Business Organisation and policy report - Essay Example

?Table of Contents Introduction 2. Exxon-Mobil – a successful merger 2 Speedy entry to new product/market area 2 2.2 Accretion of knowledge,Skills 3 2.3 Financial engineering opportunities 3 2.4 Cost advantages 4 2.5 General synergies 4 3. Daimler-Benz and Chrysler – a failed merger 5 3.1 Overpayment 5 3.2 Management Hubris 5 3.3 Culture Fit problem 6 3.4 Poor integration 6 3.5 Disruption of existing activities 7 3.6 Non-transferable human resources 7 3.7 Diseconomies of Scale and example 8 4. Discussion & Conclusion 8 Bibliography 11 1. Introduction Companies are constantly looking for newer ways to grow and mergers and acquisitions are supposed to offer companies such opportunities. Mergers and acquisitions (M&A) are a popular form of corporate development as they are seen as long-term strategic orientation of the firm (Lin, Hung and Li, 2006). In recent years mergers and acquisitions have been taking place as a strategic response to problems arising out of globalization (Karitzki and Brink, 2003). Consolidation is expected to provide a solution but half of all mergers end in disappointments. They fail to achieve the financial and strategic objectives. A study by Harvard Business Review finds that companies spend over $2 trillion in acquisitions while the failure rate of M&As is between 70 to 90 percent (Christensen, Alton, Rising and Waldeck, 2011). There have been no efforts to learn why combinations fail and mergers and acquisitions continue to be mismanaged. Despite the large number of failures, executives still consider acquisition a key strategy to achieving business objectives. This investigation presents a report on why boards of directors continue to take over other firms. This would be derived through investigation of a successful and an unsuccessful merger. 2. Exxon-Mobil – a successful merger Exxon Corporation and Mobil Corporation, the two largest marketers of gasoline, were direct, significant and powerful competitors in at least 40 metropolitan areas from Maine to Virginia (FTC, 1999). Both these organizations competed in several products and geographic markets in the United States. This was a horizontal merger – merger of two competitors, which would result in the biggest non-government oil company in the world. There are two primary reasons of mergers and acquisitions – to boost current performance and to reinvent the business model (Christensen, Alton, Rising and Waldeck, 2011). M&As are also driven by the need for market expansion and for product diversification (Duncan and Mtar, 2006). Exxon Corp. Chairman Lee R. Raymond and Mobil Corp. Chairman Lucio A. Noto were realistic in their expectations from the merger. They recognized the need to cut costs due to changes in the oil industry. In fact these were the precise reasons for the merger – changes in the oil industry and the need to cut costs. Early intentions can influence subsequent integration. Leadership has to put forward a clear and convincing rationale to people on both sides that the merger is more than a cost-cutting deal (Baxter, 1999), which was done in the case of Exxon and Mobil. The merger of Exxon and Mobil was inspired by the merger of BP with Amoco and ARCO. They too wanted to reach the heights of the new market leader and they relied purely on financial analyses (Marks, Mirvis and Brajkovich, 2001). There was no strategic intent and the decisions were based on empire-building. 2.1 Speedy entry to new product/market area The most profitable part of business is this industry is oil exploration and this merger would give them a competitive edge in this activity. This merger was a response to aggressive and excessive exploration behaviour by competing major players as each of them was trying to maintain its relative standing in the industry (Krishnan, Joshi and Krishnan, 2004). This relative positioning was important because mature oligopoly was prevalent in the industry. Mergers such as this become a strategic tool to exit some players and contract the industry (Voola, 2006). Excessive capacity in an oligopolistic industry can lead to aggressive price competition. Hence the merger helped them focus on oil exploration. 2.2 Accretion of knowledge and Skills Exxon had experience in deepwater exploration in West Africa and this combined with Mobil’s production and exploration acreage in Nigeria and Equatorial Guinea, led to better knowledge and skills that encouraged investments in areas with high prospective risks and returns. It was getting harder to find oil and gas. To maintain exploration success required new and better technology. Therefore technological advancement was absolutely essential. In addition, corporate resources had to be optimally utilized to lower costs and increase operational efficiency. This was possible through a merger. Thus, the merger of Exxon with Mobil was not meant to become bigger but to become better (Longwell, 2002). The idea was to broaden the portfolio of exploration and production prospects, optimize the downstream assets and increase competitiveness through reduced costs. 2.3 Financial engineering opportunities This merger provided them with a way for financial reengineering. They were required to divest approximately 2,431 Exxon and Mobil gas stations across the nation which resulted in cost saving of $730 million (Corocoran, 2010). This divestment would free up assets and help them make better investments. The oil companies experienced weak volume growth loss of confidence. The oil companies had to find other means to deliver the growth in value that their shareholders were led to expect. This sort of defensive merger would help reduce fixed overhead costs such as administration, research, advertising, and distribution infrastructure (Mitchell, 1999). 2.4 Cost Advantages -Scale, scope, experience At the time of the merger both the companies had four refineries each in the United States. Exxon had a net income of $6 billion while Mobil had net income of $2 billion (FTC, 1999). Together, after divestments, as a merged unit, within a span of five years they became the largest corporation in the world in terms of market capitalization. The oil companies were undergoing realignment and reintegration in the 1980s worldwide. Significant downsizing was taking place when Exxon cut 70,000 jobs through layoffs in oil business and Mobil reduced employment by 80,000 (Baxter, 1999). Mergers facilitate resource deployment. They also facilitate the relaxation of institutional and organizational constraints that hamper growth. Exxon and Mobil used their merger as an opportunity to give up some of their low-profit retailing and refining operations (Krishnan, Joshi and Krishnan, 2004). The merger would enable the new company to carry out exploration and production for much lower costs (Hamilton, 1999). 2.5 General synergies This was a unique merger because it reunited two largest companies of John. D. Rockfeller, Standard Oil Company of New Jersey/Exxon and Standard Oil Company of New York/Mobil, which had been forcibly separated by the government a century earlier. The acquisition took the best from both and applied it to the new whole (NPS, 1999). Mergers are rational actions and in this case it was a well-laid out plan. The expected synergies could be achieved due to a dedicated team, due to integration efforts and because of due diligence exercised. The executives drew on the strengths of both the units which helped them boost performance. 3. Daimler-Benz and Chrysler – a failed merger The merger of Chrysler Corporation and Daimler Benz in 1999 was a combination of two firms of the same size in the same industry but with diverse cultures (Fitzgibbon and Seeger, 2002). Chrysler thrived on its innovation and flexibility while Daimler-Benz with its structured, hierarchical management, thrived on its engineering excellence. This was a horizontal merger where external audiences were involved. The merger was meant to create synergies in knowledge, to produce goods close to the market, and to develop foreign markets all over the world (Karitzki and Brink, 2003). The CEO of Daimler claimed at that time that the merger of a luxury car maker (Daimler) with a mass market brand (Chrysler) would be able to achieve economies of scale and scope across brands (Terjesen, 2012). However, the merger failed to create synergies or achieve the intended objectives because of poor strategic concepts, cultural differences, low employee morale, lack of effective communication mechanisms and lack of top management involvement (Adams and Neely, 2000). 3.1 Overpayment The CEO of Daimler was overambitious in his plans to merge or rather acquire Chrysler of the US. Business Week (2000) describes this as a purchase meant to outflank the rivals before they outflanked him. The merger took place when Chrysler was at the peak of its earnings and model cycle. This obviously would not be possible without overpayment in the deal. 3.2 Management Hubris The rejection of the buyout by the CEO of Chrysler (Shelton, Hall & Darling, 2003) confirms that management hubris was at play. Blinded by their “management hubris” the executives at Daimler led the organization into a risky merger (Papadakis, 2007). The deal demonstrates their overconfidence and arrogance as no clear vision or strategy was articulated. Besides, the Daimler executives were offered incentives to support the deal. The CEO also played people off each other as a strategy to ensure integration. Daimler was run by a strong CEO who seemed to dominate the board. Daimler did not have a successful track record. It had previously pursued a diversification program that it was forced to unwind. Its investments in Japanese auto company Mitsubishi also proved to be a drain on the company. The biggest mistake of the CEO was the merger with Chrysler. It was driven by the dream of the CEO to become an unparalleled international auto company (Gaughan, 2005). This merger strategy was hubris-filled as it generated large losses for the shareholders. 3.3 Culture fit problem Before the merger both the companies were performing quite well. It was expected that the merger would enhance performance and the stockholders overwhelmingly approved of the merger. Very soon after the merger Chrysler started losing money and there were significant layoffs at Chrysler as well. Differences in culture have been found to be largely responsible for this merger failure. Operations and management were conducted in entirely different ways because of the differences in culture – Daimler pursued a more formal and structured management style against the relaxed and freewheeling style of Chrysler (Weber and Camerer, 2003). 3.4 Poor integration Cultural differences impact the thoughts, behavior and actions. These can lead to conflicts and tensions, and may even hinder agreement over management issues. Ineffective communication can cause failures even during the integration phase (Nguyen and Kleiner, 2003). The contrasting cultures and the management styles hindered the realization of synergies (Case Study, 2008). 3.5 Disruption of existing activities Disruption of activities took place as most senior executives left Chrysler soon after the merger. The departure of some highly regarded engineers and manufacturing executives also affected the operations at Chrysler. As the German unit dominated, performance and employee satisfaction at Chrysler took a downturn. Discontinuity of human resources at Chrysler affected performance and Daimler expressed dissatisfaction at this. Chrysler was unhappy at the way Daimler was trying to impose its own culture and take over the entire organization. In fact it appears that the top management at Daimler had actually planned that they would take over the top positions in the merged entity but did not disclose their plans till a few years into the merger (Aguilera and Dencker, 2004). 3.6 Non-transferable human resources It appears that the senior leadership at Chrysler did not want to stay on board after the merger and hence very soon after the bid, most of them left the organization. Perhaps this was part of the deal so that Daimler could replace the staff from the headquarters. The values of the merging entities may have been similar but status differences from a merger of near equals can create problems in integration. National differences can lead to conflicts in mergers. In addition to national differences in culture, organizational values also created problems in human dimension of this merger (Aguilera and Dencker, 2004). This merger of near equals also had issues of HRM in integration. The pay at Daimler was much less than at Chrysler which too was a cause of concern. The German executives also resented that the Americans employees had higher pay mostly in the form of stock options. Huge pay gap is also responsible for the failure of this merger. 3.7 Diseconomies of scale and example It was envisaged that Chrysler would use Daimler parts and vehicle architecture to sharply reduce costs. It was also expected that the merger would enable Daimler to raise its profile in the North American market. Both the companies were prospering individually as the luxury segment was growing steadily and the low cost mass market was booming (Wordonthemarket, 2011). Both had good market shares in their respective markets and hence economies of scale could have been achieved. Chrysler was unable to maintain their innovative philosophy because of Daimler’s slow and methodical processes, thereby resulting in losses and depleting stocks. Within two years the stocks had plunged from a high of 103 to 53 resulting in a wipeout of more than $49 billion in market value (Business Week, 2000). While the Mercedes-Benz division announced profit jump of 22 percent, Chrysler suffered repeated setbacks. 4. Discussion and Conclusion That executives drive mergers is evident from the two cases evaluated above. However, overconfidence and optimism of the ill-advised managers can ruin the outcome of such deals (Bogan & Just, 2009). Most mergers are driven by a fit and not based on a vision or a strategy. The evaluation of a successful merger and an unsuccessful merger demonstrates how personal motives take precedence over organizational goals. Integration becomes difficult because there is no road map prepared before the merger. The concerned partners seldom question why do they want to integrate and what skills and knowledge of the partner can enhance the overall performance. Today the goals of merger have extended from enhanced profits to gaining skills and capabilities, improved efficiency and reduced costs and overheads. The success of any merger lies in the marketing strategy that the combined company pursues post merger. Cost savings and market power analyses have to be the focus in mergers (Schmalensee, Riddell and Joiner, 2000). Perhaps this was the motive behind the two mergers. However, Exxon-Mobil could achieve it because of strong leadership and possibly also because of shared cultural values. Unrealistic goals in the case of Daimler-Chrysler merger led to wastage of resources and unrealistic expectations led to stress on the people concerned (Steger and Kummer, 2011). This is not surprising given that between 55-70 percent of mergers and acquisitions fail to meet the anticipated purpose (Schraeder and Self, 2003). The executives at both ends in the Daimler-Chrysler merger were driven more by personal motives and were not really responding to a business opportunity. During the due diligence period there were no efforts made on the people side of the equation. Managerial talent was not evaluated in the potential partner. Such failures occur due to poor governance when the board is unable to stand up against the CEO. They blindly endorse the proposal of the CEO but boards need to independently evaluate CEO proposal deals. In fact an independent body should be authorised to evaluate such deals. Mergers have become essential to maintain competitiveness in an increasingly globalized economy. They are meant to create synergies, shareholder value and enhance competitiveness (Fitzgibbon and Seeger, 2002). Competitiveness is based on the argument that larger organizations enhance efficiency. 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