Reasons for the Mergers and Acquisitions of the Firms - Coursework Example

Introduction Australian multi-nationals have divergent histories. Often they share different global ambitions and strong product recognition in Australia and abroad. New Australia multi-nationals are formed through merger of different firms. The new conglomerates so often run into snags due to structural problems with the mergers and off-shooting management issues which crop up after the mergers. This situation leads to the failures at various levels. It is noted that domestic markets for the consumption of the products and international demand for the products of the new acquisitions obtained as a result of these mergers is not very well surveyed and accounted for. Sometimes the local challenging environment forces the new mergers into the increased export focus and a new mix of quality and price both at home and abroad. The export focus of such companies as concentrated on penetrations into the markets of New Zealand, United Kingdom and the United States. On the cost side the firms usually improve profitability through better operational processes and improved management of distribution channels. Although, Australian climate and soil is very well suited to the agricultural products like fine quality of wines like Shiraz and Cabernet, Sauvignon. But this whole story is not so smooth. The structural mergers and operational management strategies are so often not so compatible therefore they result into serious issues and ultimate failures. This case is more evident in Australian mergers. There are different opinions on precise causes responsible for the failure of mergers and acquisitions. At the same time there are many recommendations that can be counted upon for avoiding such situations. Although It is widely accepted that the 'human factor' is a prime cause of difficulty in making the integration between two or more companies work successfully. If such transitions are carried out without care towards the employees who may suffer as a result, and without full awareness of the vast differences that may exist between corporate cultures, the ultimate result is a stressed, unhappy and uncooperative human resource and substantial drop in productivity. Appelbaum et al 2000 (p9-10) has said that , in fact a merger or acquisition is an extremely stressful process for stake holders in terms of job losses, restructuring process, and the introduction of a new corporate culture and identity that may create uncertainty, stressful anxiety and resentment among a company's employees. Research has shown that a firm's productivity may drop up to 50 percent while undergoing such a large-scale reform substantial demoralization of the workforce is a major reason for this situation while Tetenbaum 1999 ( p45) explains that companies so often pay undue attention to the short-term legal and financial considerations that are involved in a merger or acquisition. Balmer and Dinnie 1999 (p5) say that companies usually neglect the implications for corporate legal identity and communication and the factors that may prove equally important in the long run because of their impact on workers and productivity. In order to bring out the reason and argument behind the failure of Southcorp wines and Rosemount it is proper to go into the brief history of both the companies in Australia before their merger. As a matter of fact Southcorp wines had a long history of a diversified conglomerate until late 1990s, producing a variety of products such as packaging materials, Air conditioners, Water heaters and above all the finest quality of wine in South Australia. Before disinvestment program the name of the firm was a proud brand name for all of its products. Southcorp Wines in 1990s changed its organizational strategy to become an international wine company and disposed off all of its operations and assets, by the end of 2002 except for wine production. At that juncture of time Australian wine industry was already dominated by BRL Hardy and others. These companies had created already a sort of oligopoly in Australian wine market. BRL Hardy and its competitors Orlando Whndham company producing the Jacob’s creek label were already the mergers with French companies. In this backdrop it was not reckoned that Australian domestic wine consumption was already static for a number of years. In view of this fact these companies with the new inclusion of Southcorp wine ventured into the exports abroad. So the Australian wines exports in December 2003 grew 24% higher than the corresponding period for 2002. But despite this effort the Australian wine production amounted to only 6% of world’s total export which were already dominated by USA and Europe. Since, Australian climate and soil was suitable for fruitier and smoother than the European wines, people in USA and Europe liked it more and more. Ferguson 2002 (p46) said that since 1995 Global wine industry had a number of consolidations and acquisitions with the aim of building scale of production, distribution and marketing. In this way Australian wine industry was also drawn into these trends. Although Southcorp, until 2001 had been avoiding making inland or abroad acquisitions to the utter surprise of everybody, Southcorp, in February 2001 immediately acquired Rosemount estates that were the Australia’s largest family owned wine in cash, share and debt. Although Southcorp has always been a larger and stronger firm than Rosemount in terms of sales. But Rosemount’s financial performance has been far better then Southcorp. This incompatibility between the two firms became the reason of afterwards challenges for this merger. The merger experienced severe financial problems in all areas. In 2003 a record low return on capital which was 6.6%. There was a reported loss of Dollars 922 Million which became highest loss in the Australian corporate history. Rosemount had already established its reputation with prestigious international wine and spirit competition in London and had won double Gold Medals for the sound quality of wine produced from the finest quality of grapes from Rosemount estates. They met their export targets through their export offices in UK and USA in 1983 and 1985 respectively. Still, the wine production and business operations of Rosemount in comparison to Southcorp was quite different and unique. When Southcorp had developed a very vertically integrated large scale operations and developing wine yards, wineries and distribution facilities with the new group. The Rosemount had already owned 1500 Hectares under wine and purchased other from the neighboring wine yards. As a result Southcorp, Rosemount developed around a single recognizable brand with a flange shaped bottle and diamond faced label. The value chain results were higher. Cost synergies were expected to emerge in both production and marketing but it was very difficult to quantify before the merger was finalized. Instead Rosemount has always concentrated on wine making, marketing and distribution while Southcorp has tended to focus on grape production and wine making. In fact enormous refocus and asset rationalization like pre-merger Rosemount was needed. Southcorp continued to admit poor management of inventories and problems with the integration of two firms, they have yet not admitted to paying far too much for Rosemount. Tony Heywood 2009 (p5) has suggested employing certain proven methodologies in order to determine the most suitable brand models and allowing branding professionals. So that they can play their part in properly helping to determine, communicate and embed the new brand. They will definitely help determine the process of merger, where it was, where it now is, where it needs to be and how best to get it there. He further suggests that managing the brand architecture of merging entities is quite a complex task. For an organization which is at the point of considering a merger or acquisition in Australia, He strongly recommended to engage with a branding and communications process managed by branding professionals. And, he recommends considering the branding program of investment and allocating appropriate resources at an early stage in the process. Conclusion; There are various reasons for the mergers and acquisitions of the firms and companies. The most important argument is efficiency enhancement and niche market capturing in domestic and international arena. Balmer, John M.T., and Dinnie, Keith 1999, vol.4 (p5) suggested that the mergers and acquisitions fail mainly due to the reason that the operation strategies, management skills, production channels, distribution tactics, human resource management, local and abroad markets and above all asset and inventory management are not studied and worked out properly in the pre-merger operations. The merger between Southcorp and Rosemount proved to be a disaster in the history of mergers and acquisitions of Australia in early 2000. The financial problems immediately grew between the two merged up companies due to the incompatibility of operations and asset management. Ultimately severe financial problem arose in all areas. In 2003 a record low return on capital which was 6.6% was also unprecedented in the history of Australia with a record loss of Dollars 922 Million. The failure of Southcorp with Rosemount wine industries of Australia is such a classic case of asset and inventory incompatibilities with operational parallaxes between the two firms. References; 1- Ferguson A 2001(Southcorp’s magnum opus), Business review weekly. MCSJ case study journal. University of South Australia.p-46 2- Mergers and acquisitions in Australia14th April 2000 ConferenceUnited Nations Regional Seminar on Competition Law and Policy for Asia-Pacific. 3- Tony Heywood is a Fellow of the Design Institute of Australia, founder of Heywood Innovation in Sydney Australia.p-5 4-Appelbaum, Steven H., Gandalf, Joy, Robin, Francois, Proper, Shay, and Yurts, Harry (2000), "Anatomy of a merger: behavior of organizational factors and processes throughout the pre- during- post-stages", Management Decision, Vol. 38, p 9 and 10 5- Balmer, John M.T., and Dinnie, Keith (1999), "Corporate identity and corporate communications: the antidote to merger madness", Corporate Communications: An International Journal, Vol. 4 Number 4 1999.p-5 6- Tetenbaum 1999, corporate strategy of Australian mergers and acquisitions. Second Edition, International institute of business administration Sidney Press Club Australia. ISBN 2038475. p45 Read More