Through analyzing two failure M&A cases which involve supply chains integration between Daimler-Benz with Chrysler (in automotive industry) and between Newell an[r]
Trang 1* University of Economics and Business – Vietnam National University, Hanoi
■2012 JSPS Asian CORE Program, Nagoya University and VNU University of Economics and Business
“REALIZING THE CRITICAL OF SUPPLY CHAIN INTEGRATION
IN MERGERS & ACQUISITIONS: FROM THEORETICAL
PERSPECTIVES TO REALITY”
Vũ Anh Dũng*, Trần Công Thành
Abstract : The paper identifies the importance of integrating the supply chain in order to create value for shareholders in
business Mergers and Acquisitions (M&A) Through analyzing two failure M&A cases which involve supply chains
integration between Daimler-Benz with Chrysler (in automotive industry) and between Newell and Rubbermaid (in
household product industry), the paper points out that one of the causes which led these deals to failure is the lack of
thorough consideration on the role and strategies in integrating supply chain networks This is the main implication of the
paper for further researches to find the solutions for effective supply chain integration both in theory and reality
Keywords : M&As, supply chain integration
1 Introduction:
In M&A deals between businesses who have similar
products or directly compete with each other or
complement each other, besides the integration of
products, brands, technologies, manufacturing or
human resources (Vu et al., 2010; Birkingshaw et al.,
2000), the integration of supply chain networks plays
an important role, even it may decide the success or
failure of the deals Yet, in many M&A deals, this process
is often overlooked and not to be focused properly This
lead to a fact that many M&A deals did not achieve
synergy value as expected, not bring value to the
shareholders and ultimately turned into failure Thus,
identifying the role of integrating supply chain networks in
creating the value for shareholders before and after the
M&A deals is essential Also, supply chain integration
strategies should be considered as a prior important factor
The process of integrating supply chain must be relevant
with other strategies of participation sides and should be
reviewed, conducted in a thorough and systematic way
Therefore, researching supply chain integration in terms of
strategy, implementation process and steps is imperative
and need to be invested
2 M&As in the World and in Vietnam:
The world economy has witnessed five waves of
M&As (MergerStat, 2009) Depending on the time
The world M&As
Deals Value
Trang 2period, the first four waves took place respectively in
the periods: 1979-1904, 1916-1929, 1965-1969, and
1985-1989 The fifth wave started in 1992 and is still
going on so far However, there is a trend splitting the fifth
wave into two smaller waves which are the 5th and 6th
waves The main characteristic of the current period is that
the M&A market tends to increase in both the quantity and
value of deals According to Thomson Reuters, the value of
M&A transactions worldwide in 2010 reached 2.4 trillion
U.S dollars, increased 22.9% compared to 2009 and is the
largest increase since 2008 (Figure 1) The emerging
markets accounted for 33% of global M&A of $ 806.3
billion in 2010, up 76.2% over 2009 In addition, the
popular M&A forms in this period are cross-border
mergers This is the result of globalization in trade The
market penetration, market share increase and global
competition strategies have opened a new wave of M&A
Figure 1: The world M&As
Source: author collection from AVM Vietnam and Reuters (2011)
Vietnam M&A market has been developed since 2000
with the establishment of the Vietnam securities market
(FPT Securities) By 2005, Vietnam recorded 18 M&A
deals with a total value of USD 61 million However,
along with Vietnam joining the World Trade
Organization (WTO), the number and value of M&A
deals in Vietnam has increased dramatically According
to Price Waterhouse Coopers (2009), the total M&A deals
in 2008 reached 146 cases with the total value over USD 1
billion, triple the value of transactions of this type in 2006
[Figure 2] In fact, despite of the economic crisis, the
number of M&A in Vietnam has continuously increased
35.2% in 2008 and 77% in 2009 (According to the
statistics of the PWC, 2009) in that the transactions of
foreign companies occupied a large proportion of 40% in
2009 and 27.5% in 2010 However, Vietnam M&A deals
mostly focused on the form of purchase or transfer shares
of the partners, not really a form of merging or acquiring
100% the ownership like international M&A activities The
noteworthy thing is the development trend of the Vietnam
M&A market in recent years coincides with the growth
trend of FDI (Foreign Direct Investment) and FPI (Foreign
Portfolio Investment) flows into Vietnam (Vuong et al.,
2009)
The world M&As
Trang 3Figure 2: M&As in Vietnam
Source: AVM (2011) and PWC (2009)
It can be seen that M&A activities in Vietnam is relatively
new but promising for these reasons:
According to the Ministry of Planning and
Investment and the Chamber of Commerce and Industry of
Vietnam (VCCI), by February 2011, Vietnam has over
500,000 small and medium enterprises, accounting for
98% of businesses with registered capital of nearly VND
2.313.857 billion (USD 121 billion equivalent) Experts
have estimated that 35% to 50% of these SMEs may be
merged or acquired with other partners in the next 6 to 10
years With the increasing competitive pressure, businesses
need to create new competitive advantages, or when new
opportunities appear, businesses want to expand their
businesses and change their investment directions These
factors are probably the motivations of businesses to carry
M&A deals
The state owned enterprise equitization has been
implemented stronger and deeper This is the foundation to
promote M&A activity in Vietnam
The high and stable growth rate of GDP, the
increasing number of Vietnam enterprises, and the
promotion of Vietnam in attracting further foreign capital
would be the good conditions for Vietnam to quickly
develop and form an M&A market in the coming years
3 The M&A failure rate is not small:
Although the number and value of M&As have sharply
increased but the rate of success is low According to a
survey by KPMG in 2003, 70% of the deals failed to
achieve the targets set by the board of management;
The Economics survey reported that only 23% of the
deals recovered the investment costs within 10 years;
The Business Week newspaper identified that
approximately 60% of the cross-border M&A deals,
the buyers could not recover the costs; about 50%
achieve the break even or even loss (Dinesh, 2005)
Some other studies such as the authors Habeck, Kroger
M&As in Vietnam
Foreign businesses buys
VN businesses
Foreign businesses buy foreign businesses
Classification of M&As by the nature
of deals, 2009, 2010
VN businesses buy
VN Businesses
VN businesses buy Foreign businesses
Trang 4and Tram in 2000 even indicates that the majority of
M&A decreased shareholder value and only 20% of
the deal is successful (Habeck, et al., 2000)
One of the causes of the M&A failure is that related
parties neglected or did not calculate thoroughly for the
process of supply chain integration before and after the
M&A deal takes place (Dinesh , 2005; Herd et al.,
2005; Langabeer and Seifeit, 2001) The survey of 600
managers involved in merger and acquisition deals
conducted by Accenture and the Economist
Intelligence Unit (EIU) has confirmed that less than
half of the M&A deals which included the process of
supply chain integration (about 45%) achieved cost
reduction targets as expected (Byrne, 2007) An
interesting thing is that there was a study showing the
connection between the success rate of M&A deals and
the effectiveness of supply chain integration
(Langabeer and Seifeit, 2003) Therefore, it can be seen
that the process of supply chain integration plays an
important role for an M&A deal
4 Case study:
4.1 The failure case in supply chain integration of
Daimler-Chrysler:
Daimler-Benz, a famous automobile maker of Germany,
bought Chrysler Corp., a well-known American car maker
in 1998, with the merger value of USD 36 billion After 9
years of the merger, Daimler sold 80.1% shares in Chrysler
to Cerberus Capital Management with a total value of 7.4
billion dollars In fact, Daimler-Benz paid the price for this
unit is about 26 billion dollars
Dave Healy, an analyst with Burnham Securities company,
explained for the failure of the deal that the two companies
merged without any production synergy Initially, the plan
is that Chrysler used components and even the car styles of
Daimler in order to significantly cut costs and increase
competitiveness However, The problem is that the two
cars series are completely different in terms of image and
positioning, thus it is difficult to use the components of
each other
In addition, the use of same distribution channels is not
feasible because of the image issues (Daimler-Benz
products in the premium segment of the market while the
products of Chrysler are positioned in the lower segment)
Problems also arise in the division of manufacturing
high-end components of Mercedes-Benz where supplied
spare parts for Chrysler, but did not provide adequately All
components that Chrysler received were just some steering
components, shock absorbers, actuators, diesel engines and
a number of packages While Daimler wanted Chrysler to
totally dominate the market share in the U.S car market
Due to the fierce competition of Asian car companies,
Chrysler had not acquired expected results
Trang 5The reason for failure is clearly due to the assessment of
Daimler-Benz to its partner prior to M&A deal and its
ineffective integration strategy of supply chain as Daimler
tried to bring its luxury components to manufacture cars at
Chrysler a long with the strategy to expand market share
This integration strategy is wrong when Chrysler faced
with fierce competition on the price of the car companies
coming from Asia As a result, with such a supply chain
system, after five years of integration, Daimler-Chrysler
could not cut their business costs and occupy more market
share The merged company even had got great loss Total
shareholder value at the time of merge is USD 47 billion,
but after five years, the value was only USD 38 billion The
Daimler's largest shareholder, Deutsche Bank, had lost
USD 15 billion and publicly desired to withdrawn its
capital
4.2 The failure case in supply chain integration of
Newell-Rubbermaid:
Newell bought Rubbermaid in 1999 The deal was initially
seen as a promising deal when Rubbermaid was highly
profitable and fast growing At that time, Rubbermaid was
a blue-chip company with long history of innovation and
smart brands Newell is a reputable company in M&A
activities Over the last three decades, the company had
been very active in increasing shareholders‟ value through
merger and acquisition deals Due to both companies sell
household products and have same merchandise
distribution channels, Newell should have expected to get
benefits from cost savings through supply chain
integration At the same time, Newell also expected to get
profit of Rubbermaid from branded products with lower
production costs while reinforcing weak parts in its supply
chain network The deal was quickly finished at the record
price of U.S $ 5.8 billion, a deal was 10 times higher than
any previous deal did
However, the deal which seemed to be perfect eventually
went to fail After two years of integration, Newell
shareholders lost more than 50% of their value, while
Rubbermaid shareholders lost 35% of the value
One of the underlying causes leading to the failure of the
deal lies in the supply chain strategy which did not fit with
business and competition strategies of both sides The two
companies had different competitive strategic foundations
While Rubbermaid competed by innovation and brand
building, Newell competition strategy focused on low
production cost Production processes and costs of the two
sides were also different In addition, Rubbermaid's
business strategy was not effective at expected market of
Newell
Another cause in the process of supply chain integration is
excessive integration Newell brought a non-scientific
approach to integrate the complex production processes of
Trang 6Rubbermaid into the processes itself The initial
assumption of Newell - expanding the business through
branded products - should best be done by selectively
integration But conversely, Newell tried to change
Rubbermaid into Newell in order to reach the goal Newell
expected to save cost of USD 300 million and increased
revenue by USD 50 million in the first 2 years after the deal
ended However, Rubbermaid did not achieve the expected
sales levels, only USD 230 million was saved on
production cost, all this money was finally spent due to
resin prices increase Resin is the raw material and the most
important input of Rubbermaid
5 The importance and complexity of supply chain
integration:
Supply chain networks play an important role in the
operation of the business When an enterprise manages its
supply chain efficiently, it will have added values by
managing costs and meeting customer needs Many
researchers have shown that a proportional relationship
between the efficiency of the supply chain management
and financial performance (Dinesh, 2005) In addition,
effective supply chain management also positively impacts
to the competitiveness of enterprises A survey in 2009 of
Soo.W.K had shown that for Korean businesses,
integrating the supply chain effectively can play an
important, direct role to the competitiveness of the supply
chain more sustainable, while for Japanese firms, the close
relationship between supply chain management and the
competitiveness capability of enterprises will have
significant impact on the competitiveness of the supply
chain (Narasimhan and Kim, 2002, 2009) Therefore, there
should be consistency between supply chain integration
strategy and competitive strategy of the business
In fact, there have been many M&As achieving cost
reduction due to the effective integration of supply chain
networks According to IBM internal studies, the most
successful businesses which achieve cost savings can
mention the deals between: Ben-Q and Siemens, HP and
Compaq, or Cadbury Schweppes and Adam In these
transactions, approximately 30-40% contribution to
reducing costs was effective supply chain integration
(Dinesh, 2005)
The process of supply chain integration is not simple and
merely a synthesize or graft a list of suppliers of the
business buyer and seller There were many deals which
were believed that they would be very potential to cut
costs, increase profits before M&A deals, but they ended
up to fail One of the causes is the wrong strategy in the
integrating supply chain network The two failure cases
between: Daimler-Chrysler (The Automotive Lyceum,
2007; Nussbaum, 2007; Casestudyinc.com, 2010) and
Newell-Rubbermaid (Bain & Company) have
Trang 7demonstrated this
6 Discussion and conclusion:
In order to achieve synergy value for shareholders,
corporate strategy and supply chain integration process
needs to be carefully considered before and after the
M&A deals Supply chain integration strategies need to
be considered from the stage of due diligence and
should be flexible in implementation due to its
dependence on not only business characteristics of the
company, competitive environment, the development
level of technology, but also product and features of the
market
Although supply chain integration is an important issue,
most companies, in fact, solve it from the angle of their
experience, sometimes response passively There is a
shortage of a systematic process and strategic options
for businesses in supply chain integration For the
current researches, the results only stop at the point of
view of the determinants of supply chain integration
(Saraan and Srai, 2010; Langabeer and Seifeit, 2003;
Byrne, 2007; Dinesh, 2005; Herd et al , 2005)
However, the strategy options and detailed processes as
well as guides for implementation are not yet under
investigation It can be seen that supply chain
integration plays an important role in M&A deals It
may determine the success or failure of the deal
Finding the best flexible strategy options which are
consistent with the general market and businesses in
particular is essential tasks that businesses as well as
researchers and scholars need to concentrate on
researching
Reference:
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AVM (2011), Annual report on M&A market in Vietnam 2010 and prospect 2011
FPT Securities (2010), „M&A market in Vietnam: the force of a jolt‟
PriceWaterHouse Coopers (2009), M&A in Vietnam
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Bain & Company “Newell and Rubbermaid Corporation: The
Critical Decisions That Make or Break the Deal”, Mastering the merger
Birkingshaw, J., Bresman, H and Hakanson, L (2000)
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foster value creation” Journal of Management Studies, Vol
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Trang 8Kim, S.W (2009) “An investigation on the direct and indirect
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