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Globalisation has changed the appearance of the economy. Especially in the 1990’s firms expanded into new markets to operate more global and to develop their business. To do so, many companies choosed to expand via corporations with other companies to make the market entry easier or simply to strenghten their market position.
Mergers and acquisition became one of the most used tools for development, whereas a merger between well known and successful companies always caused a sensation. Mergers caused such a stir as the companies involved in a merger faced a complete new identitiy and innovations were about to alter the company.
The research project proves the decision for a merger rather than an alliance and the synergies gathered due to this tool of development. Two companies, Daimler-Benz and Chrysler, are investigated to illustrate the academic frameworks in practice to come to a conclusion why they merged. Methodology includes analysis of secondary data which has been published on the subject area.
The findings and analysis of the research conducted, concluded that synergy is the most important aspect when companies grow through mergers. Furthermore, the results show that internationalisation due to globalisation is the key driver of mergers.
The paper concludes with an evaluation of the study and recommendations for further research.
1.1. Reason for Choice of Topic
Companies come and go, chief executives rise and fall, industry sectors wax and wane, but an outstanding feature of the past decade has been the rise of mergers and acquisitions (M&A). Whether in times of boom or bust, M&As continue to be the preferred option for businesses seeking to grow rapidly.
A company has several options to choose from when it comes to growth strategies. One option is to grow organically by increasing sales personnel, new product developments and by expanding into new geographical areas. Alternative options to achieve the desired growth, companies traditionally build, buy, merge with other companies or co-operate through alliances. However, the best example of how to grow inorganic is to merge or aquire (Sherman, 2005).
M&As are mainly about growth according to Lees (2003) and Sudarsanam (2003). Internal or organic growth is in most cases a slow process and M&As is another option that will increase the growth process. By doing an M&A deal, the acquiring company or the merged companies can get instant access to new markets, technology and operations can be completed more efficiently. Several reasons and motives exist why a company chooses to grow through M&A. According to Gaughan (2002) the most common motive for M&A is to create synergy. However, other motives play also an important role, like diversification, improved management, market power or tax motives. Johnson and Scholes (1997) state that M&As are a quick way of entering new markets or products. The company can also gain competences or resources through this way. Knowledge about the market situation is also a significant cause why companies choose to develop through M&A. Another reason for companies to develop through M&A is that they are actively searching for benefits arising from synergies.
The author has chosen the topic to gain further knowledge about the topic of why do companies actually merge to gain synergy. The reasons for attempting to gain further knowledge are based on the author’s fascination on M&A in general and to the extend why Daimler-Benz and Chrysler did actually merge. The split between those two has not been long ago and therefore the author was particularly interested in this merger. Furthermore, the author is interested what type of synergies were the most relevant in this ‘merger of equals’.
1.2. Academic Obejctives of Dissertation
This research aims to point out that synergies play an important role when two companies are doing a corporation in order to grow.
The author has chosen the following objectives in order to support the research hypothesis:
To discover why companies select mergers instead of strategic alliances as tool for development
To investigate to what extend synergies play an important role when merging
To explore the importance of internationalisation in times of globalisation
1.3. Outline of Chapters
Introduction: Introduces the topic of this research and explains the aims and objectives of the study.
Setting the scene: This chapter is to set the scene for the study. It presents background information about the two companies and what actually did happen.
Literature review: Discusses the academic literature on mergers and acquisition and synergies concentrating on several approaches to be applied to the case study.
Methodology: Discusses how the research was conducted and recognizes any limitations and biases of the chosen methods. It involves a description of how the research and data was analysed.
Findings: Presentaion of the case study including important information for the research
Analysis: The findings from the secondary research are analysed against the earlier literature and research from chapter three.
Conclusion: The research project is finally concluded, commenting on the initial objectives of the study. The limitations and recommendations for further research are also discussed in this chapter.
2.1. Background of Daimler-Benz AG
As Jurgen Schrempp became the new CEO of Daimler-Benz AG in May 1995, one of his first jobs was the promulgation of a new strategic concept containig five points to strenghten their market position and to expand further. Mercedes considered the US market to be the important and competitive automobile market in the world. They established a greenfield plant in Tuscaloosa in 1994 already to strenghten their position in the US market and were supposed to be market openers. Those were the first signs that Daimler-Benz wanted to expand.
2.2. Background of the Chrysler Corporation
From 1994 to 1997 Chrysler beat one historical record after another, where even some models were selected as ‘cars of the year’. It was even crowned by Forbes as the ‘company of the year 1996’. Bad labour relations have been improved through corporatist agreements. However, most cars were sold in the home market and plans to expand to other non-american countries have been scattered more or less. Nevertheless, the frequent crises and the internationalisation deficits of the company had planted the idea of a partner in the minds of the Chrysler executives.
2.3. The Merger
When in May 1998 the CEO of Daimler Benz, Jurgen Schrempp and Robert Eaton, CEO of Chrysler signed the contract for a merger between those two companies, they made the biggest industrial merger in history. Both partners expected great value and advantages, as both companies seemed to complement well with each other. As a matter of fact, the company did not develop as good as anticipated.
From the beginning on DaimlerChrysler could only announce little profits and losses, in the year 2001 it was even the biggest loss in history of all German companies. By mid 2004 the market value of the company has been less than half of what the value has been of both companies before the merger. By the same time the sales figures and business numbers of competitors increased. In May 2007, not even ten years after the merger, the dream of a super company bursted like a bubble.
3.1. Reasons for Internationalisation
As Kwon & Kopona (1993) state in their theory the choice of market entry should relate to the company’s corporate strategy and the extent, depth and geographical coverage of the present and intended foreign activities. Furthermore, the decision for growing should be made when there is a sufficient understanding of the different types of entry. On the one hand companies could gather experience through alliances and on the other hand fail to see that in particular cases an acquisition would be more successful (Clark, 2005). Dyer et al. (2004) state that a specific advice is needed about when to apply each strategy that is based on internal and external circumstances. Especially internally, the companies should focus on resources that are to be combined, the extent of unnecessary resources and the type of synergy which the firms seek. Externally, important factors are the degree of market uncertainty and the level of competition. As experience and interests of the company are different, these factors will have different degrees of importance.
In Porters (1987) point of view entering a new market must be attractive for the expanding company. It needs feasibility of making profits in the target organisation. The costs of entry must be taken into account. These include direct costs as the cost of shares and advisors and indirect costs include such costs as integration costs. According to Dunning (1988) where he argues with the eclectic theory that additional costs can occur because of the failure of knowledge about market conditions, the legal and cultural diversities and the increased costs of operating at a distance. It also must be taken into consideration if the possibility of gaining synergies exists and what the opportunity of benefiting from the target company’s core competences is. The local advantages of countries play an important role. The main country advantages can be classified as economic advantages, consisting of quantity and quality factors such as transportation, production, scope and the size of the market. Then there are political advantages that include government policies which have a positive influence on the market entry. And finally there are social and cultural advantages, which implicate the physical distance between the home country and the foreign country, language and cultural diversities and the general attitude towards foreigners. Dunning (1988) declared that companies have to be aware that relative attractiveness of locations can change over the year. He also declares that particular know-how and specific core abilities which count as an internalisation advantage can have a positive impact on the general business performance.
3.2. Methods of Development
3.2.1. Merger and Acquisitions
As De Witt & Meyer (1998) state in their thesis, mergers and acquisition are the most popular and influential form of discretionary foreign direct investment. Acquiring of another company is a takeover, be it friendly or hostile, while mergers only represent the share in a company according to Douglas & Craig (1995). A non-adversarial approach benefits not only buyers but vendors as well, claimed by Beckett (2005). Mergers and acquisitions are significant alternatives to internal growth of companies as they enable company’s fast penetration of new and foreign markets, acquire necessary know-how and skilled personal and obtain economies of scale and scope, according to Jackson (1995). Companies that merge gain access to supply and distribution channels through an upstream alliance. Furthermore Contractor & Lorange (1998) state that enhancing their reputation and reducing competition if the integrated company is a competitor might be seen as an advantage. M&As are a well developed strategy and not a reaction to the first apparent opportunity as Simmons (1988) argued. As Coyle (2000) states, M&A can be the outcome of either an aggressive or defensive strategy. Aggressive would mean that the company will seek to improve its market position to create a bigger company and finally to produce on a bigger scale and more cheaply through economies of scale. Defensive strategies on the other hand are made in order to survive in changing industry. A totally different reason for doing M&A claimed Beckett (2005) as he said that companies may benefit from M&As when they acquire a company at a certain value and sell it later at a higher value. Through increasing shareholder value by providing a higher level of dividend and capital gain return and securing a higher return on the investment.
This paper is mainly looking for the purposes for a merger and therefore for the realisation of potential synergy effects, as the purpose of most M&As is to achieve some kind of synergy. The belief is that two comparable companies together will achieve far better results than independently. Cost cuttings and savings will often lead to this effect. A successful M&A can be classified as one where the potential synergies identified are to be utilised best as Coyle (2000) states.
3.2.2. Strategic Alliances
Johnson (1999) has declared that defining strategic alliances are difficult to define as various forms exist. Clark (2005) defines it as two companies which are brought together with similar interest but with different strengths to work on particular projects, developmental approaches and marketing agreements which will offer benefits for both companies. Lorange and Ross (1992) even came to the conclusion as strategic alliances entail a very broad definition that it incorporates M&A. Strategic alliances can be separated into three different types as Contractor and Lorange (1988) state: Joint ventures, Non-equity alliances and Minority equity alliances.
Preece (1995) recognised 6 main reasons for strategic alliances, starting all with the letter “L”, therefore they can be named as the “6 Ls”.
Learning is the first one of them, as he argues that knowledge will be acquired. Leaning is meant as replacing the value chain activities and filling in the missing infrastructure. Leveraging will fully integrate the firm’s operation. Linking suggests that the links between supplier and customer should be build closer. Leaping pursues a radically new area of endeavour. And finally Locking out, which means reducing competitive pressure from non-partners.
3.2.3. M&A versus Alliances
The main difference between M&A and alliances is the power of control according to Lorange & Roos (1992). A pure acquisition would mean that the brought up company is under the control of the ones who bought it. To achieve growth due to acquisition and remain in control, huge financial resources are needed.
Rather than buying a whole company, a corporation can propose a joint venture with a specific division in which the corporation is interested in. In case this joint venture works well, a multi-activity alliance could be grown. Equity swaps can be conducted for long-term stabilisation. However, without full control the corporation cannot decide for its own how the alliance or the merger will develop or if it will continue. A company with two equal CEOs does not work out well due to different interest and objects as Lorange & Roos (1992) state. And Clark (2005) stated earlier that companies could gather experience through alliances but fail to see later that in particular cases an acquisition would be more successful.
3.3.1. Types of mergers
In a merger, the assets of two previously separate firms are combined to establish a new legal entity. In fact, the number of mergers in “mergers and acquisition” is almost vanishingly small. Less than 3 percent of cross border mergers and acquisitions by number are mergers. In reality, even when the mergers are supposedly between equal partners, most are acquisitions where one company controls the other. When there is a merger between two competing firms in the same industry, it is called a horizontal merger. (Buckley and Ghauri, 2002). When there is a vertical merger, two companies merge that have a buyer-seller relationship. Then there are the three conglomerate types. Pure conglomerate will be a merger where there are different markets and different products, so totally unrelated. Then there is conglomerate market extension, where it is a merger between a company that offers the same products but in a different geographical market. The last type is the conglomerate product extension, where the merged company sells non-competing products, but functionally related in production and distribution.
In the case of the dissertation, it focuses on horizontal mergers which operate on overlapping markets and segments.
Cartwright & Cooper (1996) claimed that the definitions and intentions of M&As often read like a cheesy novel with a likeness to a more or less welcomed dating or courtship. The following four approaches are made:
Pillage and Plunder
Love and Marriage
Love and Marriage would certainly best fit to the focus of this paper, as the aim is to achieve a positive long term international growth. The fourth category is aiming for long term integration through assimilation and blending.
3.3.2. Cross-Border Mergers
One important aspect of understanding cross-border M&A is to examine the logic driving the deals. Strategic motives for a cross-border merger involve acquisitions that improve the strength of a firm’s strategy. Examples would include mergers intended to create synergy, capitalize on firm’s core competence, increase market power, provide the firm with complimentary resources, products and strengths, or finally to take advantage of a ‘parenting advantage’. However, in a recent book by Mark Sirower (1997) he argues that synergy rarely justifies the premium paid. Sirower declares, “many acquisitions premiums require performance improvements that are virtually impossible to realize even for the best managers in the best of industry conditions” (p.14). In exploiting a core competence a firm takes an intangible skill, expertise, or knowledge and leverages it by expanding its use to additional industries where it may create a competitive advantage in several different businesses. One strategic reason to acquire is to gain complimentary products, resources or strengths.
Research shows that one important driver of cross-border mergers and acquisitions may be undervaluation (Gonzalez et al., 1998). A driver of cross-border mergers might be differences in the macro-economic conditions in two countries. That is, one country might have a higher growth rate and more opportunity than some other country. Thus, it would seem reasonable to expect the slower growth country to be more often home to acquirers whereas the faster growth country is likely to more often home to target firms as Hitt et al. (2001) stated.
Reasons for cross-border acquisitions include market power, overcoming market entry barriers, covering the cost of new product development, increasing the speed of entry into a market, and greater diversification. Cross-border acquisitions can produce both economies of scale and economies of scope. They help a firm enter new international markets and thereby enhance their ability to complete in global markets. Of course, cross-border acquisitions are even more challenging to complete successfully than acquisitions of domestic firms according to Hitt et al. (2001).
In fact, some research studies suggests that with the right strategy and the right approach to post-merger integration, cross-border acquisitions can create value for the acquiring firm according to Belcher and Nail (2000).
3.4. Motives and Objectives for Merging
The literature on motives for M&A has placed a significant amount of different sources and theories by several authors.
The merits of using mergers to reduce costs are disputed by managers and by practitioners. For example, managers have been heard to comment that costs reductions are the merger benefit that is most likely to be achieved whereas the achievement of synergy is highly uncertain. On the other hand, Michael Porter argues that what passes for strategy today is simply improving operational effectiveness. Porter (1998) argues, “In many companies, leadership has degenerated into orchestrating operational improvements and making deals” (p.70). It is understandable how operational effectiveness may have come to be the driving motive for many mergers, however. Often at the same time a merger is announced, there will be an announcement of a cost reduction target.
Merging in order to create synergy is probably the most often cited justification for an acquirer to pay a premium for a target company. Synergy effects can be created by redeploying assets. This can mean two different things. In the first case, the acquiring company may transfer a resource belonging to the target company to the acquiring company. Colombo et al. (2007) also found out that a strong predictor of acquisition performance was the extent of asset redeployment from the target to the bidder. Weston and Weaver (2001) stated that the first category is synergy or efficiency for a merger, in which total value from the combination is greater than the sum of the values of the component firms operating independently. Hubris is the result of the winner’s curse, causing bidders to overpay; it postulates that value is unchanged. Of course, in a synergistic merger, it would be possible for the bidder to overpay as well. The third class of mergers comprises those in which total value is decreased as a result of mistakes or managers who put their own preferences above the well-being of the firm, the agency problem.
Economic motives are an important subcategory creating strategic logic for a merger. One example is to establish economies of scale. A second closely related reason is to be able to reduce costs due to redundant resources of two firms in the same or closely related industry. Thus if the company acquires a company that is in the same or a closely related industry and there is substantial overlap between the two businesses there may be ample opportunities to reduce costs. Another reason is that the stock of the firms from a particular country may be undervalued. A fourth reason is the macroeconomic difference between countries such as different growth rates. Finally, the exchange rates may play a role. Recent research did show that acquiring a foreign company when the home country currency has appreciated in relation to the target company’s currency has great benefits for the acquiring company when the industry is highly technological (Georgopoulos, 2008).
Firms engage in merger and acquisition activity for many reasons. Effective mergers and acquisitions can, for example: serve as a platform for corporate growth, lead to increased market share, provide the foundations required to generate and gain advantages from economies of scale (these are benefits that occur when the firm is able to use its resources to drive costs lower across multiple products; scale economies are acquired primarily at the operational level) and economies of scope (these are benefits realised through using one unit’s resources in the operations of another unit), and reduce organizational expenses by eliminating duplication and transferring knowledge between and among business units and/or individual product lines (Collins and Montgomery, 1999).
One of the most important motives for M&A activities, as seen from the experience of the last decade, has been economies of scale and scope. Companies aim to achieve economies of scale by combining resources of two merging companies or create economies of scope by acquiring a company allowing product/market diversification. Other motives include access to each other’s technology or market reach, achieving a dominant position in the industry, consolidation of the industry, and manipulating rules of competition and antitrust as Buckley and Ghauri (2002) state.
The question as to ‘whether’ merge primarily concerns the identification of the corporate objects and which of these objects are to be pursued through organic growth and which through M&A in the form of participations or a full takeover. At the same time, the consequences of the growth strategy and its economic or financial effects in the light of the competition situation and the extension of the value added chain must be carefully examined.
Empirically, in approximately 85 per cent of all concentrations between undertakings and acquisitions, the question as to ‘whether’ is answered with a view to the object of achieving growth in the core business (Picot, 2002).
However, Buckley and Ghauri (2002) stated also that mergers and acquisition have become the most dramatic demonstration of vision and strategy in the corporate world. More than 50 percent of the mergers so far have led to a decrease in share value and another 25 percent have shown no significant increase.
When coming to a conclusion what is now the main purpose to merge, the author would conclude that it depends on the companys’ expansion strategy and the different motivation to form alliances. However, effective mergers and acquisitions can serve as a platform for corporate growth, lead to increased market share, provide the foundations required generating and gaining advantages from economies of scale and scope as Collins and Montgomery (1999) concluded. These factors are seen as the most important motives to form a merger and to believe that it would help the effected corporations to strengthen their market position and even gain more market share.
According to Coyle (2000) synergy is the additional benefit that can be derived from combining the resources of the bidding and target companies. Synergy has been described as the ‘two and two makes five effect’. It can also be classified as Gaughan (2002) put it, as synergy and value creation are a synonymous and synergy is when the value of the M&A exceeds the value of the two separate firms put together. According to Habeck et al. (2000) the term synergy is used as a synonym for cost cutting. However, in his book he argues that those companies that understand this definition of synergy as cost cutting need to redefine it as it also includes the positive aspects of the M&A such as growth and knowledge sharing. Furthermore, he states that it is important to capture growth synergies as quickly as possible and favour those areas where cost efficiencies can be gained. Therefore synergy is an important part in a successful merger. Ansoff (1986) classified different types of synergies. Management synergy occurs when the top management of one of the companies resolves problems of the other company through their experience. Investment synergy can occur from the joint use of plant and equipment, joint research and development efforts, and having common raw materials inventories. Operating synergy can arise from better utilization of facilities and personnel and bulk-order purchasing to reduce upcoming material costs. And finally sales synergy where a merged organization can benefit from common sales administration, distribution channels, warehousing and sales promotion.
3.4.2. Creating Synergy through Mergers
Hitt et al. (2001) states that there are four foundations in the creation of synergy which are called strategic fit, organisational fit, managerial actions and value creation. As all four foundations exist the chance of creating synergy is substantially better. Strategic fit can be defined as the match between the two companies’ organisational capabilities. As two companies with similar capabilities and the same strengths and weaknesses merge the chances of creating synergy is reduced. Organisational fit means that the two companies are highly compatible, meaning that these have similar management processes, cultures, systems and structures. This makes it easier for the firms to share resources, knowledge, skills and effectively communicate. Companies without organisational fit could find that the integration process will be hard to implement. Managerial actions is that creating synergy requires the active management of the acquisition process, in order to realize the different synergies and the benefits they convey. To create synergy an active management is needed that recognises the international issues and other problems connected with the M&A process. Value creation is the last of the four synergy creation foundations. It is based on the fact that the benefits from the synergy need to exceed the cost of creating and capturing synergy. The costs that should be less than the value of the synergy that is created include those associated with a purchasing premium, financing of the transaction and the set of implementation actions required to integrate the acquired unit into the existing organisational structure. Synergy will add no value as creating it outweighs the value of the synergy. Gaughan (2002) has compiled a model of the process of realizing synergistic gains. The management needs to carefully deal with the strategic planning since the better planned M&A is a better chance to succeed. Secondly the management needs to integrate the two companies into one. Finally the synergy can be separated into revenue enhancing synergies or cost cutting synergies. Ficery et al. (2007) furthermore points out that synergy created through M&A, the targeted company has access to new geographic market or access to a new customer segment allowing the acquiring company to reach those new markets and segments at a faster pace and at a lower cost.
In this chapter, the author examines the most suitable methodology for the research area and justifies the different methods chosen. It outlines the authors’ main decisions on methods and data collection and considers their implications for the research findings. It also includes details for the sources used for information collection and explanations why other research methods were rejected.
Furthermore, this chapter will give an insight into how secondary research has been gathered, discuss advantages and limitations of research methods and illustrate ethical issues.
4.2. Research strategy
This chapter examines the most suitable methodology for the research area and justifies the methods chosen. The author explains how the linkage between the academic literature and reality was explored by using research methods. Furthermore, it will give an insight into how secondary research has been gathered, discuss advantages and limitations of research methods and illustrate ethical issues for this thesis.
According to Jankowicz (2000) there are four research strategies that can be used for conducting: the archival method, the case study, the survey and the field experiment. By using the archival method, the companys’ present and future performance can be analysed by using past financial figures. Using the case study as a research method, a specific organisation can be analysed by researching the internal and external situation of the organisation to find conclusion for a specific subject. Through surveys, human input can be used to find representing input out of the population to a specific topic. A field experiment applies the scientific method to experimentally examine an intervention in the real world.
The case study is the most suitable research method to use, as the objective of this research is to analyse and investigate the external situation within a real-life
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