Analysis of The Consolidation of Assets as an Integral Part of Business for Organizations

Introduction

Mergers or acquisitions have become a norm for companies aiming at growth. Various companies resort to mergers and acquisition, to form strategic alliances. In majority of cases the underlying reason for these is to guarantee long-term sustained achievement of "fast profitable growth" for the business. In today's competitive world it is important for various companies to keep up with a rapidly increasing diversified global market and increased competition. In order to gain competitive advantage it is essential to form alliances.

According to Megginson and Smart "Mergers and acquisitions are major corporate finance events that, when executed efficiently and with the proper motives, can help managers realise their ultimate goal of maximizing shareholder wealth."

A merger is the combining of two or more companies into a single corporation. This is achieved when one company or business purchases the property or some other form of assets from another company. The result of this action is the formation of one corporate structure. This new corporate structure retains its original identity. An acquisition is a little different from a merger in that it involves many problems being "dissolved", and an entirely new company being formed.

Reasons For Mergers

There are many reasons for mergers and acquisitions such as, growth of the company, achieving the economies of scale, for power or better management, stability and to increase market share and eliminate competition. At the core of mergers and acquisition lies the sole objective of maximization of shareholder wealth regardless of the scale of the business. This maximization of the wealth must be both in day-to-day running of the business as well as in the long-term through their tactical decisions. A well executed acquisition or merger will increase the profits earned by increased sales income and by reducing costs. It may also place the business in a position of strategic advantage over its competitors that will enable it to add value by using the opportunity of that advantage to increase profitability.

Role of Managers in successful Mergers/Acquisitions

The scope of organizational behavior for a manager goes beyond carving strategies for the functioning of the organization, and can extend further during and after acquisitions to extend financial benefits. The manager has an important responsibility to develop a leadership plan while keeping human elements that arise from such mergers in mind. To create this balanced equilibrium, the manager must use transition strategies of organizational behavior to keep the vision and goals of the organization while motivating and achieving better individual performances

Arkin, (2003) shows that, involving Human Resource Professionals at the earliest stages of a merger or acquisition is crucial to help employees adapt to the change. Kitching (1967) stresses the importance of installing "managers of change" to handle the critical areas needing change to accomplish the tasks of the acquisition. Kitching emphasizes the importance of change management efforts on control in the post-acquisition period. Of late M&A research takes into account not only control-based value creation, but also a variety of integration processes through which those synergistic benefits can be realized (Hitt, Harrison, & Ireland, 2001).

Gadiesh, et al (2002) identified a range of leadership characteristics that might be associated with successful M&A outcomes. These characteristics are decisiveness (closing the deal), serving as a symbol and creating momentum (crusading for the new entity), fostering a sense of focus (establishing and communicating the strategic vision) motivating organizational members (cheering on the troops), and providing key cultural and operational guidance (captaining change through integration). Managerial ability must be a non-specialised proclivity, and the leaders of the acquiring company must be men of much greater talent than those of the corporations they absorb

In the context of mergers and acquisitions, managers create "accountable others" (Galpin and Herndon 2000) as Clemente & Greenspan, (1998) write, "These leaders make concrete "the mutual responsibility of all employees, but alert and bind them to everyone else's responsibility . . .this will create a social conscience".

Case of BMW acquiring Rover

In the case of BMW (Gould, B 1998) acquiring Rover for 800 millions highlights the importance of managers and effective human resource management in mergers and acquisitions. BMW was easily able to gain entry into a new market segment without compromising its high end and niche market segment through acquisition of Rover. The main reason that's made BMW bought Rover and land Rover is that BMW doesn't have an SUV. the X5 was from the Land Rover team.So it was long term investment by BMW.Also the products and quality, although better, needed some help. And BAE was doing nothing with it.

BMW thought about acquiring Rover, as it was too small to survive on its own. However, a more fundamental objective was the enhancement of shareholders' wealth through acquisitions aimed at accessing or creating sustainable competitive advantage for acquirer. Such an advantage was to stem from economies of scale, market power or access to unique strengths, for example BMW through acquisition of Rover was able to offer a rage of cars in every category.

Successful acquisitions are distinguished from failed ones in a number of dimensions, ranging from pre- acquisitions planning to post- acquisitions integration management. Haspeslagh and Jeminson (1991) contrast two perspectives of acquisition decision making the rationalist and the organizational process.

The rationalist view based on hard economic, strategic and financial evaluation of the acquisition proposal and estimates the potential value creation based on such an evaluation. In this case the aim of the acquisitions was to create competitive advantages, strengthen their positions in the markets and to achieve the strategic value creation. BMW/Rover is the examples of acquisitions that have failed to be successful. Despite of the ambitious plans regarding Rover's future, Rover could not bring any profits until the year 2000 due to an investment programme of 500 million pounds per year in the UK. BMW experienced financial distress after acquiring Rover. Robert Hellar writes, " BMW has invested .8 billion in a business which at last report was losing ,000 annually"."

Reasons for Failure

Success of acquisition depends on pre - acquisition audit, including a human element audit, clarity of purpose, good communication and understanding of the cultural nuances of the acquired company. Making a successful acquisition requires all three stages of acquisition process namely, preparation, negotiation and post acquisition integration and shall be considered interrelated process.

BMW wanted to acquire Rover in order to create a range of cars in every category. BMW was not strong enough to compete on its own and the acquisition seemed to be attractive from the points of extending its range and achieving economies of scale in souring, production, distribution and R&D. However, obstacles started since implications of the acquisition. There was a lack of agreement between the teams negotiating a deal and implementing it, so the aims of acquisition were not preserved.

Tight secrecy in planning and negotiating is considered necessary to prevent either rivals or the staff of the target finding out about the deal. This secrecy may be one of the reasons for the due diligence audit being somewhat superficial. BMW's preacquisition audit neglected human resource aspects; the audit resulted in some nasty surprises after the acquisition; for example, BMW redeployment of senior BMW's staff to top Rover positions.

The chairman of BMW planed to turn Rover into exclusive cars as BMW and the same time he wanted to increase world sales. However, his ambitious target has turned out to be arduous. Robert Stevens (1999) writes "On February 11 BMW's chief executive Bernd Pischetsrieder resigned after failing to win the support of his board. He was the kingpin in BMW's million acquisition of Rover in 1994 and is associated with the failure of this take-over"

Conclusions

Mergers or Acquisitions are complex challenges for the management. There are major challenges most importantly employee related issues. Need for competent management is paramount with focus on the human resource audit as whatever, the merits of an acquisition on financial and business criteria, it is people who make it all happen. The employees need to be motivated and well informed about their future within the company.

As evident from the case study there was a lack of pre merger planning and non-transparent negotiations resulting in shocks for merged company. Most of all there was a total lack of post acquisition integration strategy resulting out of poor management. The most important attributes for the managers are honesty; sensitivity, competence and willingness to share with the target staff the benefits of acquisitions. These are the most important contributors to success of acquisitions, which were sadly lacking in case of BMW acquisition of Rover.