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Finance and Operations: How did the substantial investment have implications on the operations during the merger?
The main reason that led to the acquisition of Rover by BMW is discussed. Also, the circumstances under which Rover was acquired by BMW are described. Further, the competitive pressures that led to the acquisition of Rover are given. The causes of failure of the acquisition are discussed. A balanced view relating to the failure of Rover acquisition by BMW is given.
The substantial investment by BMW in the acquisition of Rover had a negative impact on the operations of Rover (a). Rover had been promised a further investment of 500 million pounds per annum, however, even though the UK suppliers of Rover were reassured, the relationship with Honda collapsed. Honda was responsible for design and development of Rover vehicles (b). The high initial investment in Rover also had other negative effects. The BMW management placed great faith in the management of Rover and allowed them to continue for the next two years. This was disastrous for operations (c). There were rising costs, poor scheduling, weak quality, falling market share, and more weakening of the brand image. As further investment was pumped into Rover and a commitment was given on building a new Mini and 750 million pounds were further invested in Land Rover, there was poor volume because new models were not scheduled before 2002. The plant was running at 62 percent capacity which further pushed up the costs. Even though there was a further investment by BMW in Rover between 1998 and 2000, the high value of the pound hit exports. There were redundancies, work reform, and measures to increase productivity.
The high investments led to pressures for performance on Rover and when performance weakened, the threat of a possible take-over bid loomed over BMW. In the year 2000 parts of Rover were sold. The Phoenix group bought Longbridge and Ford purchased Land Rover. The high investment in Rover was made by BMW without due diligence. The company did not examine the accounts of Rover properly (d). They did not evaluate the market position and value of the brand Rover. In addition, BMW overestimated the skills of the existing management. What BMW failed to understand was that Rover was dependent on Honda for its operating efficiency(e). This was a failure of due diligence because of undue haste. The deal to take over Rover was completed by BMW in 10 days. During this period because of time constraints, BMW did not look closely at the operations of Rover.
BMW did not give adequate importance to the culture of Rover. These companies had different cultures. BMW ignored the cultural gap by assuming that Rover will run as a separate company under its existing management. Rover did not have a learning culture. The company employees were skeptical of new approaches to manufacturing. BMW had favored a lean manufacturing approach but after the takeover, the designs become obsolete. When Honda was in collaboration with Rover it had continuously improved quality at Rover. However, after the BMW takeover and after Honda left Rover, the designs, quality, and operations declined.
The investment in Rover failed because the leadership at BMW was not strong. The board was divided over whether the company should be acquired. After the acquisition a large number of board members of BMW resigned. There were several BMW executives who were not in favor of the acquisition. The financing that was promised after the acquisition was not fully given to Rover. There were severe problems related to the stewardship of Rover. BMW actually removed Rover from Honda. This led to operational disaster. BMW was warned by several directors that Rover required far greater injection of capital, and had too many negative issues that had to be resolved. Very few BMW directors wholeheartedly supported the Rover acquisition (f). Their apprehensions were not misplaced. It did not have profits or a strong balance sheet and had been cash-starved. It also had a huge capacity to build cars. At the time of acquisition Rover had a capacity to build 700,000 cars when compared to the capacity of BMW to build 500,000 cars. Was the objective of BMW to acquire a huge car making capacity? The investment hurt Rover because the German management team at BMW did not have experience in managing a foreign company. BMW has been described as over-optimistic(g). It took a hands-off approach to Rover and expected the management of Rover to run the company profitably. However, this approach was not appropriate (h). The best management talent had left Rover. Some of the top management talent had been taken away by former owner British Aerospace. What was required was that BMW install a talented management team to take control of Rover, improve quality, productivity, product strategy, and brand value. BMW builds cars by using German management, providing training, engineering, and design.
There was an element of competition in the takeover of Rover. What BMW underestimated was the increased administrative strain of acquiring Rover. When a company is acquired, the parent company becomes responsible for the accounting, human resources, customer service, brand image, marketing, and informational technology management (i). The responsibility for all these activities went to the parent company. However, BMW avoided these responsibilities by leaving these in the hands of highly depleted Rover management for two years. This wrecked the operations of Rover. The staff of the acquired company can be used but the administrative responsibility becomes fully that of the acquiring company (l). The acquisition of Rover by BMW also was a drain on the cash reserves of BMW. This drain led to a situation where the survival of the parent company itself was jeopardized. The competitive move by BMW was ill-timed and ill-planned. It was a competitive move because at the same time Daimler-Benz was seeking to merge with Chrysler. BMW wanted to out-compete Daimler-Benz in acquisitions. BMW did not consult industry experts on the current position of Rover. Before it took over Rover, BMW did not assess the problems properly(m). They did not study the issues faced by Rover. The second element of competition is that Honda had made an offer to acquire Rover. BMW made a larger offer and out-competed Honda in the acquisition. However, BMW had overestimated the value of brand Rover. When BMW declared a crisis I 1998 and discussed shutting Long-bridge, the dealers lost faith in BMW. New car deliveries were delayed because of quality problems.
The acquisition of Rover by BMW for 1.7 billion pounds was very costly. This was a poor investment. It took BMW six years of draining money to fix the problem and salvage what it could from a disastrous acquisition. An incorrect belief system was responsible for the debacle. There was a belief in the 1990s that firms with a capacity to produce two million cars would only survive. Chairman, BMW, Bernd Pischetsrieder accepted this thinking. The rationale given was that any company smaller than the two million cars capacity would fail to achieve economies of scale necessary to survive in the competitive car market. There was also a fear that if a car maker had the smaller capacity it would be taken over by a larger auto company(j). The twin arguments persuaded Bernd Pischetsrieder to acquire Rover. In fact, Bernd Pischetsrieder had argued with the BMW board that acquiring Rover was the only alternative in terms of size, capacity to produce cars, and perceived price in the market areas. He also argued that Rover was the only automaker that could be acquired and this spurred the BMW directors and managers to race for the acquisition. There were secret meetings between the two companies, and Rover`s managers handed over all information that BMW asked for to value the company(n). Ten days later BMW signed the deal for the takeover of Rover. The brand of Rover which was already weakened further lost value with the takeover. In addition, the parent company`s image also suffered. The cars that were offered after acquisition by Rover were not up to the expectations of the customer. New car rollouts were delayed, and the foreign sales of cars declined because of increasing value of pound sterling.
Rover had to change its operations after it was taken over. Since it had been taken over after a competitive bid was received from Honda, Honda decided to cut its ties with Rover. To change its operations and become competitive the culture of Rover had encouraged learning. However, Rover employees had a set personality, it had a way of doing things and was not interested in changing the manner in which things were done. In case of Rover, it was not that BMW managers and supervisors were imposed on it but the existing management of Rover was insufficient (j). Further, Rover operations had been supported, designed, and improved by Honda (k). With the withdrawal of Honda, an important management factor was removed. Even when two companies are kept separate, the two organizations will have to communicate. There was a severe cultural clash. Add to the fact that several BMW directors and managers were against the expensive acquisition. Between 1998 and 2000 the matters at Rover deteriorated and market share fell below 10 percent. With a decline in exports, there was a demand for redundancies. When redundancies occur there is a reduction in the motivation among employees. If excess employees are removed there is resentment among the workforce. The demand for redundancies actually doomed the future of Rover. The employees felt insecure, the proactive employees left Rover, and those who were left behind had low morale.
There was a conflict of objectives between BMW and Rover. The key objective of the acquisition was to increase capacity so that economies of scale can be realized. However, BMW made no effort to combine the factories of these companies. The objective of achieving economies of scale was postponed and instead, cost-reducing measures were introduced. An auto company seeking to increase its market share introduces new models (o).
Substantial investment by BMW in Rover was made because of over-optimistic assessment of the brand value of Rover, the operating efficiency of Rover, and the management of Rover. The assessment was incorrect and BMW had to face severe challenges. The operations suffered because Honda parted ways with the company, the BMW managers did not take over the management of Rover, and the management that remained in Rover was ineffective(p).
Even though BMW and its chairman Bernd Pischetsrieder were fully responsible for the debacle of Rover, they chose to blame some other factors. The factors were the high value of the pound, the failure of the EU to approve the requested financial aid package offered by the UK government, accumulating losses, and growing weakness of the Rover brand.
The substantial investment of BMW in the acquisition of Rover led to operational problems at Rover. The roles of Honda in the operations of Rover were not properly evaluated prior to the takeover. Rover was allowed to run separately for two years. The depleted management of Rover could not turn the company around. Costs increased, exports decreased, and productivity declined. Rover became a loss-making liability for BMW. The existence of Rover threatened the existence of BMW. Lack of leadership, mismatch of culture, and lack of due diligence before acquisition led to the failure of BMW Rover acquisition. The key reason for acquiring Rover was to increase the production capacity, realize synergies, and get economies of scale. BMW management did not work to realize the goals of acquisition. There was no plan to achieve cost-effectiveness, improved productivity, and improved marketing. The car development process was lagging and the brand value of Rover declined. Instead of taking advantage of Rover`s global market, the exports started declining. Essentially, the decision to acquire Rover was a poor acquisition decision. It was an ill-advised investment. The results were that BMW suffered financially for six years till it decided to sell off parts of Rover. This is an example of a disastrous acquisition. The reasons for acquisition that drove Chairman Bernd Pischetsrieder into the purchase was that having lower capacity to make cars will render car companies uncompetitive. The belief was that the volume of production will sustain car companies was misleading. This led to hasty and poor investment in Rover.
From my perspective, I feel that an acquisition can be very profitable. It can bring the acquiring company quality staff, additional skills, and access to a wider market. An acquisition brings access to funds, valuable assets, and allows diversification. The acquisition is a method for reducing costs, reducing competition, and growing your company. However, in case of BMW acquisition of Rover, these benefits were not realized. The selection of the target company was faulty. The execution of acquisition was worse. A very high price was paid for the acquisition. The management of companies after the acquisition leaves much to be desired. If BMW did not want to actively manage, improve, and grow Rover, why did it acquire the company? Is it not the responsibility of the acquiring company to manage the acquired company in a responsible manner? Should a large public company such as BMW not be held responsible for making the shoddy investment and wasting shareholder`s money?