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Bachelorarbeit, 2002, 81 Seiten
1 Introduction - Mergers & Acquisitions (M&A)
1.1 Goals of M&A
1.1.1 Economies of scale
1.1.2 Economies of scope
1.1.3 Reduction of economical risks
1.2 Typical achievements of economies of scope
1.2.1 Research and development area
1.3 Legal problems of M&A
1.4 Features of M&A
1.4.1 Production level
18.104.22.168 Horizontal mergers
22.214.171.124 Vertical mergers
126.96.36.199 Diagonal mergers
1.4.3 Degree of cooperation
188.8.131.52 Contractual basis of cooperation
184.108.40.206 Investment acquisitions
220.127.116.11 Takeover of assets items
1.4.4 Forms of M&A
18.104.22.168 Silent cooperation and coordinated behaviour
22.214.171.124 Syndicate and participation
126.96.36.199 Trade associations
188.8.131.52 Joint venture
1.5 Distinction of national, international and multinational companies
1.5.1 Location categories
184.108.40.206 Local setting
220.127.116.11 Regional setting
18.104.22.168 National location
22.214.171.124 International location
126.96.36.199 Multinational location
1.5.2 Advantages of international / multinational companies
1.5.3 Problems of international / multinational companies
1.6 Recognizable trends in M&A
1.7 Reasons for the increase of M&A
1.8 The acquisition of companies
1.9 Purchases of companies
1.10 Lines of business effected by M&A
1.11 Frequent faults and omissions made in M&A
2 BMW merges Rover
2.1 Questions and targets of this case study
2.2 BMW Group in numeral figures from 1994 to 1999
2.3 Historical background of the Rover takeover
2.4 Economical and political environment in the years 1993 / 94
2.5 The automotive segment in 1993 / 94
2.6 Business figures of BMW in 1993 / 94
2.7 BMW’s options and goals in the years 1993 / 94
2.8 Reasons and visions for BMW’s Rover Investment in 1993
3 Make Or Break – The Rover Group before the takeover
3.1 Goals and strategies
3.2 Difficulties before, during and after the acquisition
3.3 The Rover Group
3.4 A long way of challenges
3.5 Clash of interests
3.6 The Rover breakdown
3.7 Culture contradictions
3.8 High stakes
4 Results and conclusions
4.1 Running out of options
4.2 One final attempt
4.3 No end in sight
4.4 The final twist
5 Final Conclusion
6 Attachment – Financial figures and statistics
6.1 The BMW shares
6.2 BMW Group Investments & Cash flow from 1994 till 1999
6.3 Deliveries BMW Automobiles / Rover Automobiles from 1994 till 1999
6.4 Sales BMW Group / Sales Rover Group
6.5 Exchange rates of major currencies against the DM from 1994 to 1999
Bibliography of 2nd Case: International investment decisions
Nearly every day the newspapers report about new merger plans or failed fusion attempts. Almost all economical industries are affected by it. But what does mergers & acquisitions (M&A) mean? M&A can be made on one hand by association (merger) and on other hand by takeover (acquisition). This process is also economically described as enterprise concentration. In the Anglo-American economy literature this term is widely known as "mergers and acquisitions". 
The recent examples, such as Daimler-Chrysler or Renault-Nissan in the automobile industry, Mannesmann-Vodafone in the telecommunications sector, Bank of America-Nation Bank in the banking sector or AOL-Time Warner provide a great sensation not only in economic expert circles. Therefore these kind of deals show the importance of international investment decisions.
This case study deals with a similar case of M&A, the failed takeover of Rover Group by BMW AG in 1994, and examines the reasons for the failures, leading to the separation of Rover Group from BMW in 1999.
Openingly, the goals, features and future trends of M&A shall be shown as well as the advantages and disadvantages of international and multinational enterprises.
There is a variety of reasons for enterprises to come in M&A . From the management point of view, economical motives like economies of scale (or company growth advantages), economies of scope (Synergieeffekte) and reduction of risks are, however, in the foreground.
The economies of scale describes advantages by increasing growth of enterprises. First it is necessary to distinguish between internal and external growth:
In case of internal or “natural” growth, increasing market shares results from an expansion of capacities due to an increasing demand.
External growth arises if enterprises combine their business activities or parts of this in order to fulfill common tasks more efficiently.
An essential reason for the strong external growth of many enterprises within the last few years is that many markets are saturated today, leaving little room for internal growth. Therefore internal growth is usually possible only by gaining market share at the expense of competition. This often seems to be more difficult and more expensive than to buy an existing company.
The economies of scope’s effect (“Synergieeffekte”) means that “the whole shows a greater value than the sum of its components ”. This helps to avoid double costs in the common areas of development, production, marketing and sales. At the end of a merger, know-how can be exchanged and rationalizations can be carried out, which lead to improved performance reductions in cost.
On the contrary these advantages can, however, be reversed by diseconomies of scope (“asynergetische Effekte”), forced by increasing organizational costs. This is often found in lacking motivation of the management and the employees caused by increasing bureaucracy of large-scale enterprises (X-inefficiency). Compared to cases of M&A, a main reason for lacking motivation is the fact that the integration of corporate culture, communication and behaviour is neglected very often by the management of the leading company after a takeover (see also BMW and Rover).
M&A are also therefore formed to distribute on different lines of business and reducing the risks of diversification in new products and markets.
Besides this, leading opinions in science of business management claims today that market leader companies have better possibilities to create and run their price strategies in order to make more profits. In other words the pursuit of profit and the corporate value become more and more decisive for M&A deals.
Further motives for M&A can be found in common parts of strategic and operative activities of the enterprises:
In order to reduce economical risks and to save money and time lots of enterprises intensified their cooperation in the research and development area in the last few years.
Rather than having two sourcing departments (purchasing departments) enables you, thanks to greater volume, to negotiate higher rebates or / and better conditions. Besides this, however, risk reduction is also an achievable motive which is frequently being observed. Cooperations in order to safeguard raw material supply are usually made by enterprises which belong to the same production level. This should help to avoid bottlenecks by sourcing raw materials or intermediate products.
The financing of large scale projects often represents a great problem and risk particularly for small and medium enterprises. M&A should increase the chance to receive bank credits or could open the way to the capital market. The improvement of finance opportunities and reducing risks are the main motives behind M&A.
M&A in production pursue a coordination referring to quantity, quality, place, time or method of production. This means for example:
- an improved exploitation of the available capacities
- a common development of production methods
- job sharing connected with a corresponding specialization on certain products or product parts
- a standardization of products
- a rationalization of production processes and
- utilisation of the cost reduction by high quantities
Common sales activities aim at improving revenues and this is being achieved by creating one sales organization and one advertising strategy.
Also important for revenue is the volume of distributed products: Dealing with only one single product or product range has become too risky in the global economy. This long-term-strategy should help to safeguard survival by scattering the commercial risks on several products in different business areas on the global market. In other words, expansion of the product range may help reducing risks which was the expected outcome of the acquisition of Rover by BMW.
Negative effects of M&A results in a lot of legal problems, e.g. the increase, misuse of market power. Misusing market power by creating a market dominating position provides disadvantages and damages to the competition and the consumers. In order to protect free markets effectively, the european and nationals governments have established very narrow limits to the companies by the Competition Act.
To judge European mergers more effectively the European Commission has established a Mergers Task Force within the “Council of Regulatory Affairs”.
Common company activities can be divided into three feature “production level”, “duration” as well as “cooperation level”:
According to Ansoff’s “market fields strategy” three kinds of mergers can be distinguished by looking at the production level of diversifying enterprises (new products for new markets):
Horizontal mergers means a connection between enterprises on the same production or trade level (see Rover acquisition by BMW).
In the case of vertical mergers companies of successive production or trade levels are connected with each other, either by forward integration - in direction to the customer - or by backward integration - in direction to the raw material sources.
Diagonal mergers are also called “lateral” or “inorganic” and represent the goal of diversifying enterprises to achieve market shares with new products in new markets.
Furthermore it is necessary to distinguish between temporary and constant cooperations:
- Short-term cooperations are formed to carry out a certain project, which is restricted in time and usually do not have any influence on the economical and legal structures of the participating companies. This type of cooperation do not fulfill the criteria’s of M&A.
- A typical case of M&A are constant cooperations with effects on the economic and legal position of the participating companies for an unlimited period of time.
Other features to describe company cooperations is the degree of cooperation e.g. contractual basis, investment acquisitions, takeover of assets items and fusions
Contracts concerning the inside relationship of cooperating companies often effects their economically independence, but they do not have any effect on their legal independence.
By acquiring parts of or the complete capital stock an company tries to collaborate together with another company or even tries to win a substantial influence on its management decisions. The strength of the influence depends on the extent of the capital interest as well as on the shareholder structure.
A company buys the assets and takes on the debts of another company. The company legally remains and represents a so called “Rumpfgesellschaft”.
A merger or a fusion can be described as a transformation of two or more companies to a new economic unit. Legally it is necessary to distinguish between fusion by inclusion (“Verschmelzung durch Aufnahme”) and fusion by new entity (“Verschmelzung durch Neubildung”). In the 1st case, the buying company remains legally the same swallowing the other. In the 2nd case, both of them are adsorbed by the new company.
Beside the cooperationally degree of companies, cooperations can be described through their form and outside appearance, e.g. cartel, silent cooperation and coordinated behaviour, agreements, syndicate and participation, trade associations, joint venture, group and fusion.
A cartel is a “formal merger” between competitive companies based on a contract or a decision of the boards. The participating companies limit their economic independence by turning off the competition within their line of business, however they remain independent legally. This kind of cooperation do not belong to the classic M&A constellations. Due to the economic disadvantages cartels are forbidden legally except for few exceptions.
Silent cooperation means uniform behaviour of several competitive companies without written and verbal arrangements in order to restrain free-market-driven trade in their lines of business by creating and misusing market power damaging competition. The same result can be evoked by coordinated behaviour meaning conscious and intended interaction of companies. Like cartels, those activities are forbidden in Europe by law, but very hard to control. Silent cooperation and uniform behaviour is proved by circumstantial evidence mostly (“Indizienbeweis”).
Agreements are verbal but not written arrangement aiming at a restraint of trade and therefore forbidden as well.
Syndicates and participations mostly are thematically and timely limited and have a constitution of a civil law company (“Gesellschaft des bürgerlichen Rechts”, §§ 705ff. BGB).
Trade associations are voluntary associations of companies or of associations itself regarding the common fulfilment of certain operational tasks, i.e. information extraction and representation of interests.
A joint venture is an association of two or more companies, founded durably in order to fulfil a common task i.e. development, procurement and sales, and its shares belong to the funding companies in equal shares. In Europe the European Commission and the national Monopolies Commissions (Kartellämter) prove their capability with law
A group (“Konzern”) is the association of at least two legally independent companies under a common line.
Fusion (“Verschmelzung”) means the transition of assets without liquidation from one or several joint-stock companies to another in the way of a “succession of complete rights” (“Gesamtrechtsnachfolge”). During this process the legal independence of at least one company ceases to exist.
The geographical location of a company is the setting from where it operates. Three degrees of geographical spreading have to be distinguished regarding the following location categories:
The company primarily restricts its operational activities to a town / municipality.
The company is working in a certain region of a country.
The company distributes its production and sales into a certain country.
The company produces domestically, exports its products also in other countries.
The company does not limit its business activities.
International / multinational companies have some very important advantages compared to their non-multinational competitors:
- They dispose of improved entries to the international factor markets, e.g. work, capital, raw material, technology
- International product and process specialization enables the usage of comparative cost advantages in different countries
- The possibility of making profits in low tax countries through their international subsidiaries by in- and exports of products at transfer prices, helping multinational companies to minimize the international tax load
However, international / multinational companies are also confronted with the following problems:
- The necessary consideration of different political and legal conditions in the different countries
- The partly strong standard descent in the technological know-how and the economic / technical infrastructure between single countries
- The increased difficulty in coordinating the company’s activities in regards to optimising liquidity and profitability
- The increased requirements on the management to ensure and to generate a common performance culture dealing with the integration of the employees from the different cultures.
Within the last few years a permanent increase of M&A could be recognized, particularly cross-border transactions. As to be suspected companies from the EU, USA and Japan participated in the most of the biggest M&A. Beside this, an increasing trend of all M&A could also be recognized in the developing countries.
The most obvious trends at M&A are the following:
- Both domestic and cross-border M&A have increased strongly from 1997 to 1998. The quote of the cross-border transactions remained roughly constant. The absolute value of all cross-border transactions amounted on US $544 billion in the year 1998, which corresponds to an increase of approximately 6% compared to 1997.
- The quote of majority takeovers (“Mehrheitsübernahmen”), where more than 50% of the capital passes to the taking-over company, increased considerably strongly by almost 100% to US $411 billions.
- Furthermore the number of the extremely big takeovers (major deals) increased virtually by leaps and bounds. Such transactions with a total value of over one billion US$ were carried out 89 times in 1998. A comparison with the previous years (35 in 1995, 45 in 1996 and 58 in 1997) shows the steep upward trend. The two major deals in the history till then caused a special sensation: British Petroleum (UK) bought Amoco (USA) for US $55 billions and Daimler-Benz merges Chrysler (USA) for US $41 billions.
- More and more takeovers are not carried out in cash terms but by the exchange of shares. The taking over company issues new shares in order to receive shares of the company, which is taken over. It is worth mentioning that mainly big transactions take place using this scheme. The exchange of stocks enables the takeover without spending too much cash. Major deals such as described above would be unthinkable, if they were to be paid in cash.
- The leading countries in the field of M&A are the USA and UK with 53% of all transactions. Companies from one of both countries were involved in 63 of the 89 major deals.
- 11 of the 89 major deals were made by the developing countries, predominantly privatisations of large state owned companies. In only 2 cases companies from the developing countries appeared as buyers.
- The worldwide top 100 companies play a decisive role in the area of M&A. In the year 1998, 14 of the top 100 companies appeared as buyers in major deals.
Reasons for the quick increase of worldwide M&A are:
- The opening of markets by liberalization of trade as well as investment and capital goods markets. A clear deregulation of government owned companies can be recognized primarily in the area of the services (e.g. US and Deutsche Post),
- the softening of state control concerning M&A in many countries,
- increasing competition by the globalization and technological changes.
- For many companies it becomes more important to be represented in many markets and lines of businesses to minimize their risks.
- Financial, strategic and operational synergy effects being the results of the big companies (economies of scale, economies of scope). Simultaneously this should help to increase self defence against economic losses.
- Quick changes in scientific and technology environment within the companies.
- To attain a dominant market position in order to force their own interests,
- to obtain short-term financial profits by increased share value,
- to defend against hostile takeovers and to preserve the autonomy of the own company. This explains the increasing numbers of M&A that have no effect of the productivity, but rather securing the company from hostile takeovers.
The list of the countries with the highest amount of M&A is lead by the USA, UK and Germany. Belgium is ranked 4 due to the sale of major oil and finance companies. Brazil, which had a large number of privatisations, e.g. the state-owned Telecom, leads the list of the developing countries and can be found in 5th place. Though there is a decrease of the companies sales which can be explained by the slowdown in the process of privatisation. In Japan it is generally noticed that the number of company sales were seven times as high as in the year 1997, so it ranks on the 7th position worldwide.
Regarding the number of companies bought up, the UK took the top position in front of the USA. 3 of 7 transactions with a selling price more than US $10 billions were carried out by UK companies. This trend continued also in the year 1999, which can be explained by the takeover of AirTouch (USA) by Vodafone for US $62 billions.
One reason for the strong activity of UK companies is to be found in the strong pound. 12 of the 17 takeovers by UK companies were focussed on US companies, only a tenth on European companies.
Compared to the total value of all company purchases the quote of continental transactions remained constantly, but the number of major deals with European buyers decreases. Only 18 of the 43 European major deals focussed on companies within the domestic market. Regarding the purchases of Japanese companies a decline can be recognized. In the same period of time a decrease in acquisitions by Japanese companies could be recognized.
The highest quotes in M&A were achieved in those lines of business, where the companies have:
- enormous difficulties in defining their unique selling propositions (usp) sharply towards their competitors,
- overcapacities in production and a decline in the demand simultaneously (especially motor industry),
- high expenses on research & development (e.g. pharmaceutical industry) or
- new technological orientations (oil and chemistry industry),
- an environment which is based on liberalizations and deregulations. This lead to increased M&A mainly in the telecommunication and financial service sector.
These following mistakes appear frequently in M&A cases:
- No serious attempt to deal with the philosophy and culture of the acquired company.
- None or to late
- integration of the employees of the acquired company immediately after the takeover by an integration team by employees of both companies,
- design of an integration schedule with defined and checkable milestones,
- design of a new corporated identity under consideration of the strengths and weaknesses of the former company’s philosophy and culture of both companies,
- design of a guide for the internal and external communication.
The target of this case study is to present and analyse the drastic false estimations made by BMW in planning and realising the Rover transition as well as its consequences. The worked out mistakes should be generalized in order to give opportunities of their avoidance for future M&A cases.
After working out the M&A basics in the 1st chapter, the 2nd chapter deals with the reasons of BMW Management to buy another international manufacturer and gives a clue why the choice fell just on Rover.
It opens with an overview of the economic development during the 6 years time period of the Rover takeover. After this, the economic and political environment is shown, also the market situation in the automobile segment in the year of the takeover, followed by the business course and goals of BMW as well as their alternatives. This chapter closes with the strategy and enterprise philosophy of BMW and with a list of the of the Rover Group’s assets in 1994.
In the 3rd and 4th chapters of this case study the mistakes of the BMW management attempting to integrate Rover into the BMW portfolio are shown and analysed, as well as its consequences for BMW and Rover.
The 5th chapter will end with the conclusion, why the Rover takeover went wrong.
The following chart gives a fiscal overview about the BMW Group from the year of buying Rover in 1994 to the year of selling 1999
BMW Group fiscal years overview 
illustration not visible in this excerpt
During the eighties the Thatcher government started with the deregulation of the state economic sectors and declared, that state-owned enterprises have to be led privately for at least 5 years before they can be sold. Rover therefore wasn't an independent company before the transition to BMW begun in 1994.
In 1988 Rover was bought from the government by the British Aerospace (BA) which itself was a state owned company. BA received 80 per cent BA and Honda bought 20 per cent. In 1994 BA wanted to sell Rover because it was by far the largest element in the non-core business.
The purchase of Rover Group by BMW AG can be defined as a classic M&A constellation: The takeover was negotiated as a control contract (“Beherrschungs-vertrag”) to 80% in form of a subordination group (“Unternordnungskonzern”). The transition was performed as a quiet takeover (“stille Übernahme”) because BA made no public offer to bid on. In the same year the last 20% were bought from Honda. The price for the entire Rover Group amounted to approx. 1 billion GBP which corresponds to approx. 2 billion DM in the year of 1994. 800 millions GBP were paid to BA and 200 millions GBP to Honda.
The year 1994 was characterized by an up rise of the world economy with steady dynamics to the growth courses of the USA and Latin America.
The USA’s economic rise (“Aufschwung”) in 1994 was particularly driven by the domestic demand and also by foreign investments, what, however, also led to a deficit in the trade balance in the amount of US $ 166 billions. The exploitation (“Auslastung”) of the industrial capacities was at 85% which was above the longstanding average. Compared to the previous year the consumer prices increased merely by 2.7%.
A weak economical revival arose in Japan while the Asian fast-developing nations were into boom. Their economy grew on an average by 7% since the inner Asian trade became nearly as important as the exports to the USA.
But on the other hand, the Japanese economy suffered from structural problems furthermore. The high assessment (“Bewertung”) of the yen primarily burdened the export addicted industry, which led to the closure of many factories.
I order to promote their international competitiveness, the enterprises carried out massive cost reductions and evacuated parts of their production in other countries with more favourable cost structures. In spite of this, the Asian pacific area altogether kept its role as a growth pole of the world’s economy.
In Europe an economical recovery also took place. Reasons for this were particularly the export to North America and to the growing regions of Asia. The exports to Latin America and Eastern Europe also have increased considerably.
The UK experienced an amplified economic recovery. Attractive location conditions (“Standortbedingungen”) and a continuous low assessment of the GBP led to considerable export successes.
Germany’s success in the export business helped to improve it’s economical situation after 1993, which was the strongest recession year of the post war period. With profound measures for cost reduction and increase in productivity the companies have improved their international competitiveness. However these successes were often connected with a reduction of jobs. For this reason the target of wage settlements (“Tarifabschlüsse”) of the year 1994 was occupation safeguarding, which caused only a small increase in labour costs and on the other hand extended possibilities for a more flexible arrangement of the enterprises internal processes.
Nevertheless Germany's structure problems remained unsolved, which results in the increase of the unemployed up to 4 millions.
 Gritschacher u.a., Internationale Unternehmensnetzwerke und ihre Globalisierung
 The former CEO of BMW Pischetsrieder was strongly convinced of this viewpoint, when he spoke about the advantages of the Rover acquisition on the BMW General Meeting on May 19th 1994 in Munich, p. 12, 15
 Schmidt, Wettbewerbspolitik und Kartellrecht, p. 97, 89ff.
 FAZ, Nicht jede Addition hat eine gute Lösung, p. 2
 Meffert, Marketing, p. 246
 Schmidt, Wettbewerbspolitik und Kartellrecht, p. 96f.
 USA: Sherman Act, Clayton Act, Federal Trade Commission Act; Europe: Articles 81ff. of the Treaty for the foundation of the European community, Fusion control ordinance; UK: Fair Trading Act (FTA); Germany: Gesetz gegen die Beschränkung des Wettbewerbs (GWB).
 Very detailed to this topic: Emmerich, Kartellrecht, p. 27ff., 309, 478f.
 Meffert, Marketing, p. 245f.
 Emmerich, Kartellrecht, p. 27ff.
 Emmerich, Kartellrecht, p. 36ff.
 Emmerich, Kartellrecht, p. 292ff.
 Emmerich, Kartellrecht, p. 34f.
 FAZ, Nicht jede Addition hat eine gute Lösung
 Taken from the BMW Anual Reports of 1994 - 99
 Dinner, telephonic interview
 Brady, Lorenz, End of the road, 5
 Look on the introduction of this study: “Mergers & Acquisitions”
 Dinner, telephonic interview
 BMW AR 1994, 8-10
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