DRAFT

2.The Problems of Takeovers and Mergers including Difficulties Integrating Businesses Successfully

The least risk option for expanding a business is the internal, organic method. However, this approach is time-consuming and requires a large amount of effort despite being low risk. A quicker option for expanding a business is the external, inorganic method. Two effective methods of growing externally are mergers and takeovers/acquisitions. Though external can be an effective method of increasing market dominance, there are also several problems that can occur that will make integration unsuccessful.

A problem that might occur with an acquisition could be that the acquiring business has issues accessing the performance of the target business. Before integration is accepted as a profitable option a certain amount of due diligence should be taken into studying the relevant facts and circumstances of the transaction to ensure that the acquiring company is able to take advantage of the potential growth and cost synergy. The problem with investigation stage of deciding whether to pursue a takeover is that it requires time and effort to get information that will allow them to make the correct decision. This time and effort needed before bidding leaves an opportunity for competitors to also take advantage of the situation as well to get a better hold on the market. This increases the risk of the bidding company rushing this investigation stage or using retrospective information to come to their conclusion potentially resulting in the wrong choices being made therefore losing a lot of money in the long-term. This fault was made perfectly clear when the Royal Bank of Scotland (RBS) acquired ABN Amro. RBS was fighting in a bidding war against Barclays to buy ABN Amro to acquire a larger hold on the market. RBS had done a certain amount of due diligence but the information they had was for before the banking crisis had started. RBS ended up paying for 3 times to value of ABN Amro. This lack of detailed due diligence exposed RBS to a substantial amount of financial risk which ultimately resulted in the government bailing them out which prevented the possible economic and societal damage from occurring. This mistake was made by senior managerial staff that over estimated the strength of the economy and had ‘tunnel vision’ on the prospect of the growth capabilities if the acquisition was successful.

Another problem that might occur with an acquisition/merger could be the cultural clash that can occur between the two integrating companies. Culture is the accumulation of how a business operates in all aspects.  Organisational culture could be attitudes, customs, beliefs and values which distinguish a particular organisation from another.  When two companies with entirely different cultures integrate, large problems can occur with performance due to the difference in opinion on how particular tasks should be carried out. An example of culture clash that has had an affect on performance is the unsuccessful merge of Daimler Benz and Chrysler in 1998. Chrysler had a significant hold on the American market, gaining $2.8 billion annual profits while keeping relatively lost costs with high efficiency. Chrysler also had connections with many car dealership networks to distribute their products. Daimler Benz identified their weakness in the American market, though they were successful and well known in European market, they desired the skills and connections to increase their market share within America. The two companies announced that they would integrate in a ‘merger of equals’ hoping to take advantage of the potential synergy effect (lower costs, R&D, distribution, etc) available to increase both companies effectiveness. The new resulting company would have 442000 employees and will be approaching a market capitalisation of $100 billion. The cost for the stock-swap deal was $37 billion. After the deal had taken place, problems started to arise between the both companies. Chrysler adopts a risk taking, informal, low cost management culture while Daimler Benz favours the formal, bureaucratic, high quality, innovative culture. Ultimately, this difference resulted in a clash. Due to the clash, many misunderstandings, resistances to change and disagreements occurred which would contribute to the failure of the merge. The merger was stated be a ‘merger of equals’, however, Daimler Benz was seen to have the more dominant position which resulted in employees of Chrysler resisting the change of culture as they were reluctant to give up their current culture. The efficiency, productivity and communication got increasingly worse due to the de-motivation of staff because of the unwillingness of both companies to compromise their belief system on how the business should operate to take advantage of the synergy available. Employees would ultimately start to leave which would contribute to the lowering productivity and increasing costs because of the time, effort and money required to train new prospective employees. Three years after the merge the DaimlerChrysler's market capitalization stands at $44 billion, which is roughly the same as Daimler Benz’s before the merge. Chrysler’s share dropped by a third of its previous pre-merge value.

In conclusion, I believe that difficulties can arise when two companies are integrating which could put both companies in danger. These difficulties could include clashes of culture, lack of experience, lack of due diligence or/and using information that isn’t relevant to the current economy or market. In both the examples above the businesses could have investigated the other company more thoroughly than they actually did. RBS may have been in a bidding war against Barclays but wouldn’t the most appropriate choice for long-term success to be more due diligent because in hindsight they could of easily dodged that deal and been more competitive because Barclays would of taken the fall instead. Daimler Benz and Chrysler could have avoided the unsuccessful merge by simply doing research into how the other company operates. If they had investigated they would predicted the culture clash before it happened and prevented the loss of profits. If they had investigated, why did they not act in the appropriate way to get past the culture change needed. A compromise between both cultures could have been produced which would of ensured long-term success for both companies. In the short-term, it would be difficult to change the culture but if for example they used Kotter’s 8-step change model, they could easily avoided the staff problems they had later.