Cross Border Mergers of Unilever - Essay Example

Q Major acquisitions, divestments and cross border mergers of Unilever Unilever’s products are used by 150 million people in 150 countries in the world and this is a strategic impetus for a consumer products company with a record level of annual sales revenue amounting to $46 billion. Unilever sells packaged consumer goods to captive consumers who have rarely abandoned the company in preference for another. The logic behind its success is to be found in its mission statement – “meeting the everyday needs of people everywhere”. Thus out of every two households in the world one uses Unilever products (Jones, 2005, p.352). It controls roughly 90 subsidiaries in the world. It’s the second largest packaged food company in the world just behind Procter & Gamble. Its current expansion programme includes a number of acquisitions and mergers. Its smaller acquisitions like the purchase of Kwality Group’s ice cream plants in Delhi, India by Hindustan Lever Limited (HLL) and bigger ones like Japans Ajinomoto Co. for $381 million. This acquisition gave Unilever the full management control and total sales and profits in seven Asian Ajinomoto owned companies. The strategic significance of these acquisitions has to be examined against the backdrop of their future revenue generating capacities. Above all they have to be considered as part and parcel of the overall Unilever operations in the world. Its organizational structure and culture have augmented this A&M drive despite a number of set-backs that it suffered in some of its operations recently. The strategic competitive environment of the global packaged food industry in particular and the consumer goods industry in general has been characterized by a series of causative factors such as demand-centric and supply-centric influences. Health worries on the part of consumers have taken a particularly worse turn for the packaged food industry while suppliers are going for mergers and acquisitions to achieve scale economies and bigger profit margins. This trend has brought with it a host of other consequences within and without the industry. Such developments have place Unilever in a particularly tight spot with regard to M&A activity. Both causes and consequences of these acquisitions and mergers can be considered on a broader set of strategic management choices and imperatives along with competitive expediencies of time and circumstance. Unilever has been operating on a uniformly defined platform of principles of which the corner stone is the strategic competitive edge over its rivals such as Nestle, Procter & Gamble and Kraft. Thus its product/market orientation strategy is based on this principle of widening the choice for the potential consumer. Its global operations are divided into North American, European and Asian segments. Its subsidiaries in countries like the USA and Canada have also gone on a M&A spree with some of the priciest ones such as the acquisition of Bestfoods for a sum of $20.3 billion in 2001. With a diverse portfolio of products including world famous Hellmanns mayonnaise and Skippy peanut butter, Bestfoods could go a long way in the acquisitions of Unilever. European operations are also expanding at a pace currently in a magnificent way so that Unilever is becoming an effective challenger to market leaders as Procter & Gamble and Nestle. The strategically important European market is basically impervious to manipulative schemes by multinationals because the EU regulatory authorities are less likely to relent their tougher hold on the monopoly formation behavior of market leaders. Though the same can be said about North America, the definitional variations there would permit acquisitions and mergers without much fuss. Its Asian operations are determined by a relatively peculiar set of circumstances. Though competitive parameters remain the same throughout the world Asia has an inherently different context in which M&A activity is comparably easier and smoother in comparison to North America and Europe. For instance Unilever acquired a further 2.44% stake in Unilever Pakistan Ltd., in October 2008. Though subsequently its share value fell by 6.35%, the company has a clear policy thrust towards strategic M&A drive in which a selected number of food and consumer product investments in different regions have been initiated in the recent past. Unilever’s policy of M&A is part of a global strategy that is conducted with utmost care and long term corporate goals on mind. In the process four strategic outcomes are sought to be produced. The first such outcome is the value capturing effort. Though value capture effort as pointed out by Chanmugam et al (2005) is not an easy task because synergy estimations and planning can be subservient to overriding cost considerations, there is an ever growing tendency among managers to ensure cumulative synergies and proper planning in order to significantly alter the post-acquisition (or post-merger) outcomes. Thus value capturing is a process of enhancing the cumulative positive synergies of the acquisition or merger and as such it’s incumbent on the management to pursue such policies as would be necessary to create value. Unilever in Europe in particular and in the rest of the world in general has succeeded to a certain extent in capturing value. This is evident in its ice cream business though subsequent divestments also show how other strategic imperatives outweigh those of immediate ones. The second outcome concerns the creation of synergies. Value chain management process and supply chain management are essentially influenced by combined scale economies of the merger. Such synergies in turn produce a series of positive outcomes for the company. For instance strategic management process is fundamentally determined by them despite the fact that the top management would not adhere to formulaic principles that were hitherto followed. Unilever has adopted some of these far reaching changes in its effort to create synergies both at the level of management and technology integration. Such efficiencies often attributed to horizontal mergers have to be merger-specific in order to have any meaningful outcome (Schweiger, 2002, p.60). Unilever’s merger with Bestfoods was considered to be such an experience albeit horizontal efficiencies have not been effectively translated into benefits for consumers. This has been attributed to a lack of merger-specificity. In the absence of merger-specificity horizontal synergies are less likely to occur. Unilever after the merger with Bestfoods had a very strong portfolio of global and regional brands. Instead of the breakfast cereal prices coming down, they went up. Thirdly there are economies of scale that would bring down the average cost to a minimum. Horizontal mergers are known to produce efficient outcomes by way of partially scale related operational capacity rationalization and enhancement. X-efficiency as related to management techniques will all the more enhance the new company’s management structures thus strengthening the hands of the top management to motivate subordinates towards the achievement of organizational goals. Unilever’s M&A strategy has been specifically oriented towards the achievement of these scale economies – technical, managerial, financial, labour-related economies, marketing and strategic. Finally there is the combined demand for the products of two companies. How would the average consumer respond to this new phenomenon depends on the correlated outcomes of the pricing strategy and product development strategy of the new company. Unilever has been able to take into consideration the combined effect of such acquisitions and mergers on price levels. Similarly product development strategy has benefited from a rise in quality. For example its packaged foods including ice creams have struck a chord with consumers after some of the recent acquisitions and mergers in North America, Europe and Asia. Unilever’s divestments have also been equally significant both strategically and psychologically. For example a series of divestments that Unilever carried out recently have produced some highly desirable results for the whole company. In 2006 it sold most of its Frozen Foods business under the Birds Eye and Iglo brands in Europe to an array of buyers. It retained only the Italian Frozen Foods business with a view to reorient it towards a more dynamic market-oriented venture. The European operations include France, the UK, Spain, Portugal, Ireland, Italy, Germany, Greece, Austria, Belgium and Ireland. The Netherlands-based wholly owned subsidiary, Unilever Overseas Holdings BV (UOHBV) of Unilever sold much of its stake in Rossel Industries Limited in India to M.K. Shah Exports in 2005. These divestments illustrate how much divestment-specificity could produce reverse positive synergies through horizontal divestments. Global brands not only reach the decline phase of the product life cycle but also tend to disaggregate synergies when the company goes too much on an M&A spree for too long. The strategic significance of these divestments is attached to the very familiar cash inflow technique. While Unilever was able to increase its cash inflow the company could also shed many of its unprofitable operations in the world. Divestment strategy is not necessarily determined by the need to find a cash flow solution but also by the need to ameliorate Group finances at times of economic trouble. When demand for some of its global brands came tumbling down there was no alternative but to get rid of them so that the rest of its market presence could be defended against competitors. Unilever has had a roller-coaster ride on M&A and divestments so far. Q. 2. Critically evaluate the impact and relevance of the environmental report or/and social responsibility report in the financial statements of Unilever. The Civil Code in the Netherlands and the UK Companies Act of 1985 in its Title 9 Book 2 requires Directors to present annual financial accounts in a manner that they give a true and fair picture of the Unilever Group’s financial affairs. On the other hand Corporate and Social Responsibility Reports (CSRs) of a company give a true and fair picture of the diverse impacts of its activities. For instance environmental, social and economic impacts of its products and operations are provided in these reports. These reports are put out by companies in order to show their ever increasing social responsibility and the attendant need for transparency to the company’s shareholders and customers (Vogel, 2006, p.50). Nowadays company annual reports are often titled with an additional clause on environmental or social responsibility. Annual financial reports are less likely to focus attention on associated risks of companies’ productions processes and the final products themselves. Thus corporate social responsibility (CSR) or environmental responsibility is “a concept under which companies promise to be responsible to the society in its conduct of business in every way that affects the very society”. This responsibility is to the society at large and customers in particular. Such obligations have both a voluntary element and a statutory element (Crowther and Bacchus, Editors, 2004, p.150). Social responsibility clauses in modern business legislation require companies to comply with those provisions which otherwise seek to outline the causal correlations between social responsibility of the company towards the very entity of people whom it professes to serve by way of producing and selling a product irrespective of their impact on the same society. CSR has become a very big concern for all responsible governments and international bodies that seek to regulate environmental standards through the imposition of regulations. While such regulations might not be universal in their application and impact CSR has been rooted in the very tradition of the corporate culture to ensure sustainable growth and fair utilization of resources (Hopkins, 2003, p.109). Unilever has adopted and ensured the continuity of these standards through its CSR reporting procedures. The following practical uses have been identified by Unilever PLC in its 2006 CSR. In the first place stakeholders’ own trust about company policy is based on the long term responsibility to the society. If there were to be a credibility deficit, invariably the customer would be the first external stakeholder to question the CSR concept of the company. Unilever’s own CSR has been determined by this stakeholders’ trust in its corporate conduct. It’s none so well expressed than in the information dissemination oriented advertising efforts of the company. In fact Unilever is the biggest corporate advertiser in the world with annual advertising budgets running into millions. According to Unilever’s CSR for 2006 the second reason for the issue of the CSR is the ability to increase access to capital. This is a strategically important area of concern to the company. With a corresponding concern to reduce the relative cost of capital the company naturally weigh the pros and cons of various types of capital and the ease with which they can be raised. The strategic importance of the company’s capital is determined by both its structure and choices. Capital structure of Unilever is fairly in favour of leverage or debt capital while its equity capital is much less. This is not a peculiar situation for any multinational company. Despite the fact that the company is able to raise equity capital without much difficulty debt capital content in its overall capital structure is relatively marked. As for the choices, pecking order theory or information asymmetry theory as enunciated by Myers, well explains how new investments are carried out by firms first, with retained profits, subsequently, with debt, and new equity issues respectively. This theoretical construct has a greater relevance for Unilever PLC for the sole reason that capital structure choices have compelled the company to adopt a leveraging posture far in excess of its equity capital to successfully obviate EU-wide regulatory plus fiscal drag-net effect. Therefore the question “If Unilever has sought willy-nilly to avoid social responsibility by increasing its debt capital as against equity capital” cannot be answered without looking at the very nature of capital structure and its choices. On the other hand if the company were to increase its equity capital, there would be a negative impact on the optimum level of leverage. Since it’s based on tax advantage, the firm would be contemplating on setting an achievable goal of debt against value. Unilever has been mindful of all this. Even a casual glance at its annual financial reports would show that the company has been highly concerned of leveraging despite cash flow problems (Myers, 2001, Vol.15 (2), pp.81-102). In the first place the tax advantage outweighs cash flow problems. Secondly Unilever’s recent series of divestments shows that it’s able to solve those cash flow problems by resorting to these asset sales. Further increasing inflationary pressures have compelled a downward trend in equity issues. Unilever has been strategically targeting its debt issue against equity issue to achieve an equilibrium in capital structure. Its CSR is to be examined against this background. The relative significance of this concept is underlined by the fact that the top management of Unilever has shown a liking for a target debt-to-value ratio as discussed by Myers (2001). Thus access to capital is not an exclusive financial consideration but a related issue of choice and cost. Thus neither the one nor the other presupposes the existence of a patterned behavioural tendency on the part of managers. Unilever in its CSR report in 2006 recognizes the protection and enhancement of brand image as the third important reason for a CSR report. Unilever has got a litany of super brands and power brands to protect against rights infringement by competitors. Unilever in Asia is the market leader in five out of six product categories. These achievements play a very significant role in determining the strengths of its strategic competitive environment where brand image has to be protected and enhanced to through such measures as quality improvement and R&D. A substantial amount of expenditure on advertising goes into this effort. Next in its 2006 CSR report Unilever cites “increase in integration and alignment of CSR strategies” as the fourth reason for putting out a CSR report. CSR strategies include such goal-oriented programmes like the promotion of social and economic well-being of communities that are placed at a disadvantageous position vis-à-vis those who are in high income brackets. For instance Unilever encourages the setting up of Small and Medium Sized Enterprises (SMEs) in Asia in order to enable disadvantaged communities to overcome economic disability. Its own partnering of SMEs through supply chain management process is commendable. Unilever’s most significant strategic initiative in CSR efforts could be seen with regard to lower prices through SMEs. Along with its concurrent policy of promoting a paradigm shift in socio-economic welfare among communities that it serves, strategic CSR initiatives have included such efforts as the preservation of environment through standard practices. Thus its total impact on society comes from diverse sources including the company’s newer planning process intended to increase value addition to the final product with emphasis on social welfare (Roll, 2006, p.44). Next Unilever gives “bolstering internal communication” as the fifth reason to put out a CSR report. Unilever has produced a series of successes that have little parallel elsewhere when it comes to CSR as a conceptual barometer for social and economic transformation. Such successes are necessarily dependent on the success of internal communication. Unilever has been able to bolster its internal communications through investments in new and more efficient communication technologies. In its previous CSR reports Unilever management claimed that communication strategy within the organization was based on such requirements as employee motivation, the need to build up horizontal inter-departmental communications structures to facilitate faster and efficient communication feedback from the lower layers of the hierarchy and carrying out of efficient public relations. Finally Unilever in its CSR reports cites “streamline responses to ad hoc information requests” as the last reason for publishing a CSR report. Ad hoc information requests originate in highly competitive business environments where product life cycles are as indeterminate as the brand loyalty is. Unilever has had similar experiences in the past. Asymmetrical distribution of information on products often leads to structural deficiencies in consumer product markets where competition is skewed in favour of the market leader and a one or two other players. While private labels play a very big role in determining the demand trends, the withholding of information by sellers could cause an artificial imbalance between demand and supply. Therefore Information asymmetries have to be taken seriously by those who regard CSR reports as an integral part of the corporate strategy irrespective the degree of competitive intensity. Unilever’s own response to this demand for ad hoc information has been positive and remarkably well coordinated through managerial structures at each level of the hierarchy within the organization. Its overall strategic response to this demand is basically a corporate response. Q. 3. Evaluate two of the additional statements of the company. Business organizations have shown a considerable penchant recently to produce additional reports or publications on corporate performance for the use of the general public and stakeholders. Corporate or social responsibility doesn’t end with the issuance of a CSR report by some companies. They pursue this effort with other similar reports such as Operating Reviews, Chairperson’s Statements or Business Summaries. Irrespective of their names these reports more or less put out identical information for the use by stakeholders (Heal, 2008, p.210). External stakeholders such as customers, governments, local authorities, suppliers and creditors are much less informed about the internal organizational processes and procedures. In the light of such inadequacies it’s the responsibility of the Directors to make available additional reports for the benefit of these external stakeholders. Unilever has been involved in such a practice for a long time. For instance Family Reports of Unilever first published since 2002 by Lever Faberge, examine family issues related to happiness over health and well-being. In fact it’s a “Home Alone” concept based on the idea that teenagers and kids have their own problems that parents are less likely to be aware under certain circumstances. The report put out in 2002 looked at the issue of “the Emergence of Boomerang Kids” (those 20 something children who continue to live with their parents and often come home if they go out). The Report was obviously an attempt at focusing attention of the society on the fact that 20 plus children have a psychological dilemma as to how best to adjust to the external environment in the absence of parents and siblings. Such critical aspects as family union and bond should be less and less of a concern for a corporate entity like Unilever but the company took on itself the responsibility to educate an otherwise ignorant set of people on the pressures of living away from home at early 20’s. According to the report by 2021 over 35% of households in Britain are likely to be people who live alone. The Family Report of 2003 shed new light on why people delayed parenthood. The well-researched report focused on the well known predicament of those economically backward persons and those who did not think of marrying till they were economically better off. The essential argument here is that individuals tend to congregate in thought towards the same position despite other differences when it comes to marriage (Hawkins, 2006, p.144). Unilever regarded it as its responsibility to focus society’s attention on this phenomenon though it was known already that people delayed marriage basically due to economic reasons. The Family Report of 2004 examined the relatively difficult task of bringing up teenagers. What the report sought to portray was the increasingly difficult task of parents in dealing with their teenage sons and daughters who were probably justifiably inquisitive of their parents’ distrust and the subsequent tainting of relations. Teenagers baulk at the very idea of parental interference (Tungate, 2008, p.77). Unilever regards that it’s its social responsibility to focus attention on some culture-centric behavioural patterns of these individuals as well. In the first instance these reports have a highly valuable content about social problems. Secondly they invariably educate parents on the very sensitive family issues, though they are seemingly commonplace. In addition Unilever has also been publishing Sustainable Development Reports as well. For example in its global SDR for 2006 the company presents an overview of its activities’ impact on the society and its environment. It also sets out in detail what business practices it would adopt in order to ensure its commitment to meeting the requirements. The report extensively presents the entire Group’s operations in the world and an assessment of their impact on the society. The concept of sustainability is a modern equanimity based principle related to the material environment and development. While it has many ramifications including corporate ones that need a greater degree of focus and analysis within the socio-economic environment in which the company operates, there is also the need for a more practical view of the challenges faced by the society. It’s here that Unilever has succeeded. Many writers have defined the concept of sustainability in a variety of ways. However the definition given by the World Commission on Environment and Development (WCED) is considered to be of prime importance – “Sustainability represents forms of progress that meet the needs of the present without compromising the ability of future generations to meet their needs”. Unilever meets most of these constituent elements in its efforts to sustain the very environment in which it operates. Both the production process and the consumption process in the economy of a country are shaped by the innovative strengths and the subsequent summation of the “five basic sustainability principles” as enunciated by Buckminster Fuller (Dresner, 2002, p.37). They are the material domain, the economic domain, the domain of life, the social domain and the spiritual domain. According to Fuller the material domain is the central principle necessary for the regulation of the mobility of materials and energy that help to sustain life as it’s. The economic domain serves as a main mechanism to husband wealth. Unilever’s sustainability reports essentially capture these elements though they are treated in isolation with little regard for the theoretical constructs of sustainability. These theoretical constructs are not incorporated into its reports due to an oversight perhaps though their absence can be seen as a big vacuum. Therefore besides the whole system of principles for sustainability and its efficient conveyance to the people, the economically viable execution of development associated with sustainability looks at the regulatory and strategic phases of it to achieve what’s known as the “environmental compatibility”. Sustainability evaluation requires metrics or such quantifiable measures to sum up important values contained in the process even though qualitative aspect also is important. Environmental Sustainability as a social responsibility parameter is practiced by corporate bodies with emphasis on the preservation of the environment. Unilever in its 2006 Report exemplifies this principle though there is no evident reference to British environmental degradation or such probabilities in the future. Unilever expresses its concern over “Sound environmental management” and focuses on climate change and its impact as well. The Report calls on the responsible citizens to be aware and the conduct themselves in a manner that environmental destruction will not come too soon if at all. Such reports have the following socially and economically desirable outcomes. Firstly they create an awareness among people as to how and why sustainability of environment and resources thereof could be of great importance to societies. The emergence of a consumerist class of people that thinks very little of the rate at which resources are being consumed on a daily basis has forced companies like Unilever to refocus attention on the very problem that resources need to be replaced as fast as or faster than the rate at which they are consumed. But nevertheless many resources are non-renewable and therefore there must be some highly developed strategic initiatives on the part of companies like Unilever to carry out R&D on alternative forms of energy for example. Secondly these reports are intended to redirect resource utilization and consumption. For instance these reports on environmental sustainability draw attention of policy makers to redirect resources to those who require them the most. Thus the economic principle of meeting the demand of consumers who are able to pay for goods and services is nullified to a certain extent here. It’s not socialist theoretical construct either. When sustainability of the environment or resources therein becomes an issue, both political and economic, there is very little that individuals can do. Redirection of scarce resources is an essential element of the process if not integral. Thirdly social policy of the government needs to be refocused on those who need sustenance at some cost. Socially responsible governments do not behave in the same manner as those economically responsible ones do. However economic sense denies that resources need to be redirected by policy initiatives of the government. Individual companies do not publish reports to force governments to redirect policy but they do so with a view to changing attitudes of policy makers. This is a very important aspect of these reports. Finally these additional reports have been used by numerous companies and researchers to identify what’s known as the most persuasive force of the society, i.e. the corporate entity coming to the aid of both policy makers and subject people at a time when scace4 resources are being consumed at such an unsustainable pace. This aspect of the reports needs to be judged from the viewpoint of education that they impart to the society. The social dimension of them is far greater than it’s assumed by the external world. REFERENCES 1. Bhamra, T. and Lofthouse, V. 2007, Design for Sustainability(Design for Social Responsibility), Gower Publishing Ltd, Hampshire. 2. Dresner, S. 2002,The Principles of Sustainability, Earthscan Publications, Ltd, London. 3. Chanmugam, R., Shill, W., Mann, D., Ficery, K., and Pursche, B. 2005, The Intelligent Clean Room: Ensuring Value Capture in Mergers and Acquisitions, Journal of Business Strategy, Vol.26, No. 3, pp.43-49. 4. Crowther, D. and Reyman-Bacchus, L. (Eds.) 2004, Perspectives on Corporate Social Responsibility, Ashgate Publishing , Vermont. 5. Hawkins, D.E.. 2006, Corporate Social Responsibility: Balancing Tomorrows Sustainability and Todays Profitability, Palgrave Macmillan, New York. 6. Heal, G. 2008, When Principles Pay: Corporate Social Responsibility and the Bottom Line, Columbia University Press, New York. 7. Hopkins, M. 2003, Michael Hopkins, The Planetary Bargain: Corporate Social Responsibility Matters, Earthscan Publications Ltd, London. 8. Jones, G. 2005, Renewing Unilever: Transformation and Tradition, Oxford University Press, Oxford. 9. Myers, S.C. 2001, Capital Structure, The Journal of Economic Perspectives, Vol. 15, No. 2, pp. 81-102. 10. Roll, M. 2006, Asian Brand Strategy: How Asia Builds Strong Brands, Palgrave Macmillan, New York. 11. Schweiger, D. 2002, M&A Integration: A Framework for Executives and Manager, McGraw-Hill, New York. 12. Tungate, M. 2008, Branded Male: Marketing to Men, Kogan Page, London. 13. Vogel, D. 2006, The Market for Virtue: The Potential And Limits of Corporate Social Responsibility, Bookings Institution Press, Washington. Read More