Economic and Demographic Trends for China

Key Chinese Trends

The link above looks at, through graphs and charts economical and demographic data which will be useful to analyse in you section A essay. 

Factors Affecting the Success of Mergers and Takeovers

Another section B topic area - Looking at factors that judge a successful takeover/merger. This also includes failed takeovers/mergers. Good examples to use in your exam so do some research

Mergers and Takeovers - Impact on Stakeholders

Mergers and Takeovers - Impact on and Reaction of Stakeholders

Link above gives you a summary on the impact on shareholders. REMEMBER - it is very important to consider stakeholders and analyse the overall impact (Section B)

Mergers and Takeovers/Acquisitions

Impact of Mergers and Takeovers on Business Performance

Open the link to view a presentation on the above topic. Remember, this topic is related to Section B

Applying Lewins Model - An example

If you are struggling to to understand how to apply Lewins model of change then open the link below, read the information and watch the video as it shows how Lewins model can be used to go from a struggling company to a successful one.

Applying Lewins Model - An example

BUSS4 (Section A China) Webinar

A complete overview of Section A China. Watch this to gain a better understanding

BUSS4 (Section B) Webinar

A complete overview of BUSS4 Section B. A must to gain the relevant understanding. Watch all of it. 

Ethical Challenges in China (Taken from http://www.ibe.org.uk/userfiles/chinaop.pdf)

Corruption

Some of the key ethical challenges that face companies seeking to implement a business ethics programme and operate with high ethical standards in China are discussed below.
In Transparency International’s (TI) Corruption Perception Index 2011, China is ranked 75th out of 185 countries. This has been a consistent score since 2008. Exploring this more deeply, the TI Global Corruption Barometer 2010/2011 found that 46% of the 1,000 Chinese respondents felt that the level of corruption in the Country had increased and just over a third considered the Government’s actions ineffective in combating corruption. When respondents were asked “To what extent do you perceive the following institutions in this country to be affected by corruption?”, business was seen as the most corrupt institution, closely followed by political bodies and public officials.

Whilst bribery is highly prevalent in all sectors in China, it is particularly common in sectors such as construction (driven by rapid economic development and massive urban expansion and the high number of government-funded construction projects), the extractive industry and textile manufacturing (falsification of factory audits is common). Other recent corruption scandals have focused on the NGO sector with NGO officials using donations to afford luxury lifestyles for themselves rather than the donations going to the causes they were intended for. 

It can be difficult for foreign-owned companies operating in China to compete against SOEs, or companies in which the State has a stake, on an even basis; common corruption risk areas include dealings with public officials, lack of separation of public officials from management in SOEs, lack of transparency when entering joint ventures with Chinese companies, and requirement to use agents. Facilitation payments, also known as ‘kickbacks’ or ‘backhanders’ are a common form of bribery in China.

Speaking up 

Reflecting the Confucian values of loyalty to one’s group, respect for superiors in a hierarchy, and avoiding loss of ‘face’, the willingness of Chinese to speak up or ‘blow the whistle’ on fellow employees if they become aware of unethical practice is low. In China, the concept of reporting misconduct, particularly through the use of anonymous helplines, can be equated with negative historical events such as the Cultural Revolution and employees often view reporting as an ‘all risk, no reward’ activity. 

Human Rights
Human rights remains a controversial topic in China with a focus on issues such as labour standards in the supply chain, child labour, human trafficking, civil and political rights. High profile scandals have included the spate of suicides in the Foxconn factory in the Shenzhen province over poor factory working conditions in 2010-2012,37 child labour among Nike suppliers in the 1990s and the arrest of human rights activists. Recent research by China Labour Watch found that working conditions were “deplorable" across Apple’s Chinese suppliers; the key issues being excessive working hours, low wages, overcrowded/dirty dormitories, hazardous working conditions, inadequate trade unions, excessive use of agency labour, poor food and routine cheating of overtime pay.38
The Chinese Government has said that human rights are improving. Some major manufacturers doing business in China have raised wages to address problems of increasing employee turnover and even suicides (e.g. Foxconn and Honda). 

Discrimination

Discrimination against women in the workplace in China is a common problem. Few women are found in senior positions in Chinese companies, reflecting the ‘masculine’ orientation of the Chinese culture and the reluctance to speak up or ‘cross’ a male colleague. Sexual discrimination at work is not uncommon with junior female employees often finding it difficult to say ‘no’ to sexual advances and still maintain their jobs. Few Chinese businesswomen would consider it suitable to travel alone or with a male colleague; this limits their prospects for promotion in a country which relies on personal contacts to transact business.

Rural migrants vs. urban citizens and ethnic discrimination are also pertinent issues. Migrant workers are often considered inferior by their urban counterparts and endure poorer working conditions, lower wages, living conditions and longer hours. They often do not benefit from the protection of China's labour laws due to

Environmental degradation

China’s cities have grown so quickly that the Country now has more urban centres than most Western nations. It is predicted that by 2020, China will have 400 cities with at least 250,000 middle-class inhabitants – and 50 of those cities will have more than 1 million middle-class inhabitants.44 With such rapid growth, environmental degradation has become a real problem for China. 

Overview of chinese Economy & Government (Taken From http://www.ibe.org.uk/userfiles/chinaop.pdf)

Economy and Government of China

• The People’s Republic of China (PRC) is the second biggest economy in the world behind the United States of America and has the largest population of any country at 1.3 billion people.
• Although still officially a Communist country, China’s economy has changed during the last quarter of a century from a centrally planned system that was largely closed to international trade, to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. 
• Some of the biggest companies in the world are found in China. Their names largely unknown in the West, some operating in over 50 countries, they control extraction, manufacturing, supply and distribution networks in many different industries.
• The development of the private sector – led by an emerging class of entrepreneurs – has been crucial in this shift. 
• In 1978, the first year of post-Cultural Revolution economic reforms in China, state-owned enterprises (SOEs) accounted for more than 90% of the country’s GDP; this has since fallen to about a third. 
• However, boundaries between business and the State remain blurred and to further complicate matters, boundaries between the State and the Communist Party of China are also vague. 
• Public officials may be managers in private enterprises yet the State may be the majority shareholder in a company and the Party organisation within the enterprise will exercise much more influence and power than the notional shareholder which is the State. 

• Economic development has been more rapid in coastal provinces than in the interior. 
• By 2011 more than 250 million migrant workers and their dependents had relocated to urban areas to find work and there is a strong rural/urban divide in many cities.
• Shanghai's migrant population, for instance, soared from 9 million in 2000 to 23 million people in 2010.
• However, as younger generations have higher expectations of quality of life than their predecessors, there is some evidence that they are now questioning low pay and poor benefits and are less interested in physically demanding jobs such as construction and manufacturing. 
• Environmental degradation has been a significant side effect of migration and the growth of industry in China, causing serious air pollution, soil erosion, and water scarcity problems. The country continues to lose arable land both through soil erosion and economic development, increasing its dependencies on imported goods.

Looking ahead, the Chinese Government faces several economic development challenges:

• To sustain adequate job growth for tens of millions of workers laid off from SOEs. The loss of the ‘iron rice bowl’ (Chinese idiom referring to the system of guaranteed lifetime employment in state enterprises) has meant that, along with migrants, there are many new entrants to the private sector workforce;
  
• To reduce corruption and other economic crimes;
  
• To contain environmental damage;
  
• To address social strife related to the economy's rapid transformation and ageing population (a demographic consequence of the ‘one child’ policy that China implemented in 1979);
  
• To reduce economic inequality as the gap between the rich and the poor continues to grow (according to official figures the top 10 percent of urban Chinese earn about 23 times that of the poorest 10 percent);9
  
• To achieve a shift from an export-oriented economy towards one more weighted towards domestic consumption. 
  

The Worlds Biggest Economies

Worlds Biggest Economies 2014

The CNN article above shows you the largest economies in the world in accordance to GDP.

Where is China? 

NOW, research and find out who has experienced the highest growth rate in the last 10 year.

Mergers and Aquisitions (2013-2014) Section B Information

List of mergers and aquisitions

The link/article above lists key mergers and acquisitions in 2013-2014. You should familiarise yourself with at least four of them to prepare for a question related to the topic.

Think about:

• The reason for the merger/acquisition
• Who does the merger/acquisition benefit 
• Benefits and drawbacks of the merger/acquisition 

The China Market: Opportunities and Risks

A really good article on the opportunities and risks involved in the China market

China - Opportunities and Risks

Essay Plan

 Use the plan below to structure your essays

Essay title:

Key hooks:

Key/terms / concepts:

First key argument:
Point	Evidence/Explanation/Examples

First alternative argument:
Point	Evidence/Explanation/Examples

Second key argument:
Point	Evidence/Explanation/Examples

Second alternative point:
Point	Evidence/Explanation/Examples

Depends on factors:
Evaluation:
Which of your points are most significant?
What is your overall conclusion?

More Relavant Theories you can Apply

0. 
   The Value of Relevant Theories and Models
   
   The BUSS4 examiner likes relevant use of models...
   “Some students made effective use of the Ansoff matrix to highlight the riskiness of different strategic options.”
   (extract from June 2012 BUSS4 Examiner’s Report)
   
   Some great reasons to apply theories and models in your essays:
   • They provide a framework for analysis
   • Makes it easier to compare and contrast different research examples
   • They help explain strategic options and analyse/evaluate the choices made
   • Provide the “language” for strategy – demonstrate use of business terminology 
   • Adds credibility to an answer – the right theory properly applied
   • Can be used in both Section A and Section B essays
   
   Making Strategic Choices: Ansoff, Lewin, Handy and Porter
   A quick reminder about these classic models of strategic choice: 
   
   
   
   
   
   
   More information about Porters Generic Strategies
   http://www.slideshare.net/dipalij07/porters-generic-strategies-with-examples
   
   
   
   
   Handys Model on Organisational Culture
   
   
   
   
   
   More information about Handys Model of Organisational Culture http://www.tutor2u.net/business/strategy/culture-types.html
   
   

Don't Forget PEEL

Writing Great Paragraphs – the PEEL Technique

Great essays are built around a well-developed chain of argument that answers the question using a small number of well-argued points. We call these “chunky paragraphs”.
Each paragraph should make just one point. Each point should contain several stages of analysis and use of good real world business examples. Keep looking back at the essay title to ensure you are focused and link your answer back to the trigger words in the question. Towards the end of each paragraph you should also bring in some evaluation.

A useful acronym for writing each paragraph point is PEEL 

P make a POINT
E use EXAMPLES and EVIDENCE 
E EVALUATE

L LINK BACK to the QUESTION POINT

Key Terms for BUSS4

Open the link below to view a host of terms you should know for BUSS4 - If there are any you don't recognise, be sure to learn them


BUSS4 Glossary

How and Why? A Guide to GOOD ANALYSIS

How & Why. These are the two important words for students preparing for BUSS4 and as they practice their essay technique.

So, why is that? And how can they be used?

The source of their importance lies in the skill of analysis…

The challenge for students is to demonstrate to the examiner that they can respond to each chosen question with a logically-argued essay. A logical answer is one in which the argument is developed through relevant points, properly explained and supported by evidence. The use of How and Why is a great way to help "properly explain" a point and make it easier to reach Good Analysis.

In our BUSS4 exam coaching days we practice the tutor2u Stepping-Stones method for developing a 

logical chain of argument. By thinking about How & Why, the Stepping Stones method becomes much easier! 

Let's look at an example of this in action by considering the recent decision by Tesco to withdraw from the US grocery retailing market. 

Tesco's decision is a good example of retrenchment. It has decided to cut its losses in the US in order to focus the business on better investment opportunities. The result for Tesco shareholders is a £1.2bn loss on the US project.

It's a great example to use in a BUSS4 essay if it helps support a point that is relevant to the question. However, on its own, the information above is not really enough. You need to explain to the examiner why a strategy of retrenchment might be a suitable choice and how the case of Tesco helps support this argument.

So, let's take this step by step and see if we can develop some logical analysis using How & Why as our prompts?

WHY might a firm decide to adopt a strategy of retrenchment?

Retrenchment is about reducing the scale or scope of a firm's operations - for example by closing a business unit, implementing significant cost reductions or scaling back investment plans. Often a strategy of retrenchment is forced on a firm do to poor financial performance. It can also be adopted where a firm wants to make a change in strategic direction.

WHY did Tesco originally decide to enter the US market?

Tesco has pursued a strategy of international expansion in many territories - and with great success. Fresh & Easy launched to great fanfare in November 2007 – just before the recession and sub-prime mortgage crisis swept through the US causing American customers to retreat to the security of familiar retail brands.

WHY did Tesco decide to review its investment in the US? 

Because their US Chain (Fresh & Easy) continued to incur heavy losses despite sustained efforts to improve the grocery retailing format. Tesco had tried to make a success of the business for over 5 years.

WHY was Fresh & Easy incurring heavy losses?

Because it did not have sufficient economies of scale to enable the business to be competitive and revenues were not enough to cover substantial fixed costs. The business was also criticised for its retail format.

HOW can a successful retailer like Tesco get it wrong in the US?

Industry experts have also criticised Fresh & Easy’s use of self-service check-out stands which confused consumers used to heavy store helper presence. The chain’s lack of vouchers and coupons alienated price-sensitive shoppers.

HOW might a decision to close Fresh & Easy be a difficult decision for Tesco to take?

Because Tesco had developed a strong reputation for successful international expansion and the attempt to enter the intensely competitive US market was high profile. Tesco management consistently reassured shareholders that they were confident that they could make a success of Fresh & Easy.

HOW will a strategy of retrenchment work for Tesco in the US?

Tesco will attempt to sell Fresh & Easy and its 200 stores in California, Arizona and Nevada. If buyers cannot be found, then Tesco will need to close the stores and settle outstanding liabilities including redundancy costs and leases.

WHY might a strategy of retrenchment involve significant costs for Tesco?

Because there is no guarantee that a buyer will be found for the Fresh & Easy store portfolio and support infrastructure (e.g. distribution centres). The Tesco plc Board has estimated that it will cost Tesco a further £1bn in terms of the difference between what it invested in Fresh & Easy and any potential sale value.

HOW will shareholders react to the retrenchment?

In general shareholders are likely to be relieved that the business has cut its losses in the US. Whilst a £1.2bn loss on Fresh & Easy is a large amount, it is a relatively insignificant amount compared with the overall value of the business. As a result of the retrenchment, Tesco should be better able to focus its resources on the core UK retailing brand and other better-established international operations.

Localisation by McDonalds

A slideshow video showing how McDonalds localises. Gets interesting from 1 min 50 secs onwards as it explains what they do in China and India. A good source of information and an example for you to use in section A

Why Did Facebook Buy Whatsapp?

Facebook paid £19 billion for messaging app Whatsapp!!! How is that justified?
An example of acquisitions. A good example to use - Do some reading on this

Barclays Boss Antony Jenkins on the Bank's Future Agenda

Antony Jenkins (CEO of Barclays) talking about the banks new strategy of retrenchment and discussing external economic factors which has forced it to amend its strategy. 

Remember 19,000 job losses worldwide in the next 3 years, mainly in investments and deciding to concentrate on retail banking instead.  

(Mainly Section B)

Revision Session in Half Term - 29/05/2014

Hi all, the planned revision session which was supposed to take place on Thursday has had to be cancelled due to personal circumstances. However the session on Friday 30th May 2014 at 10.30am is still taking place where both BUSS3 and BUSS4 guidance will be given.

In the meantime if you have any queries can you please email me or place a comment on the blog and I'll get back to you as soon as possible

Sorry for the inconvenience and happy revising

Examples of Compare and Contrast Businesses for Section B

When writing your essays, whether it is section A or B it is important that you are able to compare and contrast businesses. Here you are provided with some good examples of it for you to research and add to your examples portfolio


Here are some “compare and contrast examples” that you might use as the basis for evidence to support the analysis developed in paragraph points in a BUSS4 Section B essay.

You'll need to dig just a little deeper into these examples to gain sufficient detail for your answers (though not too deep - beware storytelling!).

As you finalise your research, try to find some more pairs of examples that can be used to compare and contrast. And also consider how the evidence you gather can be used to help support the analysis you develop at the start of each paragraph point.

RETRENCHMENT

Compare successful retrenchment:

Harriet Green has led a transformation of travel company Thomas Cook since April 2012, bringing it back from the brink of failure through a programme of rationalisation (cost cutting, business disposals) and refocusing the business on core activities. Green, who was vote Leader of the Year 2013 and Businesswoman of the Year 2014, puts her success down to energising a committed team and moving fast. There is a clear lesson to be learned about what a successful retrenchment strategy needs: decisive action, speed and focusing on the core activities that customers value.

With unsuccessful retrenchment:

CEOs Thorsten Heins (Blackberry) and Stephen Elop (Nokia) both opted for a strategy of deep retrenchment in response to their loss of their market leadership positions. Nokia’s phone business was eventually sold to Microsoft (but only after the loss of thousands of jobs); Blackberry’s owner RIM ditched Heins after its market share continued to plummet.

Both Heins and Elop were faced with a common problem for businesses that opt for retrenchment - a lack of competitiveness and competitive advantage. Blackberry and Nokia had become too complacent about their market leadership position and they were overtaken by rapid technological change.

TAKEOVERS AND MERGERS

Compare a successful takeover:

Indian conglomerate purchased Jaguar Land Rover (“JLR”) from Ford for around £1.2bn in March 2008 at the depth of the credit crunch and global financial crisis. The takeover price represented a large loss at the time for Ford who had bought the two brands for $5,2bn and had invested a further $10bn to fund heavy losses. Since 2008, JLR has proved a spectacular success for Tata. Driven by strong sales in emerging markets (particularly China), JLR sold over 435,000 vehicles in 2013 and is forecast to achieve a profit of over £2bn alone in 2014.

With an unsuccessful takeover:

The acquisition by US technology firm HP of British software business Autonomy has proved disastrous for HP shareholders.

Autonomy was acquired by HP for $10.2bn in October 2011. The price paid by HP was approximately 50 times the latest annual profit made by Autonomy. The takeover was part of a significant change in strategy by HP involving stopping making hardware in order to refocus on software. At the time of the takeover, Mike Lynch (the CEO and Founder of Autonomy) said that "HP understands the special culture we have. This is about building Autonomy."

Just one year later HP wrote off $8.8 billion of Autonomy's value, claiming that it had been duped by a serious accounting scandal at Autonomy. Many of Autonomy's senior management left very soon after the takeover by HP and several blamed a clash of corporate cultures between the two organisations (HP was described as too bureaucratic).

LEADERSHIP STYLE

Compare a the successful democratic leadership style of Tony Hsieh of Zappos

Tony Hsieh - the founder of Zappos (bought by Amazon in 2009) wanted to build a business based around a simple idea. That it - if you get the organisational culture right - then everything else that you need to be successful will fall into place. This approach to leadership has created a hugely successful business with a unique organisational culture and supporting structure.

Hsieh has an interesting insight into what an effective leadership style is. In a recent interview he explained:

“Personally I cringe at the word 'leader.' It's more about getting people do what they're passionate about and putting them in the right context or setting. They're the ones doing the hard work. ... [Zappos is] structured a lot less hierarchical [than most companies], so we're a lot more flat. We try and decentralize a lot of the decision making. We all hang out with each other, at all different levels."

With the unsuccessful autocratic leadership style of Fred Goodwin at RBS

When the Financial Services Authority (“FSA”) published their report on the collapse of Royal Bank of Scotland (“RBS”) they noted that RBS repeatedly ignored warnings about Sir Fred Goodwin's 'assertive and robust' management style from as early as 2003. They might just as well have used the term “autocratic” leadership style to describe a CEO who brought the RBS to its knees.

A subsequent report by Newcastle Business School went further about how the leadership style of Goodwin had contributed to the disastrous strategy which ultimately resulted in RBS being nationalised. They claimed that Goodwin’s “aggressive, macho management style” created a culture where staff were locked in constant fear of losing their jobs, and Goodwin’s lieutenants were said to have stopped employees speaking out about problems.

ORGANISATIONAL CULTURE

Compare a business success story rooted in the organisational culture: John Lewis Partnership

The organisational structure and organisational culture at John Lewis Partnership (“JLP”), based around employee ownership, is distinctive and highly successful. But why? What is it about the "partnership" model at JLP which drives sales and customer service so high?

The answer seems to lie in the concept of “trust” in each other based around a shared sense of purpose. All 76,500+ of John Lewis's permanent staff are partners in the business and they ultimately own the retailer's 35 department stores and 272 Waitrose supermarkets.

The JLP website explains that “partners share in the benefits and profits of a business that puts them first." John Lewis's constitution also lists a formal mission to maximise the "happiness" of its staff. The organisational structure also involves a staff council – for ideas and complaints to filter up to the board – and a weekly magazine where staff can air their views about policies and management, anonymously if they choose.

With an organisational culture that ultimately caused the spectacular failure of a business - Enron:

It is relatively easy to identify evidence like JLP to see how organisational culture can be an intangible asset of a business - a source of competitive advantage and a key reason for a business enjoying industry-beating financial performance.

However, the reverse can also be true. If organisational culture is managed incorrectly or (worse) left unmanaged, it can become dysfunctional or toxic. In these situations the organisational culture of a business can become a liability, not an asset. It can even lead to the failure of the business. The classic example is Enron.

Enron is perhaps the best example of how a toxic culture can ultimately lead to the collapse of an organisation. The collapse of Enron was one of the biggest corporate scandals of all time and much of it can be directly traced to the culture of greed, aggression and plain illegal behaviour that was encouraged and tolerated by the senior management team.

So much was wrong about the organisational culture at Enron - it is described in some detail here. Aggressive management, inappropriate incentives, lack of controls, excessive costs, deep-seated fear of senior management - Enron had it all!

BUSINESS ETHICS

Compare a business that is consistent rated as one of the world’s most ethical companies - Premier Farnell

For four years running, UK-based technology distribution business Premier Farnell has been named as one of the world's 100 most ethical businesses. Premier Farnell attributes this consistent record of achievement to a variety of initiatives which, taken together, mean that Premier Farnell has scored highly on its performance in ethics, governance (how the company is run) and citizenship. For example, as part of staff induction training which details Premier Farnell's "Core Values", the company's code of conduct is introduced to all new starters. These include keeping customers and suppliers at the heart of everything the firm does, working together, being innovative, developing the firm's people, and integrity and trust.

With a business whose ethics are consistently called into question - GSK

Sir Andrew Witty, the CEO of global pharmaceutical giant GSK, has his work cut out trying to restore the ethical reputation of a firm that continues to face allegations of unethical and illegal activity around the world.

GSK is the world's fourth-largest pharmaceutical company measured by sales (after Pfizer, Novartis, and Sanofi) and was established in 2000 by the merger of Glaxo Wellcome plc (formed from the acquisition of Wellcome plc by Glaxo plc) and SmithKline Beecham plc. GSK has an enormous product portfolio covering just about every disease area major disease area including asthma, cancer, virus control, infections, mental health, diabetes and digestive conditions. It also has a large consumer healthcare division that produces and markets oral healthcare and nutritional products, drinks and over-the-counter medicines. The sheer scale and complexity of GSK may be part of the problem when it comes to enforcing acceptable ethical standards. But so too might be the prevailing corporate culture. Just look at some recent examples:

• In July 2012 GSK was fined $3bn in the largest healthcare fraud settlement in US history. GSK admitted to promoting antidepressants Paxil and Wellbutrin for unapproved uses, including treatment of children and adolescents.
• In July 2013, GSK confirmed that some of its senior Chinese executives appeared to have broken the law after police accused it of funnelling up to 3 billion yuan (approx. £323 million) to travel agencies to facilitate bribes to doctors to boost the sale of its medicines. In May 2014 GSK was then accused of tax evasion in China.

When he became CEO in 2012, Witty promised in 2012 that GSK would make “displaying integrity in everything we do” a priority. Some might argue the business still has a long way to go!

Exemplar Section B Essay on Takeovers and Mergers

QUESTION

“To what extent is integration planning the most important factor determining the success of a takeover or merger?”

ESSAY ANSWER

Takeovers and mergers are complex transactions where many things can go wrong and therefore affect the success or failure of the deal. Integration planning is an important part of the takeover process, although there are other potentially significant factors that affect whether a takeover is successful which also need to be considered. (knowledge/ evaluation)

Integration planning refers to a process in which the buying business (the acquirer) identifies how it will run the takeover target once the transfer of ownership has been completed. Integration involves many functional challenges such as how to manage customer reaction to the takeover, handle uncertainty amongst employees and integrate potentially different computer systems. Key strategic issues also arise – for example decisions over the future of competing brands, key business locations and the senior management structure.  (application)  Integration planning normally takes place before the transaction is completed with the aim of ensuring that the acquirer has a clear idea of the integration issues and a realistic action plan of how these issues can be addressed. It can be seen therefore that good integration planning can reduce the risks involved. (knowledge/ analysis)

One reason why integration planning is important (evaluation) in determining the success of a takeover is that the process of integration is closely tied in with the need to achieve synergies. Synergies include cost savings and additional revenues from the deal and are a key part of the value the shareholders of the acquiring firm aim to obtain from a takeover (knowledge). A well-planned integration process will identify the most significant synergies and how they can be achieved, which should also encourage management to focus on those synergies wheb they take control. (rAN and evaluation). 

For example, when Santander acquired Abbey National in 2004, Santander recognised that the most important cost synergies (around £350m per year) could only be achieved if the combined IT systems of the group were based on the same platform. Santander proved effective at implementing this complex IT systems integration and, as a result, the planned cost synergies were achieved earlier than planned, resulting in better returns for Santander shareholders, although the process proved disruptive for both employees and customers in the short-term. This contrasts with the recent merger of T-Mobile and Orange UK where integration of overlapping IT systems has been a significant reason why planned cost synergies have not yet been achieved, which in turn has cast doubt over the success and failure of a significant merger in the mobile phone industry. (APPLICATION)

Another reason why integration planning is important in the overall success of failure of a takeover is that it should enable an acquiring firm to better address the potential cultural and change management issues that can arise from the deal.  Takeovers inevitably involve significant change – to both sides of the transaction – and, depending on the nature of the takeover, there can be much resistance to proposed changes. As a result, resistance to change may mean that expected synergies are not realised, leading to the takeover not achieving its objectives.  Cross-border takeovers (e.g. Ferrovial from Spain taking over BAA in the UK) or those involving a hostile bid (e.g. Kraft & Cadbury) are perhaps most likely to result in cultural clashes and hostility to change, since there can be noticeable differences between the way that management do business between different countries and employees in a firm subject to a hostile bid inevitably feel more threatened. However, effective integration planning can overcome these potential pitfalls.  A good example is Tata Group’s takeover of Jaguar Land Rover (JLR) in 2008. Due to the protracted takeover process, Tata was able to produce a detailed integration plan that it was able to share with (and gain the support of) key stakeholders in JLR including employees, government and trade unions. Tata’s integration plan emphasised the importance of continuity at JLR’s UK factories and also Tata’s long-term perspective on the returns it aimed to achieve. This long-term, consultative approach to integration planning has helped Tata make a success of the JLR takeover despite very difficult market conditions in 2008 and 2009 when demand for luxury cars fell sharply, leading many observers questioning whether the takeover would be a success. (APPLICATION/ ANALYSIS)

Whilst integration planning is a key part of the takeover process, there are other factors that are also important in determining the success or failure of a takeover or merger. On such factor is the price that is paid for the deal. If success or failure is measured in terms of a return on investment, then the price paid by the acquirer (the “investment”) has a significant influence on the financial returns that shareholders obtain. A business that pays too much for its target will struggle to make the investment work, particularly in the short-term.  For example, when ITV bought Friends Reunited for £175m it soon became clear that ITV had paid far too much. No amount of integration planning could make up for a bad deal and FR was eventually sold on by ITV for £25m soon after. Similarly, when private equity investor Terra Firma paid £4.2bn for EMI it didn’t take long to find out that the price had been far too high. This was a good example of where integration planning would not have been significant to the takeover since Terra Firma (as a private equity investor) had predominantly financial motives for buying EMI and there was little if any “integration” to be done with the business. (APPLICATION/ ANALYSIS) (evaluation)

Another factor, other than integration planning, which is vital to the success or failure of a takeover or merger is whether the deal has a strong strategic rationale. The reasons or motives for a takeover or merger link directly to the objectives set for the deal and whether or not they are achieved.  For example, there is some evidence that takeovers with mainly “managerial” motives are less likely to succeed compared with those that have a stronger strategic motive, often because unrealistic objectives are set for the deal.  Takeovers driven by managerial motives are often based on the ego-building ambitions and vanity of the senior management behind them, or result from external pressure being placed on Boards to “do deals”.  An excellent example is the disastrous takeover by RBS of part of ABN-Amro which was largely motivated by the ego of Fred Goodwin and made worse by the over-confidence of the RBS Board that they could make a success of even the most risky, complex takeovers. The result of these managerial motives was a loss to RBS shareholders of over £15bn and the resulting nationalisation of the bank, which undoubtedly qualifies as a failed takeover of epic proportions! It is useful to compare and contrast the RBS / ABN Amro takeover with investments that had much stronger strategic motives. For example, Google’s takeover of YouTube was based on Google’s aim to be a leading provider of online video and its objectives for the deal were very long-term in nature. YouTube’s subsequent rapid growth and revenue generation has exceeded Google’s original objectives, which suggests that the takeover will have produced good returns for Google shareholders. (APPLICATION/ ANALYSIS)

So, overall, how important is integration planning to the success or failure of a takeover or merger?  One factor it depends on is the relative significance of cost synergies to earning the required return. When the acquirer needs to achieve substantial cost synergies to make the investment a success, then there is more pressure on the acquirer to implement a more aggressive integration strategy – e.g. through job losses; closure of locations; product rationalization. This makes effective integration planning crucially important – the risks of such changes are high and there is potential to damage the takeover target in the longer-term if the wrong decisions are taken. So, if cost synergies are significant, then integration planning must be too. On the other hand, no amount of integration planning can make up for a takeover or merger that doesn’t make strategic sense or if the price paid is so high that shareholders can’t expect to earn a satisfactory return. As the shareholders of RBS and ITV discovered, a bad deal is a bad deal, no matter how good the integration plan might have looked on paper. (evaluation)

Marking:

L5 26
E3 14

40 marks out of 40

Overall Examiners Comments:

Apart from the odd spelling error this essay is pretty much faultless. What is good about the essay is the knowledge underpinned the arguments without being overtly explicit. What I mean by this is that knowledge is demonstrated by the concepts discussed rather than a defining every term that was used. Evidence is used to support arguments which moved the work immediately to the top levels of good application. Arguments are well structured showing the consequences of the points discussed.

Evaluative comments are evident throughout and a logical and rounded conclusion is reached based on a synthesis of the earlier arguments presented.