Introduction
In the modern business world, mergers are the moats popular method of a strategic partnership which helps to remain competitive and innovate. Two companies selected for a merger are Nokia and Canon. It is supposed that mergers between these giant manufacturers will benefit both of them and allows them to compete on a global scale and sustain a strong brand image. No other industry segment is more volatile and turbulent than the industry (Angwin, 2007). Emphasis must be placed on selecting appropriate business sectors and ensuring that they are viable market segments for the firm to pursue. Historical trends, current expertise, and interest are all key elements in selecting an appropriate business sector. It is not enough to simply enter a new market because it is popular or has been in the news lately. Market studies must be made, the business sector defined, and the firm’s role within that sector established before any attempts are made to enter it.
Because the field is characterized by rapid change and innovation, the firm that does not keep pace with this change is destined to fail. With short product lifecycles, difficulties in protecting products from pirating, and long development periods, the market is a difficult market to penetrate and become a leader in. Both Nokia and Canon are market leaders in their industries thus influenced by fierce competition and economic changes in global markets. Nokia is a multinational communication corporation established in 1965 in Finland. In 2007, its revenue was €51.058 million and operating income was €7.985 million (Nokia Home Page 2008). Similar to Nokia, Canon is a Japanese multinational corporation founded in 1937. Its revenue was 4,156,759 million yens in 2006. Canon employs 127,338 people while Nokia employs 112,262 people worldwide (Canon home Page 2008). These companies were selected for a merger because both of them have similar size and revenue, and can be equal partners in business. Both of them rely on innovative technologies and solutions, change processes, and effective performance.
Description Part
A merger can be considered to be a mutual agreement of sorts between two firms to join together to become one company. For instance, one merging firm does not take on huge amounts of debt either to fend off or to purchase the other. Mergers are seldom hostile in nature. Therefore, negative factors inherent in hostile takeovers are absent (Angwin, 2007). The possibility of massive sell-offs is usually not an issue. In addition, the organization’s employees are more inclined to accept and support the merger than oppose it. There are other factors common to the merger, acquisition, and alliance activities that must be considered, such as power struggles between the firms, a clash of corporate cultures, organizational and reorganizational issues, the effects of a new corporate direction, and entry into new or unfamiliar markets (Gaughan, 2007). A merger, therefore, like any other business activity, is not without its risks. Moreover, these risks can be managed and minimized. When studying merger activity, several common strategies tend to surface that characterize successful mergers (Agrawal and Jaffe 2000).
Vocabulary
Merger: “the union of two or more organizations under single ownership, through the direct acquisition by one organization of the net assets or liabilities of the other. A merger can be the result of a friendly takeover, which results in the combining of companies on an equal footing. After a merger, the legal existence of the acquired organization is terminated” (Mueller 1987, p. 54).
Integration – means a style of control and ownership used by companies (Mueller 1987, p. 21).
Acquiring – “To gain, usually by one’s own exertions; to get as one’s own; as, to acquire a title, riches, knowledge, skill, good or bad habits. “No virtue is acquired in an instant, but step by step” (Mueller 1987, p. 14).
Business Partners – “are independent companies which make a deal based on mutual agreement and support” (Mueller 1987, p. 18).
In other situations, the word merger was used to mean the union of two companies of substantially equal size while the word acquisition described the combination of a large company with a much smaller one. This confusion of terms arises in part from tax and legal technicalities governing the form of joining two enterprises (Angwin, 2007). When Corporation A acquires the stock or assets of another company, legal, tax, and financial factors determine whether the form of bringing together the two enterprises is a merger, a consolidation, a purchase of assets, a purchase of stock, or an exchange of stock. Although the form selected to unite two entities is extremely important to both parties of the transaction, companies are not primarily concerned here with tax, legal, and accounting considerations that are involved in a decision as to the form of a combination (Mueller 1987).
Companies are concerned with the management problems involved in the process by which companies acquire stock or assets of other enterprises. In this report, the word acquisition is used to describe this process — bringing additional economic activities or assets under a company’s control, whatever legal form is used to achieve the result. It was noted that when management representatives of an acquiring company talked with executives of a potential acquisition, the conversation was always in terms of “merger” although it was implicit and apparent that Company A proposed to “acquire” Company B. In these situations the negotiating executive of the acquiring company would discuss “merger” with the management of the company to be acquired, when he discussed the opportunity with his board of directors, he referred invariably to the possibility of “acquisition.” There seemed to be an inoffensive quality in the word “merge” not found in the word “acquire” (Mueller 1987).
Description of Merger
Type: This will be a Product-Extension Merger. “This merger is between two companies that sell different, but somewhat related products, in a common market. This allows the new, larger company to pool their products and sell them with greater success to the already common market that the two separate companies shared” (Mergers n.d.).
Background –In the case of both companies, the top management believes that there are business reasons for selling to others. It is important for acquiring managements to determine the real reasons why Nokia can be acquired a common element of intercompany negotiations is the practice of sellers dressing up or otherwise disguise the true nature of their motivations for considering divestment (Gaughan, 2007). Some owners, for instance, recognizing that rapid technological changes are about to make their product lines obsolete, will offer such reasons. These and many other reasons may be preferred as explanations for giving up control of a company that is on the threshold of new and higher earnings rates (Angwin, 2007).
Consequences – The long-term viability of the firm must be kept in mind when strategies are determined. The viability of the acquisition from a long-term perspective must be assessed. A logical progression in tools of management also reflects concern for the global implications of today’s actions. Firms must be in a position in which they can anticipate change and react to market developments (Agrawal and Jaffe 2000).
Implications – A successful strategy is one such way that allows a firm to become a responsive, limber player capable of anticipating and responding to the changing global markets by capitalizing on corporate strengths and synergies brought by the acquired firm. This is one manner in which to choose the most appropriate road to competitive advantage. A global, long-term perspective on the place a corporation occupies in the world is the first necessary step to develop a successful acquisition strategy (Angwin, 2007).
The Specifics of the Merger
When a major reorganization occurs within a company, the benefits of the reorganization are not always immediately apparent. Employees have shuffled around, out of one department and into another, taking on new or additional tasks. Management roles might change (Agrawal and Jaffe 2000). However, out of this apparent chaos might emerge a stronger, more viable corporate structure. But one factor that undermines this type of activity is that people are basically resistant to change. People become comfortable with the status quo and organize their lives around perceived constants. When these constants that stabilize one’s life are disrupted, one tends to resist them, even if the future benefits will outweigh the current inconvenience (Canon home Page 2008).
Financial commitment is necessary as well. Profits may suffer in the short term, while funds are channeled toward relocation, expansion efforts, or facility improvements (Angwin, 2007). Margins may suffer due to temporary increases in production costs brought about by the merger. In fact, it may become necessary to delay product release cycles and recalculate business forecasts to reflect the changes brought about by the merger. A long-term view must be taken by corporate executives and financial management, and a realistic estimate of profits and losses for the short term must be made to promote a smooth transition. Likewise, these estimates and forecasts must be made clear to upper management and transferred into corporate goals for the coming years (Agrawal and Jaffe 2000; Angwin, 2007). If these goals are unrealistic or overly optimistic, there is always the danger of low morale when they are not met. However, this is not to say that financial targets should not be made or that milestones should not be established. The utmost effort must be made to meet planned financial targets. Only a long-term commitment to the merger strategy and a realistic establishment of milestones by upper management can ensure success (Nokia Home Page 2008; Canon home Page 2008).
Equitable distribution of resources is a critical ingredient to a successful merger. The commitment of resources that is to be made by the respective organizations must be made clear from the onset (Gaughan, 2007). The proper mix of resources, whether it is strictly financial or involves a commitment of manpower as well, must be defined from the very beginning. In fact, resource commitment is an integral part of any successful corporate strategy (Angwin, 2007). It is especially important to develop a postmerger resource allocation strategy beforehand to ensure a workable and realistic merger strategy. Thus an overall strategy for resource allocation must be developed in parallel–at the same time that corporate strategies, financial goals, and market strategies are being developed by the respective organizations–for this commitment to ever make sense or to have any merit (Agrawal and Jaffe 2000).
To arrive at a strategy of proper resource allocation, and assessment must first be made as to what resources each organization brings to the merger and to the new corporate direction (Gaughan, 2007). Factors such as the size of the organizations, facilities available, what resources are at their disposal, what long-term commitments are presently in place, assets, liabilities, and cash flow all come into play when assessing resource availability. Once these resources are located, the next step is determining which ones are usable. Not all resources may be needed after the merger. They may not necessarily coincide with the new corporate strategy or there may be duplicates. So some may need to be sold off in an effort to consolidate (Angwin, 2007).
Most mergers fail as a result of internal conflicts. These conflicts, moreover, arise as a result of power struggles from within the organization. With any human endeavor, personalities play a key role in either its success or failure. If a merger has the backing and full support of its employees and management, the chances of success are greatly improved. Although there are fewer obstacles than in the case of a hostile takeover, gaining support and trust is always a difficult endeavor (Gaughan, 2007). Thus, a key ingredient to success is to make certain that authority is evenly distributed within the newly organized company. If this is not the case, then power struggles will result between the management of the two companies, and a true merging will never take place. There consequently will always be an “us-versus-them” attitude prevalent within the organizations. Plans must be in place to utilize the managerial talent available within each organization. It is especially important that the upper management of each organization achieves a very good working relationship with the other from the onset. Since these are the people that are the most visible within each organization and will most probably be looked to for guidance and to gauge the merger’s status, their role within the new firm is crucial (Nokia Home Page 2008; Canon home Page 2008).
Each firm brings unique strengths and assets to the merged organization, and it is the potential synergy that makes a merger strategy so attractive. The key strengths are obvious and are generally the main reason for the merger in the first place. For instance, in the Philip Morris case, Philip Morris was attracted to Kraft by its distribution synergies and proven management strengths. In high-tech mergers, the firms involved are generally attracted to each other because of the technical expertise that each offers the other (Angwin, 2007). There are many other reasons as well, including the influx of financial muscle to the organization, increased distribution channels, the ability to enter new markets, and the establishment of complementary product lines. However diverse the merging companies maybe, an underlying characteristic common with successful mergers is that management focuses on their individual corporate strengths (Gaughan, 2007; Galpin and Herndon, 2007).
One would think that in the absence of a hostile takeover, it would be relatively easy for communication between different divisions to take place. This, however, is not the case. Some employees, for whatever reason, will always view this type of change as a threat, and information will not be volunteered. Their strategy is one of turf protection and not one that furthers the overall corporate objectives (Galpin and Herndon, 2007). If left unchecked, their sentiments might spread like a virus to others within the organization and could completely shut down communication within the organization. Effective communication is thus a necessary ingredient for any organization’s success. Likewise, without the proper flow of information to the key decision-makers, any merger can be doomed to failure. In the first few months after a merger occurs, information and the flow of information are critical. Without them, corporate executives cannot effectively make decisions as to the nature of resource allocations, what to consolidate, and where management talent is needed, or keep abreast of problem areas. If communication channels continue to remain shut, executives will not be able to take steps to rectify these problems because they will not know that they exist (Angwin, 2007; Galpin and Herndon, 2007).
Commitment to a firm’s strategy is an indicator of trust in the firm’s management. Forecasting is an inexact science if it can be considered a science at all (Galpin and Herndon, 2007). Therefore, parallel to the development of a long-term merger strategy is the determination of the level of corporate commitment. Nokia demonstrates a commitment to the long-term success of the merger when initial operational losses in the third and fourth quarters of the fiscal year 2007, due to shipment expectations that could not be met, did not deter Nokia from its long-term growth strategy. Instead of cutting back on expenses, Nokia continues to invest in research and development as well as in sales and marketing budgets to support its anticipated new products. Confident in its strategy, Canon invests in long-term growth rather than pushing for short-term profits (Baldwin 1995). They anticipated the decline in net income for 2006 and were able to view it in the context of their overall strategy. Nokia has shown that it is committed to its long-term growth strategy, in which Canon plays an integral part. True to its word, it is well-positioned to continue to be a major force in the information management marketplace. As it looks to the future, Nokia plans to be a leader in application and development software for information management. By merging with Canon it was able to gain the products and expertise necessary to compete in the workstation product marketplace (Nokia Home Page 2008; Canon home Page 2008).
Consequences of merger for Nokia and Canon
Both firms will stand to benefit from their mutual working relationship. Initial discussions between executives at Nokia and Canon prove to be positive (Baldwin 1995). Each expressed his or her interest and desire to share technology in the development of an integrated product. Innovative had already begun work on a new graphic spreadsheet computer, and Canon would provide the database engine for this product. The crucial issue is that both companies see this to be a long-term relationship (Agrawal and Jaffe 2000). The commonality of their respective goals shows that the resources and technology that each player brings to this merger are crucial to the future success of the two firms. With a common mission, each agrees that a merger between the companies would be the best strategic plan for the two firms, ensuring their continued success and growth (Nokia Home Page 2008).
Under the terms of the agreement, shareholders would receive three-quarters of a share of Nokia’s common stock. In addition, Nokia would adopt certain arrangements comparable to those that are currently in place at Canon, and Nokia assumes Canon’s repayment obligations. The newly combined company would be called CoNNokia, Inc. It would be reorganized into two business groups, reflecting their new focus on two product lines and market areas: the Advanced Products Division and the Workstation Products Division (Baldwin 1995). The Advanced Products Division would be responsible for developing and supporting communication technology. It would continue to support its leadership position in the global marketplace, expand in the online transaction processing marketplace with its Canon-based product, as well as database networking. The Imaging Products Division would focus on developing and marketing office unique imaging and optical products (Andrade and Stafford 1997).
One critical issue that many firms fail to take into consideration is the fact that not only are two firms merging, but two sometimes distinct corporate cultures must merge. Oftentimes, the physical tasks of the merger are easier to implement than the psychological ones. Although the two firms did not physically merge together–product lines were to be kept separate and headquartered at their respective offices, and offices were to remain as they had before the merger–it was still necessary for them to organize into a single corporation (Andrade and Stafford 1997). The two firms needed to adopt a commonality of purpose. After all, the two locations, although separated by distance, were one company under the Nokia name. This was achieved through sharing a common purpose and view of the marketplace even prior to the merger.
One factor affecting the success of the merger was that the new organizational structure was loosely structured around the environments from which it emerged. The Advanced Products Division closely matched Nokia’s pre-merger corporate structure (Baldwin 1995). The Workstation Products Division was essentially conceived around the organizational structure already in place at Canon. Even the locations remained the same. Nokia was able to maintain the division that defined the separate companies, while at the same time capitalizing on the synergies the merger provided. Furthermore, management was already capable of operating in a distributed environment because Nokia will be was accustomed to operating within such a flexible environment (Baldwin 1995). The internal management structure of a corporate portfolio must reflect the new realities of the intensely competitive marketplace. Nowhere is the marketplace more competitive than in the software industry. The firm that establishes links among the business units within the portfolio and maintains flexibility among its management will create a sustainable competitive advantage for itself (Nokia Home Page 2008; Canon home Page 2008).
As has been emphasized, communication is one of the key factors to any strategy’s success. Without proper lines of communication in place, necessary information at critical points in a merger’s infancy will not be conveyed to the appropriate personnel who are capable of taking action and rectifying the problem (Galpin and Herndon, 2007). Unless corporate executives know what is going on, they have no defense, nor are they capable of recognizing and preventing problems before they manifest themselves. Nokia’s decision to keep Canon served to heighten the need for streamlined communications (Baldwin 1995). There are many advantages to leaving merged firms in their original physical locations, such as retaining key individuals, eliminating relocation costs, and keeping disruptions caused by merging to a minimum. However, the barriers that distance creates can possibly become disastrous (Galpin and Herndon, 2007).
Canon and Nokia recognized this problem and implemented strategies and policies that prevented a loss of communication between corporate executives. By alternately requiring Canon executives to travel to another office and Nokia’s management to travel to the Menlo Park headquarters for weekly meetings, Canon will be able to keep abreast of corporatewide issues as they developed and, more importantly, had a vehicle to keep communication lines open (Baldwin 1995). The risk of failure far outweighed the expense of commuting every other week to keep key executives informed. This strategy had an additional benefit since it also enabled executives and management to get to know each other much faster than they otherwise would have. By allowing management centers to become familiar with each other, each seemed less threatening (Nokia Home Page 2008; Andrade and Stafford 1997).
Conclusion
The merger between two market leaders, Nokia and Canon, will benefit both companies and help them to compete with market leaders on a global scale. Mergers can all be effective ways to improve the competitive position of an overall firm. However, any one of these processes must be an integral part of an ongoing corporate strategic plan. In addition, the evaluation process must shift its emphasis away from traditional financial performance criteria toward overall competitive dynamics. In other words, how a target firm will perform in the long term and how well its corporate strategy coincides with the strategy of the acquiring company are more important than the acquired firm’s current financial performance. This is not to say that one must only locate an acquisition or alliance target that is on solid footing. Rather, it is more important to internally evaluate a firm’s internal needs and purpose before embarking on a strategy of acquisition. If the acquisition is the vehicle, it must be a structural component of the acquiring firm’s strategy. An effective merger process flows naturally from a sound strategic planning process.
It must be built from the ground up, with its foundation based on the firm’s underlying mission statement. A firm contemplating a strategy of growth through acquisition must first evaluate its corporate mission statement and determine whether it is still appropriate given current market dynamics, global competition, technological advances, or corporate talent. In fact, competitive analysis or evaluation of the present status of the company as a whole must be made before any steps are taken toward acquisition. Given the input from this evaluation, the mission statement must be modified to reflect current thinking regarding the type of business the firm wishes to be in or perceives itself to be in. The mission statement must reflect the perceived talents and goals a firm has or hopes to have and the markets it wishes to enter. The process must be active at both the corporate and business unit levels to produce the necessary feedback and background, as well as the support of management, to make the mission statement a viable one. Finally, it must also support the possibility of a strategy of growth through acquisition. A factor that contributes to a poor perspective of the business environment is an excessive emphasis on the short term. A clear mission statement with clear goals around which activities can be centered is a way of managing the present with the future in mind.
References
Agrawal, Anup and Jeffrey F. Jaffe (2000) “The Post-Merger Performance Puzzle, ” in Advances in Mergers and Acquisitions, 1, Amsterdam: Elsevier, 7-41.
Andrade, Gregor and Erik Stafford (1997) “Investigating the Characteristics and Determinants of Mergers and Other Forms of Investment, ” mimeo, University of Chicago.
Angwin, D. (2007). Mergers and Acquisitions. Cambridge University Press.
Baldwin, John R. (1995). The Dynamics of Industrial Competition, Cambridge: Cambridge University Press.
Gaughan, P. A. (2007). Mergers, Acquisitions, and Corporate Restructurings. John Wiley & Sons; 4th Edition edition.
Galpin, T.J., Herndon, M. (2007) The Complete Guide to Mergers and Acquisitions: Process Tools to Support M&A Integration at Every Level. Jossey Bass; 2nd Edition edition.
Canon home Page. (2008). Web.
Mergers. n.d. Web.
Mueller, Dennis C. (1987) The Corporation: Growth, Diversification, and Mergers, London: Harwood Academic Publishers.
Nokia Home Page. (2008). Web.