Analysis of Southcorp-Rosemount Merger - Case Study Example

Running Head: GRAPE EXPECTATION: A CASE STUDY OF THE SOUTHCOR PROSEMOUNT MERGER Grape Expectation: A Case Study of the Southcorp-Rosemount Merger Name Institution Date Table of Contents Table of Contents 2 Background Information 3 Grape Expectation: A Case Study of the Southcorp-Rosemount Merger 4 Introduction 4 Problem Affecting the Merged firm 5 The benefits of merger are expected to go beyond scale. Price synergies are estimated to emerge in production, marketing, and distribution. There is a difficulty in the operation of the merger because the two firms operated in very diverse modes. Southcorp focuses more on production of grape and winemaking while Rosemount greatly concentrate on winemaking, distribution, and marketing. The scheme of joining two very diverse firms requires a change in internal management so that the business goals of both firms are achieved. The operating environment should change in order to incorporate the different operating models of the two firms. Prior to merging with Rosemount, Southcorp was an archetypical wine firm in Australia. The firm produced both good and bad wine and its variety spanned from best of the bottled wine Penfolds Grange Hermitage to a few of the unpleasant bottles wine such as the Matthew Lang. On the other hand, Rosemount has always applied a high value, high quality strategy in production and has developed a place as a manufacturer of wines of constant quality (Rice & Galvin, 2006). 5 Strategies used by the merged firm 5 Recommendations 10 Conclusion 11 References 11 Background Information Merging is a process of two firms, usually of about the same size, agreeing to combine into a single company other than remaining separately operated and owned. At times , the newly formed company or the merger acquires assets and liabilities of the merging firms. The two firms share production, distribution and marketing costs. The merged firm is supposed to develop an operating environment that will incorporate the different operational models of the two firms. This is important because the two firms had different business goals before merging which are maintained even after merging. Failure to developing an operational model that accommodates the needs of the two firms can see problems emerge in the merged firm as a result of different business operations between the two firms. The merging firms combine their resources and share costs to in order increaseproduction. In this case, Southcorp wine company and Rosemount wine company merged to form Southcorp-Rosemount merger which turned out to be the biggest wine manufacturing company in Australia. After merging, the firms combined their grape and the merger was able to produce large quantities of wine. As a result, the merger had to look for more export markets for their products and improve the quality and varieties of their wine in order to secure a place in the competitive market. The firms shared production, distribution and marketing costs so as to cut costs incurred in production and marketing of their products. However, there was a problem in the operational model to be used by the merger because the two firms had diverse operational models before merging. Southcorp company focused on grape production and winemaking while Rosemount company focused on wine production, distribution and marketing. Therefore the merger had to develop an operational strategy which accomodated the diverse operations of the two firms. Grape Expectation: A Case Study of the Southcorp-Rosemount Merger Introduction The case study shows how Australian Rosemount and Southcorp wine companies merged to become the biggest wine company in Australia. The merger achieved great success by adopting very different marketing and operational strategies. However problems emerged from asset related inaptness between the two companies and a difficult pricing environment in key markets for the merged firm. The potential benefits of the merger include cost savings and capacity to harness capital resources in sales, marketing, and distribution. In order to achieve these benefits the merged firm requires new approaches to organize the internal structure together with innovative and new supply relations within the firm and the wine industry value chains. Problem Affecting the Merged firm The benefits of merger are expected to go beyond scale. Price synergies are estimated to emerge in production, marketing, and distribution. There is a difficulty in the operation of the merger because the two firms operated in very diverse modes. Southcorp focuses more on production of grape and winemaking while Rosemount greatly concentrate on winemaking, distribution, and marketing. The scheme of joining two very diverse firms requires a change in internal management so that the business goals of both firms are achieved. The operating environment should change in order to incorporate the different operating models of the two firms. Prior to merging with Rosemount, Southcorp was an archetypical wine firm in Australia. The firm produced both good and bad wine and its variety spanned from best of the bottled wine Penfolds Grange Hermitage to a few of the unpleasant bottles wine such as the Matthew Lang. On the other hand, Rosemount has always applied a high value, high quality strategy in production and has developed a place as a manufacturer of wines of constant quality (Rice & Galvin, 2006). Strategies used by the merged firm As a result of operational diversities, Rosemount had to develop and adopt a greatly different wine production model and business activities. Southcorp developed a greatly vertically incorporated, large scale business operation, and developed wineries, vineyards and distribution services with the other firm. More than 1,500 hectares under vine were under the ownership of Rosemount but its grapes were sold through contract from the immediate vineyards. Southcorp manufactured about double the quantity of wine as Rosemount in the year 2000 and owned 6000 hectares under vine. The combination of grapes from both firms enabled the merger to produce large quantities of wine. The merger increased wine varieties and labels and the most recognizable brand was packaged in a flange shaped bottle and labeled using a typical gold faced sticker (Mockler, 2002). Through its varied supply arrangements, Rosemount exploited its capital in the more intensive portion of the wine industry value chain where potential returns were greatly higher. In 2000, Rosemount renewed the firms focus on an increase in export marketing and presence and after two years more than half of its yearly wine production was being sold in 34 overseas countries. The firm was achieving marvelous growth in profit and volume. In assessing the growth alternatives, Southcorp considered acquiring the Rosemount vine estate because it concentrated more on grape production while Rosemount greatly concentrated of wine production, marketing, and distribution. The management of both firms had to be changed and in 2002 both Rosemount and Southcorp management signified an excellent strategic fit amid the two firms. Both firms traded premium branded wine. Jointly the companies sold 10 million wine cases yearly, with 3.5 million being sold in the important United States markets where price per Litre and limits were conventionally stronger than the bulk wine exports to Europe (Hannen & Murrill, 2001). The merged firm produced great volumes of wine not only in Australia but also around the globe. As a global company, the potential to directly deal with distributors in Europe and North America was improved and the ability of the firm to assure both quality and quantity of win to chief consumers facilitated an additional push into emerging new markets. In terms of strategic motivation for the merged firm, the potential had to extend beyond marketing and costs benefits accessible by both firms. Internationally, the wine business was experiencing a time of consolidation in the late 1990s, with an improvement in business activities from 2000 onwards. Increase in stable demand and supply patterns was developing necessity for the small sized companies to gain entrance into global markets and obtain supply contracts to the larger intermediaries in Europe and United States. In several respects, the necessity to form global scale was propelled by the need to have more control over the major wine customers. Within the country, the local retail buyers had bigger liquor chains through acquisition and direct investment. The home retailers had huge purchasing power in the major home market and with was evident during the abundant wine production climate of 2002. To add to the merged firm depression, in 2002 the British market was conquered by huge discounting in traditional market divisions of Southcorp company. Expenses reduction was evidently also a propeller of potential growth in profit, although both firms had intensely ingrained costs like in the case of Southcorp firm extensive portfolio of vineyards and wineries (Rice & Galvin, 2006). However, the two firms had quite diverse business objectives before merging. Rosemount firm had increased profits and sales threefold in the last four years of 1990s. As global wine asset value rose in 2000 the chance to obtain 800million dollars in cash, 100 million shares and apply an immense degree of strategic effect on the merged firm established too tantalizing for the two firms. For Southcorp, the Rosemount business model always referred to as virtual wine company gave the guarantee of development in margins and probable cost reductions. The firms and negotiations involved a huge role for the previous Rosemount administration in enhancing change within the merger including the selection of Keith Lambert as the new chief Executive Officer of the merged firm. As, expected, Lambert pursued cost reduction strategy, management reform and brand rationalization (Mockler, 2002). Lambert Searched for cost reductions in areas such as grape supply contracts. Several of Southcorp grape farmers found their contracts abruptly renegotiated during the year 2001 and 2002 period. In various Grapes were picked after decisions were made that they were acceptable by the winemakers. Longstanding relations between grape growers and wine makers were discarded in the search for cost reductions, although numerous of the varieties of wines within Southcorp firm were built upon these relationships with a great example being the Penfolds Grange wine. Another early focus by the management was on asset sales. In the late 2001, Rouge Homme and Tulloch wineries were sold out and six warehouses closed in the early period of rationalization of distribution facilities. Integration of the company’s two computer systems was costly and problematic having a negative impact on European sales in late 2001 (Hannen & Murrill, 2001). In August 2001the management estimated that cost reductions of a $50 million could be achieved in a period of three years. Staffing tensions came up in 2001 as a result of structural change and firms focus of the cluster. In April 2001, the merged firm dismissed about 100 senior personnel in an attempt to reduce costs and lessen management degrees within the staff. The merged firm continued its focus on marketing of the three major international brands, and there were sales of 6.7 million cases of Rosemount, Lindemans and Penfolds wines in international market. In 2002, export sales accounted for 60% of entire sales. Southcorp had conventionally sold non branded wine to United Kingdom and discount retailers but the new management was actively shifting from this plan through concentrating on branded wine (Buono & Poulfelt, 2005). As a result of this shift, in August 2001 Southcorp firm wrote of a $45 million in low quality wine stocks which had been held from the Southcorp brands, signaling an apparent progress towards up market wines of greater quality for the merged firm. In 2001, wine sales to United States market was 3.2 million wine cases, with European sales totaling to 5.6 wine cases. Margins and average case income were greatly high in the United States, with a $311 million in income compared to a $291 million in income from Europe, although mounting average European case prices was an apparent plan of management (Hoskisson, 2008). The success of Rosemount firm in the United States was brought up by the sale of the branded Rosemount wine. There was a hope that current distribution canal could be engaged from 2001 in order to re energise the supply of the Lindeman wine brand in the United States. Problems came up in 2002 in all Southcorp’s major markets in Australia, Britain, and United States. The strategic propellers of the merged firm, created troubles for all wine manufacturers that were hard to lay strategies for. Within the international low margin wine divisions, the intense planting programs propelled by asset value increased and started flooding international markets with an actual sea of wine. Southcorp firm responded assertively in every of its major markets through discounting and loading inventory in an attempt to recover sales. The inventory did not work, margins dropped down and eventually the company was experiencing an extraordinary financial crisis. The newly appointed chief executive officer was sacked (Hill & Jones, 2009). Recommendations The merged company must put more focus on their capital resources and managerial efforts in the sales and marketing so that their products secure more markets in other global countries. The merger should employ strategies that will enable improvement of the unpleasant brands of wine through upgrading the quality and quantity of these brands so that they can enter into both local and international markets. The Southcorp firm must entirely concentrate on grape production because it is more experienced in this field while Rosemount should entirely concentrate on wine production, marketing, and distribution and this can see a reduction in production costs. The management should monitor all stages of production so that the end products are of excellent quality and are easily able to secure a place in the international market. The Rosemount’s strategy of the three global brands should be changed and extend its sale outside the three major brands identified by management. Such disposals dictates that the subtle prices of marginal brands be remunerated for by growth in the price of international brands. Southcorp firm must replicate the success of Rosemount on a grander level and not by a process of organic development but through firms change and reform that will lead to successful operation of the firm. The merged firm should secure more local markets so that fluctuations within the global markets will do greatly affect its business. The merged firm should expand their maturation and production capacity so that international and domestic demands for the different brands are serviced (Sudarsanam, 2003). Conclusion The merging of the Southcorp wine company and the Rosemount wine saw the new merged firm developing new operational and marketing strategies in order to meet the business goals and objectives. The merger encountered problems because the individual firms had different operations model. Southcorp firm focused more on grape production and manufacturing of wine while Rosemount concentrated on making of wine production, distribution and marketing. As a result of these operational diversities, the two firms had develop and adopt matching wine production models and business activities such as cutting down their production costs and securing international markets for their products. References Rice J. Galvin P. (2006). Grape Expectations: A case study of the Southcorp – Rosemount merger, The Management Case Study Journal. Hannen, M., & Murrill, M. (2001). “Wine links on the grapevine”, Business Review Weekly. 23(7): p. 19. Sudarsanam S. (2003).Creating value from mergers and acquisitions: the challenges : an integrated and international perspective. New Jersey: FT Prentice Hall. Hill C. & Jones G. (2009). Strategic Management Theory: An Integrated Approach. London: Cengage Learning. Buono A. F. & Poulfelt F. (2005). Challenges and issues in knowledge management. New York: IAP Publishers. Mockler, R. J. (2002). Multinational strategic management: an integrative entrepreneurial context-specific process. Ofxord: Routledge. Hoskisson R. E. (2008).Strategic management: competitiveness and globalization : concepts & cases. London: Cengage Learning. Read More