The merger of BMW and Rover Essay Example

to keep the competitive advantage. The high start up costs in the automobile industry, make it very hard for new entrants to enter the market. If a new entrant were to compete with BMW they would have especially high start up costs due to the expensive nature of the products that BMW produce.

These strengths helped to hold BMW in a good market position, but there were aspects of the market which were threatening to take away their market share and their competitive advantage.

At the time of the takeover there was a global economic slowdown. The economic slowdown had an affect on consumer spending patterns and so fewer automobiles were being purchased throughout the globe. Consumers were tending to buy smaller cheaper cars which caused growth in the market for mass production which BMW was not a part of. Rivals Mercedes were planning to expand their product range to gain more market share with an off road sports car ready for 1997. Other manufacturers had already broken into this new market and were seeking the benefits leaving BMW behind.

Porters five force model along with a SWOT analysis could be used to explore the environment in which BMW operates in for strategic situation and strategic choice analysis. They would yield these results.

BMW needed to develop a new cheaper car to follow the trend of consumer choice changes and break into new markets. It was not long ago that BMW seemed to be suffering an identity crisis over whether to remain a luxury car manufacturer or to drive down the road to mass market.

To compete with Mercedes and other manufacturers they would have to develop a new sporty

off road car. They wanted to become a mass marketer, not just for more product ranges, but also to achieve economies of scale. However, this would no be a cheap job, high development costs and risk were involved in this expansion so BMW chose to opt out.

From a shareholder wealth maximisation perspective It became clear that an idea may be to merge with an existing firm already in the automobile industry so they could 'share' their strengths and create synergies to increase share value. From a managerial perspective it meant the company could grow by entering growing markets and diversify risk. Rover, a struggling British company was put up for sale by British Aerospace because of their need to concentrate more on "core" defence and aerospace business.4 At first it seemed like it was a match made in heaven. It seemed that by merging with Rover all of the firm's weaknesses and threats could be overcome. It was a perfect opportunity. BMW and Rover were certainly two of the healthier players in a European market suffering its worst contraction since World War Two.

From a managerial perspective, the cost of acquiring compared to the gains it would achieve seemed to be an offer to good to miss. The cost of acquiring Rover was £800 million which is less than it would cost to develop a new automobile. Merging with Rover seemed like the perfect strategy to extend their current product market. The German company wanted a quick entry into the booming market for off-road sporty vehicles. It also wanted to move into small, front-wheel- drive cars, where much expansion was also forecast. The Rover Group's Land

Rover range, and Mini and Metro saloons, looked like the perfect fit.

BMW acquired Range Rovers and the new model, the Discovery, which made its debut in April at prices below $30,000 in their new U.S. market. The hope was to grab sales from the segment's volume-leaders Ford Motor Co.'s Explorer and Cryslers Corp.'s Grand Cherokee, and beat rivals Mercedes Benz to the market for their new production in 1997. BMW hoped to receive instant brand recognition from Land Rover in the U.S. market and distribution network that had its best ever year in 1993.

The firm achieved two distinct price ranges within the company, from roughly £5,000 to £15,000 for Rover and £15,000 plus for BMW. BMW chairman Bernd Pischetsrieder revealed that the brands "supplement each other in almost an ideal manner".

BMW hoped to enter new markets such as Latin America, Indonesia, India, China, and the Philippines. Mr Pischetsrieder, the head of BMW claims "these are the markets you can't seriously enter with a BMW-badged car". The smaller more affordable cars under the Rover umbrella are the likely candidates for new plants in these markets.

With the takeover, BMW increased its market share in the European passenger car market to 6.6 per cent based in 1993 registrations. The acquisition mainly affects the large passenger-car market. In some parts of the market, including the U.K. and Germany, BMW's share of the large-car segment should of exceeded 25 percent.10 It doubled in size over night to become Europe's seventh biggest auto-maker with sales of one million cars and trucks per year.11 They had increased the shareholder wealth than if the companies were to stay separate.

Rover and BMW could gain

competitive advantage by cutting purchasing and production costs by sharing activities and spreading costs over larger sales volumes to achieve economies of scale. Together, BMW predicted the two companies could sell more than one million vehicles a year.12 This would allow them to withstand the giants and emerging super groups - Daimler-Benz and Chrysler are in alliance, so are General Motors and Fiat, and Renault has a big stake in Nissan.

Shareholder wealth was maximised as the joint companies together were worth more than the two companies separate added together.

By merging with a British company, BMW gained access to cheaper labour and acquired a 20 per cent stake in Honda's British manufacturing arm.

This helped reduce costs even further with the manufacturing plant in Longbridge Birmingham employing 14,000 workers.

Honda supplies most of the engines, transmissions and designs for Rover's vehicles, and holds valuable licenses to these components.

Honda, the Japanese car manufacturer, makes some of the best engines in the world. The acquisition would give BMW access to this technology which is costly and timely to engineer.

So did the merger create a competitive advantage for BMW? At the time, yes. By BMW merging with Rover, they acquired two new products in a growing market ahead of their competitors Mercedes and entered the US market. With the Rover badge they could enter new markets where BMW would not. They reduced their production costs by using cheaper labour in Britain and achieved economies of scale by larger production quantities.

They needed to realise the synergies they have gained and take them into the future, as competitive advantage is only temporary. They needed to make effort to understand each others firms to

fully integrate and gain the best possible outcome.

Either assess the outcome in terms of subsequent events, or comment critically upon what you perceive to be the main difficulties ahead in realizing the intentions of the deal. (40 marks) 1000 words

The merger of BMW and Rover took place in early 1994. It appeared to be a match a match made in heaven. This was no the case, it was more like a match made in hell. Fours years went by of decreased sales and major losses on BMWs behalf. They had failed to integrate successfully.

Shortly after the deal was announced, Standard ; Poor's put the A-1 ratings for commercial paper sold by BMW and BMW US Capital Corp. on Credit Watch with negative implications. At the same time, S&P put British Aerospace's single-A-minus senior debt rating and its A-2 commercial paper rating on Credit Watch with positive implications.

This was perhaps the first signs that the deal could have been a wrong decision.

Firstly, BMW expected Honda to keep its share holdings in Rover. Honda had other ideas. The Japanese auto maker said it would unwind its stake in Rover and "review" agreements to provide the British auto maker with crucial vehicle designs, engine technology and manufacturing know-how just weeks after the deal. Honda wanted to go alone in Britain and stated "In the future, we intend to create a more independent operation in Europe, using our own resources," Honda President Nobuhiko Kawamoto said.

This may not have been because of the deal, but because of Hondas own performance stalling the US for the Honda Accord and in Japan because the economic slump.

After 2 months of talk, Honda decided

to continue the production of some Rovers for the remaining lifespan of the products.

Within four years, BMW started to make losses of up to 3 million dollars per day. From January 1998 to 1999, Rovers sales halved and in 1999 they lost 780 million pounds.19 It became apparent Rover could not be saved. The world car industry was experiencing chronic overproduction. The Guardian stated there was a "25% overcapacity" (March 18).

Competition from France, Italy, Germany and Japan were slowly taking over the British market and transnationals such as Ford and Vauxhall achieved higher levels of efficiency.

On February 5th 1999, Chairman Bernd Pischetsrieder, the cool and confident commandant who put the acquisition together, was forced to fall on his sword.21 He left because of the disagreements about what to do with the loss making Longbridge plant.

Job losses were predicted which meant that BMW might of shifted the production of Rover to Hungry where they were offered a free site and cheaper production costs. The UK government stepped in to try to get BMW to keep the plant at Longbridge for fears of job losses. In April 1999, the UK government agreed to pay 150 million pounds in subsidies to BMW to continue production at Longbridge.

Even if the production was steady for BMW, a fiercely competitive world market stood in the way. The high value of the pound reduced its sales overseas and within Britain. "If the pound entered the euro today at DM2.50 that would save us far more than we are asking the UK government for," a company source said.

Due to currency developments alone the BMW Group was losing more than GBP 1 million with

Rover every day, a loss clearly not acceptable and economically viable any more.

Venture capitalists Alchemy Partners were willing to take Rover off BMW. They would make cuts by at least 6,000 jobs at Longbridge, further exceeding to 80,000 over the course of the cut backs. A human disaster on a scale not witnessed in Britain since the decimation of the coal industry by Thatcher's government.

The Alchemy Partners planned to turn Rover into a niche producer of the MG sports cars.

In May 2000, the deal between Rover and the Alchemy Partners collapsed. BMW did no offer the Alchemy Partners enough to take away Rover. The employment cuts would cost them more money than they were being offered. Phoenix Consortium took Rover for a mere £10 and Ford bought Land Rover.

In October 2000, the last mini was made on the production line. BMW took mini with it, the only successful component left switching its production to Oxford. BMW continued back with the markets it begun with.

After the selling of Rover, MG Rover lost 254 million pounds in 2001 and 77 million pound losses in 2003. This was less loss than BMW in 1999, but showed no signs of the profits which were hoped to be achieved within the 2 years.

So what were the problems internally which continued to make losses for BMW by buying Rover. Many years of underinvestment by Rover before BMW took them over were blamed for debacle. BMWs assessment of Rover was far too optimistic. Although the company was in profit at the time of the merger, they failed to realise the fact that Rover could take a turn for the worse. The 800

million pound price tag looked cheap and was cheap for a reason. They needed to invest a further 2 billion pounds which they did, but in the wrong places, they should have invested in the products not the factories.

The difference in management style between Germany and Britain was a significant factor for the failure of the merger. There was insufficient culture management. The problem could be found on both sides. A suspicious British management which found it easier to accept Japanese management practices than German management practices and a German management that found it difficult to understand British management culture and failed to turn it to their advantage.

German managers did receive intensive intercultural training, but needed day to day training for a longer period of time by experts who have managed both cultures in top management for years.

Goal setting proved to be a cultural problem. Rover would set goals high, if they reached 80 per cent, this would be ok, at BMW this would not. The goals at BMW must be clearly defined and the expectation is to reach the goals.

BMW found it difficult to reposition the English automaker alongside its own products and the Rover division was faced with endless changes in its marketing strategy.

One of the initial strategies was to increase their product market. But the first combined product, the Rover 75, was directly competitive with BMWs mid-range models. The other Rover cars were too old and uncompetitive to broaden anything: and the task of replacing them has been left far too late.

On the flip side, Rover's problems certainly wouldn't have been solved without BMW. The company simply didn't have the resources, whether

in time, money, or engineering know-how.

Doing the deal was the easy part, it was making it work which proved to be difficult. BMW failed to integrate and take full executive control over Rover within the first four years. They failed to align their strategies with the cheaper cars and align each others cultural management style as a result of poor corporate communications. There have been outside unstoppable factors such as the strong pound and the over capacity of the automobile market, but this is something careful planning would of predicted and avoided.