MBA 849
GLOBAL BUSINESS
MERGER MANIA
1999/2000
College of Commerce
University of Saskatchewan
TABLE OF CONTENTS
Table of Contents
page 1
Executive Summary
page 2
1.0
Introduction
page 6
2.0
Incentives Behind Global Mergers
2.1
The Cost Factors
2.2
The Marketing Factors
2.3
Mixed Differences
page 7
page 8
page 10
page 11
3.0
Managerial Consideration
3.1
Cultural Effects
3.1.1 Four Dimensions of National Culture
3.1.2 Acculturation
3.1.3 Managerial Awareness
3.1.4 Advantage of Culture Clash
3.1.5 Sovereignty
3.1.6 Case #1 – Matsushita / MCA
3.1.7 Case Analysis
page 13
page 13
page 14
page 15
page 17
page 18
page 18
page 19
page 19
3.2
3.2.1
3.2.2
3.2.3
3.2.4
3.2.5
3.2.6
Ethical Considerations
Stakeholder Theory
The Market Ethic Principle
The Utilitarian Principle
The Proportionality Principle
Human Factors
Ethical Integrity
page 20
page 20
page 21
page 22
page 22
page 23
page 25
3.3
3.3.1
3.3.2
3.3.3
3.3.4
3.3.5
3.3.6
3.3.7
Financial Risks
Financial Returns
Who is the winner?
Valuation Pitfalls!
Financing the Acquisition
The Divorce
Case #2 BMW and Rover
Case Analysis
page 26
page 26
page 27
page 28
page 29
page 30
page 31
page 32
4.0
Conclusion
page 33
1
EXECUTIVE SUMMARY
Introduction
Over the last decade the rate of mergers and acquisitions has drastically increased.
Globalization is changing the impact of mergers as the economy has become border-less.
This wave of mergers, joint ventures, consolidations and cross-border alliances are
different from the past merger manias. The World Wide Web, fax machines and
electronic commerce have allowed companies to operate in a global environment. Of
great debate is the result of mergers and acquisitions. Do they create benefits and to
whom? The debate has never resulted in a clear victory for either side. In this paper we
will look at the reasons for merging and the issues that can potentially arise from
merging.
Incentives behind Global Mergers and Acquisitions
Large and small corporations are taking advantage of the opportunities and rewards the
global village presents. The incentives are numerous and the benefits exceptional. With
this strategy corporations are able to cut costs, evade trade barriers, invest in diverse
economic environments, and improve marketing conditions.
The cost incentives include the availability of labor, the accessibility of raw materials,
lower labor costs, lower transportation costs, lower production costs, and the availability
of reserved technologies.
The incentives for marketing improvements include market growth potentials, the size of
the host market, the desire to follow the competition, the need to maintain close customer
contact, and a desire to maintain market-share (usually on a global perspective).
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Other mixed incentives include, political stability, foreign exchange rates (bidder’s
advantage), avoidance of government barriers to trade, and the host country’s
perspectives to foreign industry.
Managerial Considerations
Cultural Effects
Mangers of international mergers must be aware of both national and corporate culture
and its impacts on the outcome. Culture is defined as “the collective programming of the
mind which distinguishes the members of one group or category of people from another”
(Hofstede, 1991). When the organizational culture at one end of the partnership clashes
with that at the other end, serious consequences may result.
The cultural aspect of mergers is presented using Hofstede’s Four Dimensions of
National Culture, the Process of Acculturation, and a study looking at the advantage of
culture clash. This leads to a discussion on managerial awareness, which suggests that
although managers are aware of cultural diversities, they are still having difficulties
implementing progressive strategies.
Presented is a case summary and analysis of an international merger between Matsushita
Electric Industrial Co. Ltd. and MCA Inc. in 1990. What resulted was a culture clash
which inevitably ended the partnership five years later.
Ethical Concerns
Failure to consider ethical aspects can dramatically alter a firm’s success in a competitive
market. The stakeholder theory, the market ethic principle, the utilitarian principle and
the proportionality principle have been proposed to provide managers with an ethical
framework for evaluation. Depending on the theory or principle applied, different
outcomes may result. In order to make the best ethical decision, managers must consider
3
how the merger will effect its stakeholders. Particularly important for mergers is how a
proposed plan to merge or an actual merger affects the human element - workforce
reductions, restructuring of the employees and management, the community, suppliers
and the country.
With the global impact of mergers, especially in less developed countries with cheaper
labor, resources and relaxed environmental law, large multi-national corporations must
assume a leadership role and recognize their ethical obligations. To operate a business
ethically means to operate with integrity. This requires the firm to make a conscious
choice so that a firm’s actions are in alignment with a firm’s principles by establishing a
code of conduct in accordance with its vision and mission.
A firm that competes
ethically will win a favorable reputation from all stakeholders which is key to the
company’s success.
Financial Consequences
The outcome of a merger (negative or positive) differs from the perspective of the
acquirer to that of the target. Even in a mutual alliance the enterprises must be aware of
who will benefit more or be the dominant one.
The financial market is also quick to analyze who will benefit from the combination.
Today’s multi-million dollar deals have been keeping financial markets and bankers
busy. Some deals are straight stock swaps, or new equity issues, some are financed with
internal capital while others use debt or a combination of the above.
If a merger or alliance proves to be unsuccessful, a few months, or a few years later,
separation is the likely course. Such is the case of BMW and Rover. After years of
injecting millions into Rover with no profit in site, BMW’s reaction to sell Rover was
4
viewed enthusiastically by the market with the increase in BMW share price. Ending an
alliance may prove difficult as dividing assets and liabilities is often a painstaking task.
Managers must therefore be aware of the financial risks involved.
CONCLUSION
Mergers are playing a key role in the global economy because of the numerous
incentives. Despite them, managers must achieve a balance with the cultural, ethical, and
financial spectrum. Although the cases will demonstrate the failure of mergers caused by
the lack of attention to managerial considerations, these factors have not acted as a
deterrent. The business leaders of today are favoring the benefits over the considerations
as the rate of mergers is on the rise.
5
1.0 INTRODUCTION
Over the last decade the rate of mergers and acquisitions has drastically increased. It is
almost impossible to pick up a newspaper or journal and not learn about another alliance,
joint venture or even hostile takeover.
Time-Warner and AOL, Daimler Benz and
Chrysler, and Glaxo Wellcome and SmithKline Beecham are just some of the more
recent mergers. This wave of mergers, joint ventures, consolidations and cross-border
alliances are different from the past merger manias.
They are different because
globalization is changing the impact of mergers (Daley, 1998). The World Wide Web,
fax machines and electronic commerce have allowed companies to operate in a global
environment. To survive and adapt in this environment, where speed and change is
inherent, companies must continually re-invent themselves.
The time and expense
required to develop new techniques or new markets is too long. A business leader
thinking his company can do it on its own is left behind as his competitor merges with
those in the new market or owning the new technology already.
Globalization is changing the impact of mergers in the twenty-first century.
Companies can now search for new opportunities anywhere, produce anywhere and sell
anywhere, all made possible by advancements in communication technology and changes
in economic regulations. Of great debate is the result of mergers and acquisitions. Do
they create benefits and to whom? The debate has never resulted in a clear victory for
either side. After a look at the positive aspects of global mergers, the paper focuses on
three considerations that are crucial for business leaders of tomorrow. Focus will be
placed on cross border mergers, staying away from domestic consolidations.
Mergers and acquisitions are nothing new but the pace is unlike those before. Bankers
predict that mergers (domestic and international) involving European companies will
approach the $2 trillion mark this year (Reed, 2000). In 1999, the value of mergers were
6
$1.5 trillion. According to J.P. Morgan analyst Paul Gibbs, 60% of these were cross
border mergers. In Canada, foreign investors, mostly American, took over 186 firms
worth $41 billion, up over 117% from 1998. The record for mergers is $1.9 trillion in the
U.S. (Reed, 2000).
Mergers appear to have their benefits as they can produce more efficient companies,
share new technologies and can create jobs. These issues seem to positively impact
shareholders and stroke CEO’s egos. The negatives are also visible: loss of control, loss
of sovereignty, and loss of jobs. This downside is more often overlooked as non-trivial
stakeholders (employees, suppliers, customers and a country) feel the impact.
For the purpose of this paper a merger is defined as: the acquisition by one or more
persons, whether by purchase of shares or assets, by amalgamation or by a combination,
acquires control over or significant interest in the whole or a part of a business
competitor, supplier, customer or other person (Consumer & Corporate Affairs, 1991).
Significant interest is where the acquirer achieves the ability to materially influence the
economic behavior (decisions relating to pricing, purchasing, marketing and investing) of
that business (Consumer & Corporate Affairs, 1991). Therefore, merger, acquisition,
takeover and alliances will be used interchangeably in this paper.
2.0 INCENTIVES BEHIND GLOBAL MERGERS AND ACQUISITIONS
As the world grows and develops, so do the potential global markets and competition.
The international corporate world feeds and grows precisely amidst such conditions. Yet,
one must understand that such inter-continental growth is carefully tapped into, rather
than torrentially flooded onto, since not every international market guarantees a
successful enterprise – but rather an opportunistic possibility. When corporations merge
or acquire another foreign equivalent, it is because of expectations of several benefits and
7
rewards associated with such business deals. The following section will look into the
corporate reasoning and benefits associated with global mergers and acquisitions.
2.1 The Cost Factors
Corporations are continuously pushing for an increase in profit maximization mainly
through increases in sales revenues and cost cuts. However, a company is not always able
to increase sales revenues, therefore under such circumstances great efforts are made to
cut costs. At times global expansion is the answer.

Lower labor costs - companies many times merge or purchase foreign companies
simply due to the fact that countries in which the target acquisition is located offers
lower costs in labor wages. Such was the case with the German car manufacturer
Volkswagen, when in the 1970’s, it purchased a Brazilian automobile component
producer. Volkswagen then turned the producer into a Volkswagen component
producer – which cut significant production costs just in labor wages alone (German
industrial labor is highly unionized).(Samuels, 1972)

Availability of labor – The availability of labor can also be a strong reason for a
purchase or merger. At times companies in highly developed countries have
difficulties hiring labor to fulfill certain production demands, demands that at times
involve health risks - such as chemical facilities. Under such circumstances
companies will seek similar foreign companies whose host countries offer an
abundant supply of such labor. (Peel, 1990)

Availability of raw materials – A difficulty facing many companies is the availability
of raw materials. This area is an especially prevailing problem with mining and oil
companies. More financial resourceful companies are continuously acquiring smaller
companies that have good access to the bidder’s needed resources. This is especially
common with the diamond giant deBeers. (Peel, 1990)
8

Desire to be near the source of supply – Another common area is the desire to have
easier/immediate access to the resources required for production. With the limited
amount of vital raw materials at home, companies are dependent on other nations for
the supply of such goods. This situation of instability creates great discomfort among
the importers, which to avoid uncertainties, will purchase or even merge with a
company that produces the resources or is established in the country/area of the
resources. (Chiplin and Wright, 1987)

Lower transportation costs – A common problem found with many companies is the
cost of transportation. The heavy industry especially, has annual transportation costs
that rank in the billions of dollars. When companies involving high mobility of
resources or final products attempt to reduce costs, a serious analysis is made at
purchasing or merging with companies that are able to produce for and supply the
relevant customers at a closer geographical location. (Cateora and Graham, 1999)

Availability of technology and capital – Economies all over the world shift back and
forth at uneven rates. While Japan may be in a recession, the United States may be
experiencing strong economic growth – and vice-versa. Under such conditions large
cash starved companies, in recessive nations, may attempt to leverage themselves to
acquire smaller cash-rich companies in healthier economic environments. This
strategy is very common with large corporations that target undervalued companies,
that in turn can offer the bidder a high level of return when the market corrects or
when the bidder gains access to the target’s liquid resources. Another reason why
mergers and acquisitions (M&A) take place are technological interests that the bidder
or mutual partners may be interested in gaining from one another. This becomes an
alternative to high level investments in research and design, especially when the
technology (company) can be purchased for a lesser amount. (Peel, 1990)
9
2.2 The Marketing Factors

Size of the market – One of the main reasons a company expands globally is to
expand its sales in broader markets. A mature company will target its goods or
services to a market that is in its infancy or growth stage. However, foreign markets
can be better penetrated if a company is able to work in conjunction with another
company that is already established in the host country. This conjunction takes place
either as a merger or an acquisition. If a merger takes place the two companies simply
gain resource advantages over their competitors, which is mutually desirable.
(Cateora and Graham, 1999)

Desire to maintain share of market – Mergers and acquisitions are also common
when a company feels threatened by a new or an old competitor. If, for example, a
company forecasts or is experiencing a loss in market share because of a new entrant
or competitor, it may attempt either a hostile takeover or a convenient merger. Such
tactics are becoming quite common in the automobile industry worldwide. As
companies such as Ford continuously expand their market share by purchasing other
car companies such as Mazda, Aston-Martin, Volvo and Jaguar, it places great
pressure on its competitors. The competitors of Ford, such as Daimler-Benz, are then
forced to merge or acquire other car companies (such as the Daimler-Chrysler
merger) to maintain market share. (McCann, 1988)

Market growth – Some companies are acquired simply because larger corporations
are aware of the growth potential of a target company. Poor management is
sometimes the reason that the target companies are not performing up to potential, at
other times it is obsolete production tactics or even outdated marketing strategies.
Nevertheless, most cash-rich corporations are always on the look-out for promising
businesses that may also increase the bidder’s market growth. (Cateora and Graham,
1999)
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
Customer contact – Many corporations export products and services to many
different countries. However, to remain competitive with other companies these
enterprises find the need to maintain a closer contact with the customer base. This is
important when considering rising markets with very complex cultures such as China
and Brazil. The need to better communicate and interact with these critical markets
pushes for the establishment of a physical presence in those specific countries.
Therefore, corporations will purchase companies that are already in operation in those
cultural environments. The logic being that such companies not only give the bidder
direct access to the critical markets, but also, they have the important factor of
experience within the complex cultures. Hence, several of the targets are actually
native companies of the host country. (Peel,1990)

Desire to follow competition – This reason for M&A is somewhat more prevalent
among highly competitive companies. Banks for example are very sensitive to interbanking mergers and acquisitions. The stronger that two banks become, the weaker
the remaining ones get – unless they too merge. In the global sense it is most
desirable to maintain a strong focus on the competition and in the eyes of the
customers not to stay behind. This is also applicable to product manufacturers or
service providers who wish to maintain equal footing with their competitors. If a
competitor expands operations into another country through acquisitions or mergers,
it is in the rival’s best interests to do the same. If not, it would become difficult to
maintain a similar level of competition in the long run.
2.3 Mixed Reasons

Foreign exchange – Foreign exchange is perhaps one of the biggest incentives for
foreign direct investment, particularly capital. In recent years, Canadian corporations
have been consistently purchased by American ones. This trend is occurring not only
because of strategic values, but also because of the devalued Canadian dollar. This
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simply means that it becomes much cheaper for American companies to acquire
foreign companies rather than build new enterprises. It becomes a very profitable
option because when the host nation’s currency appreciates, so does the foreign
investment. (McCann, 1988)

National preference for local products – Nationalism is an important aspect
considered by many corporations. Consumers given an option of a product or service
of equal price and quality will usually opt for the locally produced good rather than
the foreign good. This aspect is of serious concern in highly competitive global
markets. For this very reason, foreign corporations will merge or acquire companies
in foreign countries to represent their products in that country. This strategy ensures
foreign products are sold under a local label with little risk of consumer nationalistic
discrimination.

Government erected barriers to trade – Many countries have very steep trade barriers
towards foreign products. These are meant to protect the national industry from that
of aggressive foreigners. However, if foreign products are unable to penetrate such
markets from the outside, an attempt will be made to penetrate from within. This
strategy is simple; the foreign company purchases or merges with the local
corporations and overcomes any previous trade barriers that originally prevented the
aggressor’s expansion.
Political stability – There are times when nations undergo great shifts in political change.
Such changes can be very pro-nationalistic, with heavy anti-foreigner feelings. Under
such circumstances, it becomes very risky to have a wholly owned foreign enterprise in
such a location. Therefore, it is common to see a shifting of full corporate ownership into
a shared ownership structure. In other words, the foreign company will attempt to merge
its company with that of a local corporation. Rather than loosing an investment, it simply
dilutes it. This tactic is often effective since the host nation is happy that the corporation
12
is part national, and foreign investment still pours into the country (Cateora and Graham,
1999).
3.0 MANAGERIAL CONSIDERATIONS
Despite the various advantages attained through corporate mergers, a firm cannot totally
immunize itself against various non-financial effects in any market.
Specifically, a
manager must consider the cultural and ethical aspects of mergers and balance these
affects against the risks that may result. Failure to consider these non-financial elements
can dramatically alter a firm’s success in a competitive market.
3.1 CULTURAL EFFECTS
Culture, both national and corporate, has a direct bearing on the success of mergers. With
the increasing presence of international mergers in today’s global business environment,
companies are becoming more familiar with the fact that financial and strategic fit alone
do not guarantee a successful merger (Marks, 1999). This issue is highlighted when
mergers take place on the international stage because of a greater cultural clash, both
nationally and organizationally. In fact, one of the biggest obstacles facing a company in
a cross border merger is the cultural difference. (De Voge & Spreier, 1999) (Buono &
Bowditch, 1989). Cultural differences are often the root of strategic, financial, and
operational concerns which are often perceived as more crucial to the success of the
merger (Buono & Bowditch, 1989). In addition, one study reported that the most poorly
handled factors in mergers were those that affected employees’ values and beliefs of the
organizations concerned. These "people factors", while judged to be at least as important
as the financial and technical issues, tended to receive less attention during all phases of
the merger process—where they were considered, they were handled less skillfully than
the higher profile aspects (DeVoge Shiraki, 2000).
13
Hofstede (1991) defines culture as “the collective programming of the mind which
distinguishes the members of one group or category of people from another”. Nahavandi
and Malekzadeh (1988) have defined organizational culture as “the beliefs and
assumptions shared by members of an organization (Burton, Malcolm, Chapman and
Cross, 1999). Furthermore, organizational culture can be defined as the core values and
norms that are shared by the majority of organizational members (Buono & Bowditch,
1989).
3.1.1 Four Dimensions of National Culture
Often, it appears as though a national culture greatly affects the organizational culture of
a company that operates within that nation’s border (Cartwright & Cooper, 1996). As
noted in Hofstede (1991) organizational culture differs from national culture in several
ways. Because our early mental programming is instilled in us socially via our nation’s
culture, this culture helps us determine values about what is normal versus abnormal, and
defines one’s basic assumptions concerning relationships with people, time and nature.
These relationships, in turn, define how we interact within the organizational
environment.
Hofstede suggests four dimensions of national culture that affect the way they operate in
the business context: power distance, uncertainty avoidance, individualism versus
collectivism, and masculinity versus femininity. Power distance, for example, suggests
that depending on the way a nation deals with inequalities determine the relationship
between subordinates and bosses within that nation’s organizations. Countries that expect
and accept an unequal distribution in power between subordinates and bosses tend to
have organizational cultures where a larger emotional distance exists between employees
and bosses, and where subordinates are more unlikely to approach and contradict their
bosses directly. The opposite holds true for countries that do not expect nor accept an
unequal distribution of organizational power. In these organizations there is limited
14
dependence of subordinates on bosses, and a predominance of consultation or
interdependence between subordinates and bosses.
One must ask, how does this affect international business in this new century? If a
merger takes place between two organizations from countries where these four
dimensions are similar, the merger should culminate in a smooth fashion. If, on the other
hand, the two merging organizations are very different according to these dimensions, the
merger may not be as smooth. Essentially, each organization involved in the merger may
have different perceptions about the key issues of the merger based on its national
culture.
An example between a Swedish and Malaysian Company will illustrate the importance of
power distance on international mergers. In Sweden, there is a lower level of power
distance within its organizations as compared to Malaysia. As a result, it is easier for
bosses and subordinates to interact in Sweden, and subordinates are not looked down
upon as much as they would be in Malaysia. Therefore, if the merger meant that a
Swedish manager had to work in Malaysia, he/she may wonder why Malaysian
employees do not approach him/her. Also, if a Swedish subordinate was relocated in
Malyasia, he/she may be looked down upon more and thus may feel more inadequate in
Malaysia. These problems then may translate into less productive employees leading to
the threat of lower profits. Several authors agree that the compatibility of national
cultures between firms involved in international mergers is indeed a major determinant in
the outcome of such unions (Burton, Malcolm, Chapman and Cross, 1999).
3.1.2 Acculturation
The cultural problems above relate to the process of acculturation, defined as adjusting
and adapting to a specific culture other than one’s own. Since the cultural aspect is key
15
to the success in international operations, it is therefore important in terms of
international mergers (Czinkota, Ronkainen, Moffett, Moynihan, 1995).
The extent to which one culture adapts to the other, or acculturation, depends on the
following four modes of acculturation:
1. Assimilation – acquired firm adopts culture of acquiring firm (low conflict level)
2. Integration – basic assumptions and practices of both organizations are accepted and
preserved (moderate conflict level)
3. Separation – acquired firm wants to maintain all aspects of its culture in an
autonomous manner and rejects the others’ culture (high conflict level)
4. Deculturation – members of the acquired company no longer value the cultures of
their previous organization but do not wish to be assimilated into that of the acquiring
firm.(highest conflict level) (Burton, Malcolm, Chapman and Cross, 1999).
Post acquisition conflict or acculturative stress depends not only on the mode of
acculturation, but also, the relationship of the modes between the two firms. Essentially
the favored mode for the acquired firm depends on the perception of how attractive the
acquirer’s culture is relative to their own. For the acquiring firm, the favored model
depends on the extent to which cultural diversity is tolerated and accepted within the
parent company. Furthermore, the acquiring firm will be influenced by its corporate
strategy–the amount that it has to impose its culture and practices on the target company
(Burton, Malcolm, Chapman and Cross, 1999).
One study in particular concluded that cultural clashes are minimized when acquired
employees are both willing to abandon their old culture and perceive the acquirer’s
culture as attractive (that is, assimilation). This is achieved when the acquiring culture
provides employees with a greater degree of participation and autonomy than that which
16
was present in the acquired company’s culture. The importance of dealing with such
clashes are noted by the following example:
A bank merger initially intended to have complete integration by
introducing a new name, location and new systems. However, it was noted
that one of the firms had instilled its dominance on the merger in terms of
values, philosophies and personnel. This lead to resignations of employees,
and a lack in worker motivation (Buono and Bowditch, 1989).
The importance of this example for mangers of mergers speaks for itself. As noted in
Buono and Bowditch (1989), people may refuse to give up certain beliefs, values,
traditions and priorities when international mergers force new cultures to interfere in an
organization. As a result, they may lag behind the rest of the organization in accepting the
culture change. Although the above example represents a domestic acquisition, Burton,
Malcolm, Chapman and Cross (1999) note that these principles are the same for
international mergers.
3.1.3 Managerial Awareness
It appears, however, that although managers are becoming more aware of cultural issues,
this awareness is not being implemented appropriately. The example of UK mergers as
presented in Burton, Malcolm, Chapman and Cross (1999), suggests that 43 percent of
international acquisitions fail to produce a financial return in excess of the acquirer’s cost
of capital, and 45 percent fail to meet their initial strategic objectives. In part, these
disastrous results have occurred due to cultural differences.
In fact, management
consultants such as Ernst and Young report that cultural differences are a primary cause
of the higher perceived risk that European acquirers associate with cross-border
acquisitions. Coopers and Lybrand state that 85 percent of unsuccessful UK acquisitions
involve differences in management attitudes as a major cause of failure (Burton,
Malcolm, Chapman and Cross, 1999).
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3.1.4 Advantage of Culture Clash
So far, this section on the effects of culture on mergers has stressed that when cultures
clash during merger situations, more conflict results, leading inevitably to tougher times
financially. Most authors that have been researched for this paper stand by this viewpoint
as well. On the contrary though, one such article stresses an opposing view. This article
suggests that cultural differences enhance the success of international mergers. Morosini,
Shane, & Singh (1998), state that by accessing both firms’ diverse set of routines and
repertoires that arise through national culture, the merge will be more successful. If
cultures are drastically diverse, the merged company can benefit from two sets of
business philosophies. The key is in the successful management of the cultural
diversities. The results of a study on 52 international acquisitions between 1987 and 1992
report a positive association between the national culture distance (cultural diversity) and
success of international mergers. With this in mind, it appears that a manager’s best
alternative in finding a suitable partner is to join with a culturally distant one, but only
when careful planning and cultural awareness on both sides is achieved.
3.1.5 Sovereignty
Sovereignty is an important issue with increasing numbers of mergers. In Canada, much
of the economy is controlled by foreign nations, primarily the US. The Vancouver
Canucks, Spar Aerospace, Macmillan Bloedel are only a few of the successful takeovers.
As Canadians, we may be losing control of our own destinies, but may not be willing to
pay higher prices or purchase lower quality goods if we restrict mergers
As the borders between countries begin to fade, so do the borders between companies.
What is an American company or a Japanese company or a French company? If
companies from around the world are bidding on a large U.S. government project,
should Americans feel threatened when the tender is awarded to a Canadian based
business, with many factories and employees in America. Or is it worse when an
18
American company wins and is planning to use its European plant to manufacture much
of the work?
3.1.6 Case--Matsushita Electric Industrial Co. LTD and MCA Inc.
Any merger and acquisition has a potential for clashes of culture, and when a foreign
company becomes the parent, the potential is often greater.
For example, the case of
Matsushita Electric Industrial Co. LTD and MCA Inc. shows the cultural risk of mergers.
Matsushita Co. is a huge Japanese consumer electronics firm in Japan. In 1990,
Matsushita Co. bought MCA Inc., the U.S. entertainment giant. However, after 5 years,
the company sold MCA Inc. to Seagram, a huge Canadian distiller.
What happened to
the two companies? Why did they fail to keep the business relationship?
Although MCA was merged under Matsushita, MCA president Sidney J.Sheinberg never
made things easy for his Matsushita managers due to his reluctance to incorporate the
Japanese management style. As well, Matsushita failed to bridge the diverse methods of
communication.
Only after the acquisition did employee communication become a
priority. Consequently, it was too late to establish an efficient communication system in
the merged company.
3.1.7 Analysis
This case demonstrates the importance of precise planning before mergers take place.
Because cultural diversity meant that each partner had different communication methods,
merging meant that these differences had to be overcome in order to establish one
communication system.
According to the four modes of acculturation from above, it is clear to see that
Assimilation was not taking place as the acquired firm did not adopt the culture of the
19
acquiring firm. Also, there was a hint of Separation as the acquired firm wanted to
maintain some aspects of its culture while rejecting the same aspect of the others’ culture
(i.e. communication methods).
The case can also be interpreted using Hofstede’s Four Dimensions of National Culture.
Each dimension provided an index that measured each of the 50-sample countries’
relevance to the dimension.
For example, the Power Distance dimension provided a
score for each of the 50 countries. The countries with the higher scores meant that power
distance was more prevalent in that countries’ national and organizational cultures.
The scores for Japan and the USA are as follows (see Appendix A for details).
Power Distance Index
Individualism Index
Masculinity Index
Uncertainty Avoidance Index
Japan: 54
Japan: 46
Japan: 95
Japan: 92
USA: 40
USA: 91
USA: 62
USA: 46
As can be seen, the only dimension where these two countries are close is Power
Distance. The wider the gap in scores, the more culturally diverse are the organizations in
the two countries. In relating the above case to Hofstede’s model then, we see that
organizations within these two countries are culturally different, therefore in-depth
planning and implementation are required to support smooth merger activities.
3.2 ETHICAL CONSIDERATIONS
3.2.1 Stakeholder Theory
To examine the implication of mergers on an ethical level, one of the most accepted
theories is to analyze its effects on the firm’s stakeholders (Hosseini and Brenner, 1992).
The stakeholder theory implies that a firm’s managers must be concerned with the
interest of all parties affected, including stockholders, employees, the community in
which the firm operates, and other interest groups (Meade, Brown and Johnson, 1997).
20
Based on the stakeholder theory, certain ethical principles can be applied to aid the
manager in the evaluation process. Throughout the years and across various cultures, a
number of ethical principles have become the basis for evaluating the choices of critical
decisions.
Among the principles, the market ethic, the utilitarian principle and
proportionality principle have been proposed to provide managers with an ethical
framework for evaluation of global mergers (Chase, Burns and Claypool, 1997).
3.2.2 The Market Ethic Principle
The market ethic principle is the most basic of the three principles, and is founded on the
assumption that any action that will cause the value of a firm to increase will translate
into benefits for society (Chase et al, 1997). The market ethic argues that a firm has the
best interest of all stakeholders involved, as any activity that will add value, such as
increasing economies of scale, will spur healthy competition among firms.
Evaluation of this principle is based on how the merger will affect the financial aspects of
the firm, as indicated by share price movement. If investors react to the announcement
positively, in an efficient market, this reaction will cause the share price to rise.
Conversely, if the reaction by investors is negative, the share price will decrease (Chase
et al, 1997). The market does not favor the proposed merger between Canadian National
(CN) and Burlington Northern Sante Fe Corp. (BNSF), for example, as CN’s stock price
has fallen by approximately 20 cents since the announcement (Wilson-Smith, 2000).
Based on the societal value of increased competition, this principle favors a selection of
the firm’s stakeholders, namely shareholders and customers, but neglects to consider the
effects on the employees, the community of other interest groups.
21
3.2.3 The Utilitarian Principle
The utilitarian principle promotes the action that achieves the greater value (Laudon and
Laudon, 2000) or the greatest good for the greatest number (Chase et al, 1997). The
different actions available to a manager are assigned a value and then ranked. This
principle assumes that the consequences of each action are known, and the action
receiving the highest score is the most ethical choice (Laudon and Laudon, 2000).
While this principle does allow managers to consider the effects of all stakeholders, both
the method used to predict the consequences of actions and the value ranking, although
quantitative, are subjective. Furthermore, an action taken which may benefit the greatest
number may prove to be costly for the minority. For example, the CEO of CN has
defended the proposed merger between CN and BNSF stating that this merger will secure
increased trade with the U.S. and Mexico (Wilson-Smith, 2000). However, how will this
greater good eventually affect the Western provinces if some of the previous routes are
eliminated in order to serve a larger majority?
3.2.4 The Proportionality Principle
The third principle, proportionality, is a five step process evaluating a decision based on
the consequences, timing, probabilities, direct causal effect and alternatives available
(Chase et al, 1997). The process, although complex and time consuming, does consider
the effects on all stakeholders of a particular decision. Using the CN and BNSF proposed
merger, for example, it may become evident that within 5 years all previous CN routes
through the Western provinces will be decreased 10 fold, greatly affecting the
distribution and thus competitiveness of prairie farmers in the export market. This result
may cause CN to re-evaluate the benefit of the proposed merger.
When evaluating choices based on the above principles as applied to the stakeholder
theory, it becomes evident that each principle may favor a different decision. In order to
22
make the best ethical decision, priority needs to be given to those actions most beneficial
stakeholders (Chase et al, 1997). Particularly important for mergers is how a proposed
plan to merge or an actual merger affects the human element.
3.2.5 Human Factors
In a recent pole conducted by Wirthlin Worldwide, there was a distinct generation
difference between the perceptions of mergers as either positive or negative (Journal of
Marketing, 1998). According to the poll, 52% of those surveyed aged 65 years or older
viewed mergers negatively, while 67% in the 18-24 year age category viewed them as
positive (Journal of Marketing, 1998). Perhaps one the most compelling explanations for
the generation difference can be attributed to the direct affect mergers have had on this
generation. Regardless of the precise reason, over 53% of respondents identified the
employees as the overall loser in a merger (Journal of Marketing, 1998).
Many mergers are undertaken as a means of reducing the operating costs of the two
companies by making it more efficient in its operations. Much of these cost savings are
achieved through workforce reductions. For example, the mergers between ExxonMobil
and Royal Dutch/Shell Group has reduced its global workforce by 16,000 and 18,000
jobs respectively (Richards, 2000). This has a devastating effect on the worker and
his/her family. The employee may be required to default on long-term credit obligations
initially, and sell secured assets, often at a loss, in order to meet the payments
(Waverman, 1991).
Not only does an employee lose his/her job, the identity of the employee is also affected.
Some of the identities an employee assumes include that of an income provider, a
member of the workforce, or the identity associated with their employment within a
specific company. The loss of identity is particularly severe for a senior employee who,
in effect, ‘grew up’ with the company.
As well, some employees may experience
23
psychosomatic difficulties such as marital tension or even suicide (Hoffman, Frederick
and Petry, 1989).
Furthermore, these effects and feelings resulting from a merger may be directed
internally, toward the company. It has been reported that employees are less productive
and committed, and experience decreased satisfaction and loyalty (Hoffman et al, 1989).
However, employees are not the only ones affected, management is also affected. The
company may experience difficulty in retaining key management, and, for the managers
who remain, there is considerable tension due to leadership and power struggles and an
increase in dysfunctional work-related behaviors among all hierarchical levels (Hoffman
et al, 1989).
In addition to the layoffs, many mergers cause the restructuring of the workforce. Along
with ‘downsizing’ or ‘rightsizing’, the ways in which work is performed is moving away
from the traditional Ford assembly line pattern to work encompassing broader job
descriptions, work-based teams, new technologies and flatter hierarchies (Bailey,
Parisotto and Renshaw, 1993).
In an increasingly competitive labor market, the
Darwinian theory of survival of the fittest is evident: those quickly able to change and
adapt to this new environment will survive. Those who are not able to quickly adapt, or
who are not as productive, will be the losers, most notably the elderly and unskilled or
semi-skilled worker (Bailey et al, 1993). As a result, workers are directly concerned
about the effects a merger will have on their job, both retention and changes, pension
benefits and retiree health care benefits (Hoffman et al, 1989).
The loss of employment caused directly from a merger indirectly affects the person’s
family as well as the community. One of the most detrimental effects to the community
occurs when a merger closes a company or plant.
The community suffers a loss of
identity (particularly if the company has employed the majority of workers in the
24
community) and the local tax base of the community will decrease. Depending on the
extent of community members directly affected, the decreased tax base will lead to a
decrease in the quality of community life (Waverman, 1991).
Furthermore, due to the multiplier effect, many of the suppliers and businesses dependent
on the firm suffer the loss as well (Chase et al, 1997). The suppliers will not only lose
contract renewal, but may have made investments in specific assets in anticipation of the
renewal (Waverman, 1991).
With the firm closing, the most talented and skilled workers will need to search for
meaningful employment that will sustain their incomes and living conditions (Czinkota,
Ronkainen, Moffett, and Moynihan, 1998). With the ExxonMobil alliance, it is expected
that 1,300 jobs will be eliminated in Houston over the next three years (Richards, 2000).
Thus, the community and the country will experience a ‘brain drain’ as these more
talented workers migrate to another country that will provide the remuneration equivalent
to their talents. (Czinkota et al, 1998).
3.2.6 Ethical Integrity
Companies that merge and establish operations in less developed countries need to
conduct themselves with the same ethical integrity abroad as in their home country. For
example, the environmental laws in less developed countries are less stringent than the
laws of developed countries. Many firms operating in these countries take advantage of
these relaxed rules when operating in a less developed country (Czinkota et al, 1998). It
has been suggested that large multi-national corporations must assume a leadership role
(Czinkota et al, 1998), and further recognize their ethical obligations and work with one
another to develop international institutions for formulating and implementing
international codes of conduct (De George, 1993).
25
The way in which a company acts ethically is a direct result of the company’s vision and
mission. In recent years, many firms have begun to place an emphasis on the effects a
takeover may have on the stakeholders. Many firms are beginning to incorporate a nonfinancial effect (NFE) amendment into their corporate charter which allows managers to
consider the effects of a possible takeover on stakeholders rather than shareholders
(Meade et al, 1997).
To operate a business ethically means to operate with integrity. To operate with integrity
requires the firm to make a conscious choice so that a firm’s actions are in alignment with
the firm’s principles (De George, 1993). Thus, a firm needs to establish a code of
conduct that is in accordance with the vision and mission of the company, translate this
vision into a strategy, and finally, communicate this strategy to all stakeholders, both
internally and externally (Krueger, 1992).
Operating and competing with integrity does not always mean that a firm competes
successfully, but integrity does provide the institutional discipline that can provide a
competitive edge (De George, 1993). Moreover, a firm that competes ethically will also
win a favorable reputation from all stakeholders (De George, 1993). Since the reputation
of the firm is one of its most cherished assets, unethical decisions may be extremely
detrimental. (De George, 1993).
3.3 FINANCIAL RISKS: The Corporation’s Perspective
3.3.1 Financial Returns
Whatever the reason for a merger the general perception of profitability is the goal.
CEO’s want to maximize profits, as their careers / bonuses depend on it. CEO’s have
stated that these are not the primary motivators for merging. Whether you believe the
CEO’s or not, empirical evidence suggests that mergers do not increase share price.
26
Studies have found that during the actual announcement period investor returns are a zero
net present value for bidding firms while target firms almost always experience large
significant gains around the announcement period. Asquith (1983) finds that during the
pre-announcement period there is an average cumulative excess return (CER) of 14.3%.
There are insignificant gains on actual announcement days since information leaks
regarding the merger have already been taken into account. There is no stock price
change immediately following the outcome of a merger but after 240 trading days, during
the post-outcome period some non-significant losses are evident, CER of –6.59.
For the target company the gains achieved on announcement day average +6.2 according
to Asquith (1983). It appears the market reacts favorably to the announcement of a
merger for target firms. This may be because the target firms were presently undervalued
and the merger has revealed new information, or perhaps the expected synergies or new
management will benefit the target. The pre-announcement period usually has large
negative CER for target firms, which makes them ripe targets in merger proposals. If the
merger fails to take place Asquith has determined that the market quickly evaluates the
failure of the merger and the stock price will drop, loosing all the gains from the merger
announcement.
3.3.2 Who is the winner?
During the negotiation of a merger a company must keep in mind which side will have
the advantage.
When the Glaxo Wellcome and SmithKline Beecham merger was
announced there was an upward movement in both companies’ share prices, but since
then, both have fallen. The perception by the market is that SmithKline received the
worse end of the deal, as Glaxo is a slow-growing company with limited product
development. The positive side for SmithKline is that it became part of the world’s
largest drug company with annual sales over $24 billion. Mark Brewer, an analyst at
Dresdner Kleinwort Benson in London did not see a lot of sales synergies in the deal
27
(Evans, 2000), and in the immediate future, there appears to be little upside to
shareholders in either company. However, the long term seems positive because of
greater research abilities and greater sales clout. Although it will take years to pay off the
merger, there seemed to be no better alternative to achieve revenue growth amidst the
strong U.S. pharmaceutical competitors.
3.3.3 Valuation Pitfalls!
Of course not all mergers will be successful. In some instances, deregulation may be
rushing poorly planned out alliances. In other cases, some companies have so much
money that they may be tempted to overpay to buy out competitors. In other firms,
stocks are rising so high that they can boost reported earnings in the short term by
purchasing a lower priced rival, even if the deal doesn’t make strategic sense (Sivy,
1998).
In the decade when AOL announces the world’s largest takeover, offering $64.7 billion
for Time-Warner, it appears anything is possible with mergers and acquisitions. How are
the valuations done? Some of today’s targets have not even produced a profit but future
projections seem grand spurring risky deals.
The following is an example of an overpriced acquisition. This occurred when the
financial statements of Atlantic Computer were misrepresented. The financial risk, which
creative accounting concealed, were enough in themselves to bring down British &
Commonwealth.
The collapse of British & Commonwealth (B&C) in 1990 was triggered
by one of its acquisitions, Atlantic Computers, which had been making
healthy profits - on paper - both before and after B&C took it over. But in
1989, less than a year after buying Atlantic for L416 million, B&C
discovered that its acquisition was a black hole into which the whole
28
group threatened to tumble. B&C wrote off L550 million and Atlantic
was put into administrative receivership in early 1990, but that was not
enough to save its parent and the whole group finally went under a few
months later. In their report on the debacle, Department of Trade and
Industry inspectors said: `If Atlantic's business had been accounted for on
a prudent basis, it is probable that it would not have been able to report
any significant profits ... at any time from the commencement of its
business.(Outram, 1996)
3.3.4 Financing the Acquisition
How the deals are funded have a definite impact on the result of the takeover. Some
deals are accomplished with stock swaps or new equity issuance. Other deals are financed
with cash, debt or a combination of the above. When a deal is heavily leveraged, it is
more difficult to walk away. If the deal turns sour the bank still needs to be repaid. In
1999, merger and acquisition deals were behind more than a quarter of all loans in the
U.S. and totaled nearly one-fourth of all leveraged U.S. loans. (Phandungchai, 2000)
According to TFSD, bankers were busy in Europe in 1999 also, with 9,550 mergers
valued at $764 billion being completed. (Rothnie, 2000)
Travlos (1988) examined the differing returns that companies could anticipate when
using either tender offers or common stock exchanges to pay for a merger or acquisition.
Cash offers, or tender offers, signal to investors that the firm is cash rich while their share
price might be low or undervalued, making a common stock exchange more costly for the
firm. This is a favorable signal to investors and most often results in “normal” returns or
slightly excessive returns (insignificant).
The converse is true in a common stock
exchange which signals to investors that the stock is overvalued. This is a negative
indication to stockholders who are also experiencing the dilution of their shares by the
29
stock exchange. The outcome of the common stock exchange bid results in abnormal
negative losses for the firm.
It is very interesting to note that cash or tender offers are usually associated with hostile
takeovers and common stock exchanges are more linked to friendly mergers. This
indicates that even though a company will pay a premium in a hostile takeover, investor’s
value cash offers more, even with the added risk, than the dilution of their shares and the
signal that the bidding firm is over valued through a common stock exchange.
3.3.5 The Divorce
It is not easy to recover from an unsuccessful merger or alliance. If both partners want to
relinquish ties, how will they share the assets of the alliance? What asset valuation or
pricing techniques will be used? Will an independent appraiser be required? Can one
partner buy the other partner’s share or must an external buyer be found? What about the
liabilities that an alliance may have. These are important considerations that are often
highlighted on the global stage.
In addition, the decision to terminate a venture in some host countries such as Belgium or
Italy can be extremely expensive. Both countries have an exorbitant severance benefit
that requires employers to pay terminated employees. For example, terminating a 45year old manager with 20 years of service who is earning $50,000 (U.S.) per year costs
about $130,000 (U.S.) in Italy and $94,000 in Belgium, compared to an average of
$19,000 in the United States (Serapio, 1996).
Resolving disputes can also be tricky. How will disputes be handled, judicially or
through arbitration? Which country’s laws will oversee the dispute? It is very difficult to
determine by looking at financial statements and stock prices if a merger has been
30
successful or not for an enterprise. If financial performance is poor is it because of poor
strategy, faulty implementation or uncontrollable/external influences?
3.3.6 Case --BMW acquisition of Rover
On January 31st, 1994, Germany’s BMW, maker of luxury sedans paid $1.3 billion U.S.
or L800 million to acquire Britain’s Rover Group, a large volume auto maker. BMW
doubled its market share in Europe to 6% with the takeover. Due to a recession in
Europe in the early 1990’s, BMW had been struggling to remain profitable. Europe had a
surplus manufacturing capacity and Japan factories in Britain were still increasing
production. For BMW to succeed it had to come up with a global strategy. Expanding
the range of cars was necessary because BMW had focused too much on the luxury car
sector. This strategy included developing both a less expensive model and an off-road
sport utility vehicle. Ford had gone through a similar experience and spent $6 billion on
developing Mondeo. For BMW this would strain cash flow too much and could hurt the
prestigious high-end name of BMW.
Instead BMW purchased a rival who had a
complementary product range.
Rover had many things to offer.
It was efficient, its productivity was higher than
BMW’s, due to lower wage costs, approximately Dm40,000 a year less per employee
(Olivier, Ball, 1994). As well, Rover had been in partnership with Honda for 14 years
and understood Japan’s method of production and engineering. It appeared to be a
perfect partnership. The markets agreed as BMW shares increased 83% on the day of the
deal, up by Dm5.5 to Dm739.5. US investors also bid up the stock to Dm749.5 by the
end of trading (Olivier, Ball, 1994). This is contrary to Asquith’s study on returns of
bidding firms because the merger was swift, 8 days, and kept quiet so Honda would be
unaware. Therefore, the market did not have foreknowledge and had not bid up the price
during the pre-announcement period.
31
Getting Rover’s management on side was important for the merger to succeed. The key
managers had learned a great deal from Honda and that information was required by
BMW. To reduce the culture shock BMW had left Rover’s management team and unions
in place. BMW also injected $3.4 billion into Rover to update its operations and products
(Cook 2000). Great things were expected from the amalgamation.
By October 1998, losses were accruing as Rover had become inefficient and the strength
of the British pound was compounding the problem. BMW’s management went to
Britain to see if they could turn things around. There were too many problems to change.
Rover had reached losses of $1 billion to date. The man behind the acquisition, was fired
February 1999. A strategy was implemented to invest another $2.2 billion in Rover over
the next 3 years, by which time the company should break-even.
By March 2000, based on rumors that BMW might be selling Rover, BMW’s share price
increased $12. A couple days later, with Rover’s loss of $1 billion for 1999 and an
increasing British pound, BMW announced it would sell Rover to a venture capital firm.
BMW kept Land Rover, the only profitable part of the company and will continue to
make the mini range of cars.
3.3.7 Analysis
At first glance it appears that BMW was considering the cultural and ethical effects of the
merger. Rover’s management team and unions were left intact, and BMW has even
pledged itself as protector for the 50,000 Rover employees and suppliers (Cook, 2000).
However, on closer examination, this may not be the case.
Prior to the merger, Rover had established a 14 year working relationship with Honda, in
which Rover learned Japanese engineering techniques and production methods (Cook,
32
2000).
As well, these close arrangements resulted in the sharing of supply and
distribution channels between Rover and Honda.
The result of the merger has left Honda as an angry spectator.
Furthermore, the
management team at Rover had wanted to strengthen their ties with Honda and become
equity owners, not employees of the German company (Cook, 2000). BMW knew that
the support of Rover’s key managers was crucial for success, yet their existing
relationship with Honda precluded their involvement in negotiations, and their desire to
become equity owners ignored. This may have proven to be more costly for BMW than
anticipated—the commitment of Rover’s managers was not won, and the dependence of
Rover’s continual success was due to the expertise afforded by Honda. As well, the
severed ties with Honda may have hurt supply and distribution channels.
The rise in the British pound played a large part in the failure of the merger. Despite the
fact that British managers and workers in the car industry were inefficient BMW felt
profits were assured as the German mark was 2.40 to the pound (Cook, 2000). The
pound converted into Euro is now 3.15 marks. BMW’s operations outside of Britain had
to be very profitable to offset losses experienced inside Britain let alone fund any
upgrades required for the British operation. BMW’s management needed to be more
aware of the possibility of fluctuations with the currency exchange.
4.0 CONCLUSION
Important lessons can be learned from the cases presented. The ethical and cultural
effects of a merger must be seriously considered as they affect many stakeholders. First,
mangers of international mergers must be aware of both national and corporate culture.
The Matsushita / MCA represented one example of culture clash that often results during
international mergers.
33
Second, a firm must consider the ethical effects of a merger. A large part of a firm’s
success depends on the support and commitment of employees and managers, and how
the actions of a firm can affect its reputation. Severing ties with past stakeholders may
create obstacles to future success by irreparably damaging relationships.
Third, financial resources can be quickly collected and a merger can happen with
amazing speed, establishing one firm as a clear leader. Yet, these same resources of
speed and financial support can be granted as quickly to competitors, making them the
leader. Furthermore, the former leader may now face the threat of being acquired by the
new leader. For example, BMW is now the target for a takeover by Mercedes-Benz, Ford
or Volkswagon.
In addition, there are other financial risks to be considered, one being
the fluctuations in the exchange rate.
The technological advancements in communication and the ease of accessibility to capital
have become more prominent in the global environment. As a result, mergers are playing
a key role in the global economy because of the added incentives of global mergers.
These include cost cutting, market expansion, along with numerous socio-political
incentives. Despite the numerous motivators, managers must balance them against the
cultural, ethical, and financial spectrum.
Although the cases presented have
demonstrated the failure of mergers caused by the lack of attention to managerial
considerations, these factors have not acted as a deterrent. The business leaders of today
are favoring the benefits over the considerations as the rate of mergers is on the rise.
34
Appendix A.1.
The first of Hofstede’s 4 Dimensions of National Culture. The higher the PDI score, the
higher the level of power distance of that country. Here Japan and USA are relatively
close indicating that this dimension alone is not extremely vital to the success of mergers
between these 2 countries. Appendix A.2. - A.4. Indicate scores for the other 3
Dimensions of National Culture.
35
Appendix A.2.
36
Appendix A.3.
37
Appendix A.4.
38
Appendix A.5.
The graph below demonstrates two of Hoftede’s 4 dimensions - A correlation
between Power Distance and Individualism. The countries were then grouped
according to their similarities of these two dimensions. As can be seen, the USA
falls at the bottom of the lower left hand quadrant while Japan is in the top right
hand quadrant. As a result, Hofstede suggests that the further apart the two
merging countries are, the more difficult the merger process will be.
39
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