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
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.
