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Merger And Acquisition - Demystified

The professionals who are trained in different environment have different set of skills which can be leveraged through the accurately tapping their potential and hence adding value for the organisation

Photo Credit : (Shutterstock)

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The basic reason for M&A is the value derived through market access as it boosts brand and increases the market share. Other reasons being Taxation benefits, diversification of holdings, product line extension, technological integration, and synergies like cost saving, cultural integration by employing people from different geographies and enhancement of distribution channel.

The professionals who are trained in different environment have different set of skills which can be leveraged through the accurately tapping their potential and hence adding value for the organisation

Once the objectives have been identified the next step is analyzing the costs. Has it been fairly Priced, can the company afford it, what if the economy soars leading to noxious impact, what would be the regeneration costs or clandestine.

This is followed by due diligence process with even miniscule parameters in mind. Focus on important aspects like current shape of the economy, company, current debt status and other financial issues that might affect the profitability of the company in the near future, level of the talent in the organization the Macroeconomic factors. The last step would be to have appropriate exist strategy. Strategy in mind in the entire process. The synergies in the merger and acquisition are determined in the form of the incremental cash flow. Some of the important elements to be considered is incremental revenue resulting from the combination, costs involved, incremental taxes, capex - amount of capital expenditure required to maintain the firm's present productive capacity plus changes in the working capital requirements.

Ownership model that the company wishes to have is either stock financed or cash funded.

There are different categories of M&A.. Some of them to be mentioned are over capacity deals, Product line extension, Financial deals in which multibusinesses sold it to a division to a financial acquirer, geographic roll up, M&A as R& D and industry convergence deals.

Let us take a case study of merger of two automobile giant companies Daimler and Crysler touted initially. Juergen Schrempp, CEO of Daimler and Bob Earon the CEO of Chrysler in mid 90's announced that the company would be merged. The newly formed entity with the consolidated sales of $ 155 Billion represented about 8.5 per cent of the global market share. The automotive industry was suffering from over capacity of nearly 25 per cent at the time reducing the profitability. Daimler, German Manufacturer with Brand Mercedes under its umbrella represented luxury brand .On the other hand the Chrysler American Producer of Minivans, Jeep and Chrysler automobiles.GM, Ford, Toyota, Volkswagen and Daimler Crysler represented the 60 per cent of the market value. Five other manufacturers represented Fiat, Nissan, Honda, Renault, and PSA had a market share of 25 per cent.

The rationale behind overcapacity deals is that it eliminates the less effective managers, shuts down in competitive facilities making the administrative process more effective. The advantage of overcapacity deals is that it makes helps in attaining the greater market share, more efficient operations and managers who perform enjoy more of power and in the process making the entire industry less excess capacity.

With the merger of Daimler and Crysler it was thought that it would provide a blue print to consolidate the entire automobile industry. With the merger together they had 8.4 per cent as market share on paper everything looked rosy in terms of fitment. Crysler didn't have the infrastructure on a global scale and Daimler Benz aspired to diversify the product line along with the distribution channel.

With the merger there was an expected cost reduction of $1.3 billion and focus on increasing revenue through cross selling .The two car makers were true complementary to each other by reason and product. Daimler's competency laid in technological innovations and Chrysler introduced products to the market place.
There were issues post merger and Daimler share price lost around 50 per cent .Quick integration is an important aspect of successful mergers

The success needs to be imposed quickly. The differences associated with the country, ethinicity, religion, and gender seemed to be apparent in both companies. There were issues in terms of the cultural integration. It was quite difficult to impose German working style on the American processes. Daimler an engineer focused company and Chrysler business driven through sales and marketing. The top Management from Crysler manufacturing, and engineering departments left the company when they came to know they would be reporting in Germany through functional bureaucracy in Stuttgart.

Another major reason the merger failed was due to lack of due diligence where synergies were not valued properly. A lot of time was spent on transaction and governance structure than on potential synergies. The valuation team spent time in providing tax free transaction than identifying the synergies .On Feb 1998 Juergen Schrempp Visited Eaton to finalize the deal.CEOs of both the companies agreed to five objectives although there were hurdles at nascent stages due to German regulations. The objectives were focused on maximization of value for both companies, tax-free to US stockholders and tax efficient to Daimler Benz. It was suppose to be a merger of equals with pooling of interests and the last the surviving entity would be German Stock Corporation.

Contrary to expectations by 2000 the company lost half a billion dollar. By early 2001 the companies over 21000 workers were laid off.

Daimler represented Cultural (Formal, Traditional , Mannerly, Bureaucratic) , Structure (High Authority, Strong Hirarchy,Little Payment Disparity) and Products ( High Quality , High Price ,Luxurious , Small Cars) VS Crysler ' Cultural (Relaxed, Informal, Flexible, Risk Taking and Free Form), Structure (Top Down Management , Lean staff, Highly Centralized ,team work) and Products (Attractive , Competitive pricing, comfortable driving and moderate speed).

The Chrysler advocated American adaptability, value efficiency and empowerment .Daimler valued more Hirarchy and respect for centralized decision making and less risk taking.

There were huddles in day to day operation; environment was querulous due to cultural differences among executives at all level in two merged companies. Moreover American based Crysler offered its executives multiple fold salary as compared to Daimler executives which reduced the working efficiency and moral of company. Finally the two companies separated completely in 2007. Synergies play an indispensible role in M&A.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Divakar Prakash

The author is a Strategy Consultant with experience of consulting CEO level executives and key stakeholders in Real Estate , Government, Not for Profit, FMCG and Chemical sectors. Educated at the School of Management ,University of St-Andrews consistently a top ranked institution in Europe at Master's level in business Strategy, Corporate Finance and General Management

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