Usually the CFO is to deliver all the vast synergy benefits that were promised to the market. According to Deloitte, between 50-70 percent of mergers fail to deliver shareholder value.
Accenture revealed that for an acquirer expecting to reap $500 million in yearly cost savings from a merger and acquisitions transaction, a simple one-month delay reduces the net present value of the deal by more than $150 million (assuming a 10 percent cost of capital). A seven-month delay costs nearly $1 billion in lost value, or approximately $3.5 million per day.**
Before the merger, successful acquirers need to ensure that their efforts incorporate fast and accurate assessments of both short and long term success. Superior information management technology is also crucial, as companies with access to accurate and reliable data are able to specifically measure not only the potential synergies, but also the 'dis-synergies' that need to be parted from.
The best practice is to implement a flexible information management approach that accommodates circumstances planning.
Labatt Breweries was one particular company that was going through major organizational restructuring a few years ago. It moved from a regionally federated business to a national business. When Labatt was involved in the merger with AmBev not long after, by taking this approach and installing flexible data warehousing software, its executives were well-prepared to handle this major upheaval with minimum disruption.
Halifax and the Bank of Scotland's venture to form HBOS plc, where they chose a flexible data warehouse to get a reliable view of procurement data held in different systems. HBOS was realistic enough to recognize integrating operations and IT systems from different divisions. They implemented an iterative approach and using a data warehouse to sit above their underlying systems; their business users were able to gain the necessary insight to drive important cost-savings. Above all, these savings were delivered quickly. Any merger or acquisition of any size is going to present vital challenges when it comes to integrating the different systems of the two companies involved.
*(King, et al., 2004)
**
The longer you leave failures the greater the probability of corporate upheaval. Compaq's Eckhard Pfeiffer lost his job through taking too long over closing the performance gap opened by Michael Dell. He took too long over finding some way to combat Dell's direct sales and over making sense of the mixed-up mega-merger with
Digital Equipment. Many European companies are in a similar state. They are lacking on performance and tackling with outdated business models; and in many cases depending often on giant mergers for their global chances.
Such huge unions as Daimler-Benz/Chrysler, or British Petroleum/Amoco, may work and be value creators. BP is a good example of radical change fired by a simple ambition: to be the best. Top management reduced the bureaucracy and set simple targets, and linked overall aims with objectives for every unit and team. While BP's pay-off came speedily, rivals Royal Dutch-Shell delayed behind - until its directors applied much the same formula.
The board ordained a higher return on capital, cut down on head office, and linked individual pay to performance. The reforms had however flopped as hugely as BP's had succeeded. In the latest financial year, Shell's profits slumped by 95% and return on capital was negligible.
Performance is somewhat dependant upon industry. For example, a high-growth, technology-driven industry is overall more profitably promising than a mature one, such as the steel industry. Many technology markets are still at an early stage, while in matured industries, for example steel, the level and distribution of profits tend to be more or less in a state of equilibrium. Most of the value is created by leading firms in the number one or number two position. Firms that are at the bottom struggle to survive while the rest trail along, making just enough to keep the business alive.
Industry can influence the performance of the mergers and acquisitions. The value creators and destroyers performance is independent of the nature of an industry. Studies have also found that environmental factors such as macroeconomic conditions and the cyclical behaviour of the industry have little influence on performance. They argue that extreme performance (both good and poor) is fundamentally driven by the quality of management not by the dynamics of an industry and that exceptional management produces exceptional performance, and poor management produces poor performance.
Daimler- Benz merger between Mercedes with Fokker and Dasa amounts of money trying to buy companies at the front position of technology only to crash into a high tech depression in 2001 which resulted in them losing 98 percent of their share value.
Chairman resigned from his position at the end of 2005 as head of the world's fifth largest auto manufacturer. In an agreement with the board of directors and Schrempp, he terminated his employment with the company early (his contract ran through 2008). Schrempp has been blamed for the fall of the company's share price since Daimler-Benz's merger with Chrysler Corporation in 1998 of which he was the architect. DaimlerChrysler once held a large stake in the car company as well as the car operations of manufacturer . Its stake in Mitsubishi was as high as 37% but since it did not participate in a new capital increase in April 2004, it was reduced to 22%. The company sold the last of its Mitsubishi stock to in November 2005(see )
(b) Choose a listed company that has merged in recent years and assess whether or not the company has succeeded or failed to meet the strategic objectives for merging.
BP AMOCO ACOR CASTROL - Helios
BP has long been a major part of the world’s oil and petrochemicals industry. Our history goes back to just one man – William Knox D’Arcy – who invested time, money and labour in realising his conviction that Persia (now Iran) held extensive oil deposits.
Today, BP has a major world-wide presence – it is one of the world’s three largest oil companies and one of the six or seven largest companies in the world. In New Zealand, BP is the leader in a highly competitive oil and petroleum products marketplace.
The Amoco Corporation, in operation since 1889, is one of America's leading oil companies - and is now part of one of the biggest deals in industrial history.
With total assets around £20bn and revenues of more than £21bn it was one of the largest publicly traded producers of crude oil and natural gas in the world.
It currently employs about 43,000 people worldwide and has over 340,000 shareholders. In 1997 Amoco recorded earnings of £1.6 bn and revenues exceeded £21bn. The brand name "Amoco" comes from the American Oil Company which was established in 1910 by Louis and Jacob Blaustein of Baltimore, Maryland.
In 1998, British Petroleum and US oil giant Amoco announced plans for a $110bn (£67bn) merger that created Britain's biggest company. The company BP Amoco had its headquarters in London. It was placed in the top three of international oil producers and the new group confirmed that it would cut 6,000 jobs worldwide as a result of the merger.
The shares prices in BP soared after the announcement as the market welcomed news of the deal. Shares in BP surged 15% after the news broke - helping to revive an ailing FTSE 100 index. BP shares were up 101.5p at 874.5p by 1310 GMT while Amoco traded at $46, up from a Monday close of 40-7/8. The merged company was held 60% by BP shareholders with the remaining 40% held by Amoco shareholders.
In the proposed deal, Amoco shareholders got a 25% premium above BP's current market value. The merger deal was a share swap whereby Amoco shareholders were offered 3.97 BP shares for each share of Amoco common stock.
The new company is run by BP chief executive Sir John Browne and co-chaired by BP chairman Peter Sutherland and Amoco chairman Larry Fuller. Sir John said he hoped the merger will increase pre-tax profits of the two partners by "at least" two billion dollars by the end of 2000. He said the deal marked: "a superb alliance of equals with complementary strategic and geographical strengths which effectively can better serve our millions of customers worldwide.”*
* Sharon Beder, 'BP: Beyond Petroleum?' in Battling Big Business: Countering greenwash, infiltration and other forms of corporate bullying, edited by Eveline Lubbers, Green Books, Devon, UK, 2002, pp. 26-32.
This move was widely viewed as a of Amoco by BP and portrayed as a for legal reasons only¹. The newly-renamed BP became an no longer openly standing for "British Petroleum". The move away from "British Petroleum" was in a sense an indication of the fact that BP had become a global business and that the direct recognition of the company as British could be a disadvantage in some areas of operation. Both BP and Amoco had significant investments in solar energy and share strong records and reputations for sound operating practices, and environmental and social responsibility.
America represents 40% of BP's overall business. After a series of mergers with Amoco, Arco, Burmah Castrol and Vastar, by 2001 BP had become the largest oil and gas producer in the United States and one of the largest petrol retailers.
In 2000, BP unveils a new global identity that brings together BP, ARCO, Amoco and Castrol under the single BP brand, and a new brand symbol - the Helios
In the 2006 list of companies, BP was ranked 4th in the world for with sales at $268 billion (down from 2nd in 2005 and 1st among oil companies), in the 2006 it was ranked the eighth-largest company in the world. BP's profits in 2005 amounted to $22.341 billion with replacement cost profit after interest, tax and minority shareholders' interest taken into account of $19.3 billion².
BP Solar is the world-leading producer of through a series of acquisitions in the solar power industry. Recently, BP announced that its solar, wind and hydrogen power businesses would be known as BP Alternative Energy. BP is the leading partner in the controversial .
The company currently has 37,000 employees in the US. It sells 15bn gallons of fuel every year to motorists at 14,000 petrol stations and BP's five US refineries consume 1.5m barrels of crude oil per day. The company ultimately holds a fifth of all proven oil and gas reserves in the country.
Strategic Aims
BP aims to improve the quality and capability of their manufacturing portfolio. Their marketing businesses, supported by world-class manufacturing, generate customer value by providing quality products and offers. Their retail strategy provides distinguished fuel and convenience offers to some of the most attractive global markets. BP’s many oil brands offer customers benefits through technology and relationships. Furthermore they focus on increasing brand and product loyalty in Castrol oils. This is continued to build deep customer relationships and strategic partnerships in the business-to-business sectors.
¹ after a single year of joint operations, "Amoco" was dropped from the corporate name
²
BP Amoco strategic objectives are to gain greater market share while investing in green design. Green design is a term used to describe growing awareness of how businesses effect the environment within the fields of architecture, construction, and interior design. It is also referred to as “sustainable design” or “eco-design”. Green Design supports principles and practices that minimize environmental intrusion such as: choosing energy efficiency wherever possible, working in harmony with the natural features and resources surrounding the project site, using materials that are grown or recycled rather than new materials from non-renewable resources, reducing waste, both energy and material, and designing buildings to use already existing energy. These green design initiatives can help BP Amoco reduce costs, increase efficiency, and capture the environmental market segment.
BP Amoco aim to motivate environmental improvement within its organisation and make a connection between environmental design attributes and business strategy/benefits. Without a perceived business benefit, organisations will ignore environmental improvement measures.³
After segmenting the market and analysing the possibilities of profits in green design, BP Amoco saw significant opportunity in re-branding themselves as the energy company of choice for the “environmentally aware motorist” (Beder 2002). This shows a conscious effort by BP to target lead, high volume and loyal green customers. It targets the lead group because it shows it’s investing in solar and wind energy resources, marking BP as the first oil company to begin investing in alternative energy sources.
BP Amoco’s objective is to be leaders of oil companies in green design and they seek to produce a profitable business market and a competitive advantage. While it should be noted that BP Amoco still generates 98.5% of its income from oil and fossil fuels, the effort to implement green design shows a potential market of environmentally aware customers and BP Amoco’s efforts to capture it. Market research and customer analysis have given them the necessary information to make profitable business decisions.
BP's tie-up with its United States rival Amoco was supposed to create an ethical champion at the top of the global oil industry and it was one of the biggest mergers in history. But eight years on, BP's US arm is becoming America's most accident-prone business. Issues are being raised about whether BP took a firm enough grip on its US management after mergers with Amoco in 1998 and Arco in 2000.
BP's spokesman says its commitment to renewable energy is unchanged. The company has invested heavily in solar and wind power, while a carbon impounding project is under way in California to generate electricity from petroleum coke. There have been doubts about BP that runs deep in America and the company may never bring back the optimism inspired by its environmentally aware change. Pratap Chatterjee, director of California-based CorpWatch, says: "This is a company that says it cares about the community and society, but it's not repairing its own pipelines and refineries."
³ After performing a brief market segmentation analysis, the Kano Technique can help identify and prioritize green design business strategies (Finster et. al. 2002).
Reference:
Websites
Annual reviews
Strategy Business - http://www.strategy-business.com
Articles and journals
Books
Mergers: Leadership, Performance and Corporate Health, , David G. Fubini, Colin Price, Palgrave Macmillan
Sharon Beder, 'BP: Beyond Petroleum?' in Battling Big Business: Countering greenwash, infiltration and other forms of corporate bullying, edited by Eveline Lubbers, Green Books, Devon, UK, 2002, pp. 26-32.
