3. The factors influencing the success of takeovers and mergers

Takeovers and Mergers are common ways for company to expand. A merger is where the companies voluntarily join together to benefit from the possible advantages of working together, however a takeover is when one company will buy another company, this will be done by buying 51% or more of the company shares to gain control, this will usually be to use its expertise and assets in order to benefit their original company.  Some takeovers can fail, resulting in little or no benefits from having joined the companies together, however some takeovers/mergers can succeed to the extent or even more so than expected, leading to the company owners having great deal of profits. There are many aspects of the takeover/merger that need to be looked at to make sure that the takeover/merger goes well.

One aspect that needs to be looked at that can influence the success of the takeover is the differences in culture. Culture is the way in which a company operates, this can include things like organisational structure, rituals and routines and leadership styles. Each company will have their own culture, in some cases, when companies take-over/merge, it is hard to find a way in which their cultures can mix. One company that did this well was Tata, they took over Land Rover and Jaguar. Tata, took into account that there might be differences between their workers and the 16,000 workers that worked for Land Rover and Jaguar, and therefore made a carefully planned integration process.  One of the main things that Tata set out to do was to make sure they kept the companies as a British company, this is due to them believing that “Ownership is not about taking over a culture” and is more about setting challenging targets and making sure that the targets are met.  Less than three years Tata bought Land Rover and Jaguar for £1.1bn from Ford, it has boosted global sales by 26% to 244,000 vehicles.  This is exactly what the companies wanted and showed that the way in which they chose to integrate was an example to future takeovers. However if companies are to ignore cultural differences, as was the case with companies Daimler and Chrysler in 1998 then the takeover/merger may fail. Daimler was a German car making company which specialised in high prices luxury cars, whereas Chrysler was an American company known for its low priced cars.  However the difference in the companies wasn’t only through the products that they produced, it was also the fact that Daimler was known as an upmarket company whereas Chrysler was a ‘blue collar worker’ factory.  This created a difference in the workers, not only could they not speak the same language, being paid considerably different amounts, but Daimler workers also had a dislike for Chrysler works, they claimed they would never drive Chrysler cars, and they was unwilling to give car parts to Chrysler.  This meant that the merger was not having the benefits that they had hoped for and was said to have cost the owner of Daimler billions pounds between the time of the merger and 2007 when the companies separated, on top of the £650 million that it cost Daimler to pay off Chryslers debts before selling it to Cerberus.  Both of these examples show that it is important to take into account cultural differences and make sure that they are dealt with at the time of the takeover/merger, if workers do not get on with other workers or the companies do not find a adequate way to share assets the both companies can suffer and make huge losses, and lower the overall worth of the company.  The companies involved could try to resolve the differences by making sure they have honest and open communication between themselves and their workers. They could use Kotters 8 step model to create urgency for the change and allow every worker to know and understand why the change is needed. If everybody involved has the same aim from the takeover then it should run more smoothly and is more likely to be successful.

               

Another aspect that can influence the success or failure of a takeover/merger is how much preparation was done for the takeover/merger, and if the companies fully understand what will be involved in the takeover or merger. Due diligence must be undertook before a takeover or merger is carried out, to ensure that the companies have full understanding of what is to be expected. One company in which did this well was Kraft when they took over Cadbury.  Kraft carried out a lot of due diligence before the takeover and they also prepared themselves financially by saving some of the profit they made from Kraft so that they would be in a good position to make the offer to Cadbury when the time came. This meant that they didn’t have any cash flow problems during/just after the takeover and they also knew what to expect of Cadburys and knew all about its British background which also helped the companies to join together culturally. However an example of when a company failed to carry out adequate due diligence is when the Royal Bank Of Scotland (RBS) took over the Dutch bank ABN Amro.  The problems with this takeover started before the deal was even made, this is due to RBS having a bidding war with Barclays Bank, which lead to RBS offering 3 times the book value for the Dutch bank. The bidding war meant that RBS didn’t carry out due diligence to the right extent, (and the little that they did do became inadequate after the collapse of Northern Rock) RBS offered the money without any real planning, due to them not wanting to be out bid by Barclays. This lead to them having losses and making the bank takeover a failure.

In conclusion there are many factors that can have an effect of the success or failure of a business, if the companies were to ignore these factors then they are putting themselves at a high risk of failure.  A report by Coopers and Lybrand in 1993 shows that cultural differences is responsible for a large amount of 85% of takeover failures, and that lack of knowledge planning is present in 80% of cases. This demonstrates why some of the companies mentioned above have survived the takeover and are preforming well as a joint company, whereas some companies then went on to regret the takeover and sell off the company that they brought.  Therefore all companies that takeover or merge with another one is advised to be careful and to gain full knowledge about the other company before going ahead with the takeover. The must make sure that they have a strategic fit, which is making sure that the company in which the wish to buy suits their current business and that the new company doesn’t contain any aspects in which will be useless to them. They must also make sure that they do a cultural audit, this is recording all qualitative factors about the business such as workers opinions and rules/ unwritten norms of workplace interactions.  These will both either show that the businesses will work well together, or it will show potential problems in which can be solved by careful planning.

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

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Takeovers and Mergers are common ways for company to expand. A merger is where the companies voluntarily join together to benefit from the possible advantages of working together, however a takeover is when one company will buy another company, this will be done by buying 51% or more of the company shares to gain control, this will usually be to use its expertise and assets in order to benefit their original company. However takeovers and mergers don’t always go successfully, sometimes there are small problems which can be easily solved, however there can also be more deep routed problems which may lead to business failure.  All companies participate in takeovers and mergers to seek the benefits that they believe they can get, however in every takeover/merger there can be a large time lag of the rewards, and in this time it can be unsure if the company will actually receive any benefits at all, or if it will be worse off.

One problem that a companies in involved in a takeover or merger might find they have is a culture clash. Culture is the way in which a company operates, this can include things like organisational structure, rituals and routines and leadership styles. Each company will have their own culture, in some cases, when companies take-over/merger, it is hard to find a way in which their cultures can mix. This was the case with companies Daimler and Chrysler when the merged in 1998. . The merger was supposed to a merger of equals and was to provide them with a worldwide combined sales around $130bn (£78.3bn).Daimler was a German car making company which specialised in high prices luxury cars, whereas Chrysler was an American company known for its low priced cars.  However the difference in the companies wasn’t only through the products that they produced, it was also the fact that Daimler was known as an upmarket company whereas Chrysler was a ‘blue collar worker’ factory.  This created a difference in the workers, not only could they not speak the same language, being paid considerably different amounts, but Daimler workers also had a dislike for Chrysler works, they claimed they would never drive Chrysler cars, and they was unwilling to give car parts to Chrysler.  This meant that even though directors of each company saw to eye to eye, the merger was not having the benefits that they had hoped for.  The failed merger was said to have cost the owner of Daimler billions pounds between the time of the merger and 2007 when the companies separated, on top of the £650 million that it cost Daimler to pay off Chryslers debts before selling it to Cerberus . However not all takeovers fail if there is a difference in the company cultures, it’s only if you neglect to look at how they differ and neglect to accommodate for this will mean the takeover will fail, When Tata took over Land Rover/Jaguar they took into account the cultural differences, and went on to make record making profits over the next few years, including a 1.1 billion pound profit in 2010.

Another problem that companies may face when taking over or merging with another company is that they aren’t prepared for the takeover or considered all factors of the takeover/merger. Due diligence must be undertook before a takeover or merger is carried out, to ensure that the companies have full understanding of what is to be expected before during and after the takeover. An example of when a company failed to carry out adequate due diligence is when the Royal Bank Of Scotland (RBS) took over the Dutch bank ABN Amro.  The problems with this takeover started before the deal was even made, this is due to RBS having a bidding war with Barclays Bank, which lead to RBS offering 3 times the book value for the Dutch bank, this became more of a problem when the UK started to enter an economic crisis, meaning that RBS was now paying more than they originally needed to for the Dutch bank, as well as having problems with money themselves. The bidding war meant that RBS didn’t carry out due diligence to the right extent, (and the little that they did do became inadequate after the collapse of Northern Rock) and RBS offered the money without any real planning, due to them not wanting to be out bid by Barclays. They didn’t do any more due diligence taking into account the external economy changes, this meant that when Northern Rock collapsed they was unable to cope with the takeover due to their poor planning.

In conclusion, poor planning and ignoring cultural differences are just two reasons in which a business takeover/merger might fail. A report by Coopers and Lybrand in 1993 shows that cultural differences is responsible for a large amount of 85% of takeover failures, and that lack of knowledge planning is present in 80% of cases. Many companies that have failed due to overlooking the importance of these factors. Not taking into account cultural differences, about how workers might feel being made to work with people that work very differently to what they are used to, this will mean that both sets of workers will want to work the way in which they are used to and not change their ways, creating a barrier between the two sets of workers. Companies could change this by applying Kotters 8 step change model, this allows the company to create a real urgency for the change, allows everyone to see the reason in which the change is important and makes sure that the change stays in the long term in every aspect of the company. Another aspect which could determine the success or failure of a takeover is the leadership style, if the leader can plan and determine the effects of change, whilst effectively managing all staff and operations in the company then the takeover should be a success. Whereas if the leadership cannot cope with all of the changes that happen during a takeover then the companies may suffer from the takeover plans.

6. The reasons why government might support or intervene in takeovers and mergers

Takeovers and Mergers are common ways for company to expand. A merger is where the companies voluntarily join together to benefit from the possible advantages of working together, however a takeover is when one company will buy another company, this will be done by buying 51% or more of the company shares to gain control, this will usually be to use its expertise and assets in order to benefit their original company. Governments can either support a takeover or intervene to stop it. If the government feel that the takeover will be good for/ have no effect on the market as a whole then it will let the companies join together, this is called a free market economy where all company has complete control over what they do and how much they charge. However if the government feel that the takeover will result in a market failure, then they will intervene to stop the companies from joining.

One reason that the company would support a takeover and not intervene is if the takeover would be to prevent the failure of a company, which has a large effect on the country. This is the case for the Lloyds who took over Halifax Bank Of Scotland (HBOS). HBOS was in trouble due to their debts of around 11 billion pounds and Lloyds took over the company for a final price of 12 billion, therefore saving HBOS from failure and minimising damage to the UK banking sector. Normally this deal would not have been allowed due to it now being a monopoly in the savings and mortgage markets, Lloyds banking Group now controls nearly a third of the UK market and half of the Scottish market. However, because the government wished to help maintain the stability of the banking sector they agreed to not intervene with the takeover and decided to use the ‘National Interest’ clause in the Competition law to allow the takeover to go ahead. If HBOS was to go into liquidation then this would mean high levels of unemployment, and reduced number of tax’s that the government are receiving. Reduced tax’s will mean that the government has less  money to use and the higher unemployment rates means they will need to pay out more money than they were previously to give benefits to people that have been made redundant. In addition to this HBOS lends money to small businesses and helps to increase competition in various markets, however if the bank was to go into liquidation then they would no longer be able lend money to small business in an attempt to help to country out of the recession. However by allowing the companies to merge, the government was taking on a risk of Lloyds abusing the monopoly power that they now have.  Lloyds now has a large share of the UK markets and they could abuse this power by setting mortgage repayment as higher than they were before the merge, and because of the lack of choice in the market, the customers will need to pay this price to get the mortgage that they want.

On the other hand, one reason that government might intervene with a takeover is to prevent a company from owning the majority of its relevant market, in case they were to abuse the power that the takeover would result in them having. An example of this is the News Corporations takeover bid of BskyB, which would mean that the joint companies would be in control of a large amount of the media sector. Previous negativity around News Corporation due to a phone hacking scandal means that the government had worries that they would misuse the dominance that they have over the media sector to suit the companies own needs, and this sparked the government to request that Ofcom  create a report analysing the potential takeover. Ofcom reported that after taking over BskyB News Corporation would reach 55% of news readers and could possibly use BskyB’s services for the good of News Corporation.  Rupert Murdoch the owner of News Corporation may use the power that he has to increase prices excessively, this will mean that he could gain a higher profit margin at the expense of the general public.  However if the government had allowed the takeover to go ahead, then it might have actually had an opposite effect. News corporation might have used the merge to lower prices and pass on this saving to the customers. They also could have used the money savings to increase innovation within the companies, this means that customers will be presented with new and innovative things in which would make the takeover worthwhile. 

In conclusion it is down to the government to decide if they will try to intervene with a takeover, this decision will be influenced by the possible positive and negative effects that the takeover will result in. Most take overs which involve small companies will not be seen as a big concern by the government, however it is the large companies which can have an effect on whole market that the government will take into consideration. They will need to weigh up each argument and decide which will have the most of effect on the economy, and if this effect will be a good one. They will base their opinion on what the companies as one will benefit the general public, if the companies are likely to abuse the power, by increasing prices excessively or making large redundancies, then this means the government will do everything in their power to stop the takeover from going ahead.  One of the main powers that the government can use to stop a takeover from going ahead is the competition commission, the competition commission will look into any mergers which the Office Of Fair Trading refers to them, they will investigate the merger and look to see if the merge will lessen the competition in that market, the only exceptions they will make is if merge will raise pubic interest issues, such as with Lloyd’s takeover of Hbos. However it is unsure whether the government will actually use their powers such as the competition commission to stop the takeover from happening, or if they simply use it as a preventative to try and deter large companies from joining together.  Most large companies might not attempt to join together on the basis that they presume they will be stopped, this means that the government has power over the company owners without having to actively intervene.