another benefit would be achieving rapid growth, in above mentioned, a company can growth in either internally or externally; with external growth would be more rapid, since the company would merger or takeover another company with all their assets, it instantly growth by a large volume, hence to achieve the objectives of the company. The further impact of growth rapidly is being more competitive hence gaining market share and power, by many ways, take Kraft and Cadbury as an example, The main motives behind the takeover by Kraft was to become the largest confectionary company in the world which would result in a turnover of around 50 billion USD per year, before the takeovers, Kraft were the second largest confectionary company in the world following the competitor Nestle; After Cadbury accepted the takeovers, Kraft Foods Incorporation forming the world’s biggest food and dairy product company (Confectionary Company) defeating his competitor Nestle. Primarily, Kraft would achieve the its company strategy of growth and gaining market share, since it became the market leader, becoming an monopoly/oligopoly in the market allow the firm to set the price of their products which others price takers would fellow . Moreover, this horizontal takeover involves the acquisition of the same stage in the supply chain, which could benefit from cost reduction of Economies of Scales with lower costs leads to high profit margin. However, although takeovers and mergers could achieve a rapid growth instantly gaining economies of scale, being too big also has diseconomies of scales, in Kraft being the largest company in the market, communication might be harder, coordination would become harder, also depends on how Kraft use the Cadbury to cut cost by Economies of Scale.

Moreover, takeovers and mergers also is to access new market segments, in order to get in to a new market segments, it requires a lot of market research and development before to launch the product in to the market. And according to Porters theory that in order to stay competitive, either the product has an USP or low cost, neither would be in a ‘no man’s land’ because of there would be no reasons to buy your products from the view of the customer. In Kraft and Cadbury, Cadbury is a market leader in the chocolate market in the UK, already had a 72% of the market shares. On the other hand, if Kraft wanted to get in the chocolate market,(grow internally), it would be competing with Cadbury to be the price follower, and might not be sustainable according to Porters theory in a long term, it would take a long time and huge investment to breakeven. This takeover allows Kraft Food Incorporation to access this new market segment, with being the market leader instantly making profits like when previous owned , as the view of the company it would be a large revenue on top of original sales. However, there’s also an issue of potential loss of customers following takeover or merger, as they might fear the product won’t be as good as before or the loyalty of the taken over products.

In Conclusion, a mergers and motives have a lot of different reasons, and not 100% satisfactory and not 100% advantage, weighting up the risk and reward is essential in order to make a successful mergers and takeovers. Overall these motives above have contributed to increase Profits, profitability and shareholder value. It can be measure by satisfying the shareholders, which they have highest interest and biggest influence to the company. Takeovers and Mergers these external instantly growth in a short term would have difficulties such as clash of culture, in return in long term would help future growth and maximize the ability to generate profit. The success depends on the company culture to adjust and coordinate. For Kraft and Cadbury takeover the strategy is being the largest confectionary company in the world resulting to make almost 50billionUSD in 2010 after the takeover, having over 28% increase over the year in revenue. These large amount of revenue allows Kraft to growth bigger  stay competitive and more important is satisfy the shareholders eventually leads to them keep investing or invest more to gain more capital, achieving  Kraft Corporate Objective, to be sustainable.