The Grand Metropolitan - Essay Example

?THE GRAND METROPLITAN The history of Grand Met is full of mergers and acquisitions. Throughout its of operations, Grand Met has expanded by conglomerate mergers throughout the United Kingdom and the United States. From hotels to betting business and from catering to tobacco and brewing business, Grand Met marks its presence in different businesses. Grand Met’s core strategy of expansion was to acquire running business either at the same level of its value chain or on the other. Besides expanding through horizontal integration, i.e., acquiring businesses at the same level of value chain; or through vertical integration (acquiring businesses at an earlier stage of the value chain or at a later stage of its value chain) Grand Met also ventured into business which were outside of its specialization (Liggett Group which manufactured cigarettes but also one of its sister companies was a distributor Grand Met’s IDV in the United States). The company’s initial success can be owed to its original owner Max Joseph’s experience in the real estate business. This is one of the major strengths of Grand Met which lead to many acquisitions under the supervision and leadership of Max Joseph. Grand Metropolitan is currently known as Diageo plc which was formed after a merger with Guinness, another business leader in the industry of alcohol and beverages. Diageo plc’s span of operations spreads across the globe in 80 countries and has a strong portfolio of brands such as: Smirnoff vodka, Bailey’s Irish Cream liqueur, Johnnie Walker Scotch whisky etc (Aaker, 1992; Blackmur, 1990; Helpman, 1983). STRENGTHS AND WEAKNESSES OF GRAND MET’S STRATEGIES Another one of Grand Met’s strengths was its sound cash flow. Grand Metropolitan’s strategy of expansion was to finance its acquisitions via debts. In lieu to the company’s debts, Max expected the estate prices to grow and so, he assumed it safe to borrow and finance the interest and repayments from the company’s strong cash flows which came through by effective management. Despite its strong cash flow, the company’s strategy of keeping the debt piling up and financing further acquisitions through external sources had a major weakness. Max relied on the company’s internal cash flow to service the debt. However, in the long-run, the company almost faced bankruptcy. In the 1970s, Grand Met acquired Watney Mann, another brewery relying once again on heavy loans. This put a lot of pressure on the company’s financial standing to the extent that it had to generate enormous trading profits in order to survive as the cost of borrowing and servicing its debts had become cumbersome. Alternatively, Grand Met should not have been this aggressive in expanding and must not have relied on external debts but rather, play more safely by strengthening itself internally. Coupled with the recession in the economy of the UK in the 1970s property values had gone down and hence, the company’s balance sheets inevitably showed weaker assets. Had been the company internally strong and had not rushed into expanding its operations across gambling, catering and restaurant businesses, it could not have lost so much money by servicing its debts. Besides this, amongst many acquisitions, only IDV was the one which stood out. Max did prefer decentralization but this lacked vision for Grand Met and rather, the company made many irrational investments in acquiring businesses which were later sold out so as not to continue losing money (Aaker, 1992; Helpman, 1983; Reader, 1988; Nupponen, 1995). The opportunity of un-catered markets was noticed by Grand Met as it expanded in the United States. Once again, the company chose Forward Vertical Integration with a mixture of diversification. Grand Met’s subsidiary IDV’s distributor (Paddington) in the United States was acquired however, the acquisition also lead to taking over of Paddington’s parent company Liggett which was in cigarette manufacturing along with other diverse businesses of soft drinks, bottling, dogs food and fitness products. This opened up doors of opportunity to enter the market of Grand Met’s primary business: hotels. At this point however, the focus of Grand Met had shifted from operating hotels and trading in real estate to more diverse businesses (Gaughan, 1996). RESULTS FROM UNFOCUSED INVESTMENTS At this point, most of the hotels were operating under management contracts with no serious interference from the head office. Maxwell Joseph, the founder of the empire had passed away leaving it to Stanley Grinstead who further diversified the business to the service sector by acquisitions. The financial repercussions from these acquisitions were to be seen in the coming future. Grand Met’s entry strategy in the United Stated with a diversification and steering Grand Met towards a whole new market and domain had its costs. The company must have clearly defined its objectives while entering the United States instead of diversifying in a new market with any chance it got. The Liggett group which was acquired began lagging on its performance and all other businesses were decentralized despite bringing some operational improvements company wide. The company meanwhile was rationalizing on several of its operations. Unprofitable businesses were closed down and the remaining businesses were either rationalized by merging them or by disposing them off at viable returns. At this point, the company had begun to work on its internal stability rather than diversification and acquiring which ever business which crossed its way (David, 1993; ). LONG-TERM VISION Grand Met came close to being taken over by an Australian conglomerate when its shares began to relegate consistently. Stanley Grinstead stepped down as chairman and he was replaced by Allen Sheppard. Under the leadership of Allen Sheppard, the preference of acquiring businesses as an expansion strategy changed. Sheppard showed more interest in acquiring those businesses which had brands already operative in the market. Looking back at Max Joseph’s time period, the company’s stand on expansion had totally changed. Rather than focusing aggressively on acquiring businesses just to create a presence in the market, Grand Met had now learnt its lesson and was now focused more to make the company’s operations strong and expand while relying on its internal operations. Sheppard’s strategy to mark Grand Met’s presence by strong brands was reflected throughout the company’s operations as Sheppard had lead two of the company’s greatest and most notable acquisitions. The first one was a beverage and alcohol company named Heublein. This strategic move boosted IDV’s spirit sales and brought brands like Smirnoff under its umbrella. Apart from this, Pillsbury was also a key acquisition which gave Grand Met access to the global food business. As soon as Pillsbury was acquired, the business was rationalized to improve on its operations and restructure the subsidiary to strengthen more brands. The company now had a clear vision to create a flagship presence in the global food, drinks and retailing industry rather than to invest in diverse businesses. This can be seen from aggressive acquisition of Pillsbury and Grand Met’s dedicated department of corporate acquisition at its Head Quarters in London (Gaughan, 1996; David, 1993, Winskill, 1996). Under Sheppard’s regime, an array of uncontrolled acquisitions took place which drained a lot of Grand Met’s capital on account of debt servicing. The company did not have a formal vision and a long-term corporate goal which lead it to making bad investments which endangered the company’s existence twice. Sheppard realized this fact and recognized the importance of a long-term vision. This helped Grand Met to rationalize on many of its ventures which were unprofitable. Eventually, the company was aimed at becoming a leader in the food, beverage and retailing business. This led it to important takeovers such as Pillsbury and Heublein. Alongside this, the paradigm shift from aggressive external expansion during Maxwell Joseph’s leadership, to a focus on internal operations with controlled investment driven by a long-term vision, can clearly be noticed when Sheppard took over. He believed in strengthening the group internally, by investing in brands which had potential and reaping the benefits from effective cost control technique (David, 1993; Winskill, 1996). GRAND MET’S FUTURE Allen Sheppard was eventually succeeded by George Bull who, along with Anthony Greener and Philip Yea from another conglomerate, world leader in the market of alcohol and drinks business called Guinness, merged Grand Met with the later to form Diageo which is primarily in the business of drinks and alcoholic beverages. By the time the merger was completed, Grand Met had already rationalized and had organized its empire in four major food brands: Pillsbury, Green Giant, Haagen-Dazs, and Old El Paso. Besides this, it had IDV and the Burger King chain which, later on, was also sold by the merger Diageo in order to organize itself in one category of premium drinks. Eventually, the company is now an alcoholic beverage business with a strong value chain of its own. This was done by vertical integration both forward and backward. This decision is justified in the way that it is in sync with the company’s long-term strategy to be a premium drinks leader in the market. Vertical integration has strengthened its network of supply and distribution and the company comes out with a consumer brand adding value to it itself before it reaches the final consumer (Harrigan, 1983; Economist, 1997; Marketing Week, 1998). REFERENCES GAUGHAN, P. A. (1996). Mergers, acquisitions, and corporate restructurings. New York, John Wiley & Sons. AAKER, D. A. (1992). Developing business strategies. New York, Wiley HARRIGAN, K. R. (1983). Strategies for vertical integration. Lexington, Mass, Lexington Books. BLACKMUR, D. (1990). The strategic management of vertical integration: theoretical perspectives and empirical evidence. [Brisbane], University of Queensland, Dept. of Economics. HELPMAN, E. (1983). The multiproduct firm: horizontal and vertical integration. Cambridge, Mass, Dept. of Economics, Massachusetts Institute of Technology. NUPPONEN, P. (1995). Post-acquisition performance: combination, management, and performance measurement in horizontal integration. Helsinki, Helsinki School of Economics and Business Administration. (1996). GrandMet: UK brands to be sold. GROCER -LONDON-. 218, 10-12. WINSKILL, R. (1996). How Grandmet Chose Its New Treasury Workstation. TREASURY MANAGEMENT INTERNATIONAL. 18-22. (1997). Guinness and GrandMet. ECONOMIST -LONDON- ECONOMIST-. 94-96. (1996). GrandMet's challenge - GrandMet has a new worldwide marketing chief- but he has a tough job to do if he's to get the best from global brands. Marketing. 16. (1998). The merger of Guinness and GrandMet is fuelling uncertainty about the future of Guinness Brewing. Could it be ripe for a sell-off? MARKETING WEEK. 28-31. READER, W. J. (1988). Grand Metropolitan: a history, 1962-1987. Oxford [Oxfordshire], Oxford University Press. (1998). Grand Metropolitan Plc. Dairy Foods. 99, 11. DAVID, F. R. (1993). Strategic management. New York, Macmillan Read More