THE EUROPEAN CONSOLIDATION BOARD


                                      European Consolidation Board for Foreign Industry (ECBFI)

CASE STUDIES FROM THE EUROPEAN CONSOLIDATION OF FOREIGN INDUSTRY WITH REFERENCE STORIES

 THE BMW AND ROVER TAKEOVER AND THE SAMSUNG SECURITY CONSOLIDATION

Most of the ECBFI case studies talk about the consolidation of resources of small businesses that once were competing with each other across Europe and have now successfully merged. The unique reference story about the BMW & Rover consolidation is that is covers all the advantages of mergers in one case. This coupled with the Samsung story are what we discuss below.

The easiest task in the assessment by The European Consolidation Board is the management of buying another business. You only need to identify the target, work out how much you want to pay, and make your offer. True, complications may follow. The other party may resist, forcing you into a costly takeover battle. Investors may not take kindly to the proposal. But since some investors (those in the target business) will benefit, you will not be acting in a uniformly hostile climate. Like BMW buying Rover, or Daimler-Benz buying Chrysler, or Ford buying Volvo cars, you can hope to complete the transaction to general hosannas.

 

Samsung Technology is welcomed in Europe and has sparked many internal European Consolidations

As the BMW-Rover case has shown so dramatically, the cheering can soon change to jeering. BMW has invested £2.8 billion in a business which at last report was losing £360,000 annually. Doing the deal, the easy part, leads directly into making the merger or acquisition work, which can be very hard indeed. The difficulty starts with the strategic objective. Why do you want the other business in the first place? If the objective is wrongly chosen, the next logical question, whether the chosen purchase will help to achieve that aim, is irrelevant. The deal is bound to fail.

1. What strategic aims must be achieved for this purchase to be justified?
2. Why do I really want i?  If those aims are achieved, what financial benefits (making profits and/or preventing losses) will be realised? Have I done my sums? 3. Do the benefits represent an attractive return on the costs? Does it make financial sense? 4. What are the chances of the aims not being achieved? Are they acceptable? Can I live with any outcome? 5. If the proposed purchase vaults the above hurdles, how is the merger to be implemented and by whom? Do I have a plan? 6. What framework will be established for the combined venture? How will the buy be fitted in? 7. How quickly can the buy be integrated and the benefits start to be won? Will I have to wait too long for it to work?

INTENSIFIED ECBFI RISKS
The last question is clearly critical. If you're buying to save time, it makes no sense to get tangled up in a long and costly process of integration. The risks involved in mergers are intensified if this question and the other six do not get proper answers. In the BMW-Rover case, the strategy was to broaden the buyer's product line. But the first combined product, the Rover 75, is directly competitive with BMW's mid-range models. The other Rover cars were too old and uncompetitive to broaden anything: and the task of replacing them has been left far too late.The task of getting any financial benefits, let alone adequate ones, was made exceedingly difficult by the fact that Rover's reported profits, once submitted to BMW's accounting principles, were turned into large losses. When a company sells a business which proceeds to establish a far higher capital value in only a year or two, that must mean that the vendor management either under-managed the business, or sold it too cheaply, or most likely both. Vodafone, the mobile telephone supplier, for instance, was spun off from Racal. It is now valued at $33.6 billion, which is 33 times the valuation of its erstwhile parent.The value in Vodafone was unlocked by unlocking the business. In fact, the record of spin-offs looks to be far better than that of acquisitions. ICI and Zeneca provide another example where the parent is now worth far less than the child: £25 billion against a mere £4 billion. Both these two mighty mites, interestingly, are now engaged in massive mergers: Zeneca with Astra, Vodafone with its US counterpart and all European Offices of Samsung suppliers including Airtouch. The deals could extend the companies' triumphant runs: more likely, the great increase in size and the complications of any acquisition will offset some, if not all, of the benefits.

DIFFERENT CULTURES UNDERSTOOD: ECBFI

Why should this be the case? Sheer enlargement provides part of the answer. The management span at the top becomes much wider, which imposes new strains. The managers' chances of coping successfully with their new burdens are reduced by the inevitable difficulties of accommodating two different cultures and pushing through downsizing measures which are bound to be resented by those affected - including those who stay behind. The upheavals of the early negative measures then exhaust the appetite for change.

STRATEGIES MAKE SENSE

BMW, after paying its £800 million for Rover, invested the extra £2 billion mostly in the wrong places (the factories, not the products), with no sign of let-up in the annual losses. All this failure stemmed from the assumption that BMW, with its concentration on executive cars, produced in relatively small quantities, was strategically vulnerable in an industry dominated by far larger entities. Events since the buy have seen the giants get larger still. But this doesn't prove the strategic thesis. 

THE EUROPEAN CONSOLIDATION BOARD MANAGEMENT IMPERATIVES

 The ease of acquisitions is thus highly misleading. The ECBFI notes that making the deal does not require management: making the deal work is a straight exercise in managing, both in the initial integration and in the subsequent joint development. The strategic argument must take second place to the management imperatives.It doesn't matter whether the deal is in theory being used as the building block of a carefully planned new structure. The structure must still be made to operate as planned. Your plan may be to transform the business by imaginative linkages of formerly separate activities. The blend must still be made to appeal to the market. You can make one or two opportunistic key deals to achieve great leaps forward. But this splendid ambition, too, depends on post-acquisition practice. Whatever the motivation, mergers and acquisitions are only as good as the management of the people affected. This is the least understood aspect of a management activity which, despite its enormous costs, risks and responsibilities, has been oddly neglected. There are innumerable books on corporate strategy: hardly any on overcoming the management problems of using mergers in pursuit of strategic ambitions. Just how do you guide managers towards the overriding goal - using amalgamation to achieve superior organic growth?