Mergers and acquisitions are strategic tools that are employed by many businesses in order to improve their position in the market. The process is sometime friendly where both the acquiring and the targeted firm agree peacefully the terms and conditions of take over, while in other cases the process is hostile where the two firms do not easily agree on the terms of take over. This study will look an example of hostile take over where two corporations (the Granada plc and the Fort plc) had difficult time to agree on the terms of the take over.
CIRCUMSTANCES THAT LED TO HOSTILE TAKE OVER
The take over of Forte PLC by the Granada was launched in November 22, 1995. Granada which is a conglomerate of leisure and television launched one of the most expensive take over in UK which totaled about 3.3 billion pounds. The aim of this expensive takeover was to transform and strengthen the position of the Granada in the market. After the acquisition the Granada was intending sell some of the famous hotels that were owned there before by Forte. Disposal of these famous hotels would end the family ownership in Forte.
Forte PLC has operated as a family owned business since 1934 when it was started by Lord Forte. After developing the company for many years, Lord Fort left it under the leadership of his son Rocco who assumed the position of CEO after 1982. In 1992, Lord Fort stepped aside as the president of the company and Rocco became the chairman and the CEO of the company. Though many people expected sir Rocco to run the company using autocratic approach that was used by his father, he separated his rule with his fathers’ rule when he assumed the full position of power in the company. Sir Rocco transformed the company from family business to a full multinational corporation. This transformation was achieved using several strategies in order to improve the management of the company. For instance, when he assumed position of power, he started by replacing all the directors who were friend to his father and replaced them with younger generation of men who had good track records when it comes to commerce and business. He also changed most of the senior managers of the corporation where he replaced about 70 percent of the senior managers. He also restructured the company and disposed all peripheral businesses such as Gardner merchants and Harvester to Bass PLC. Prior to takeover, the Rocco had fully transformed Fort in many ways which could be demonstrated by increased profit, sales, dividends and turnover. The corporation had also been transformed into a global corporation with increased brand, assets and strong position in the hotel market.
THE GRANADA GROUP
The Granada group has grown out of acquisition and mergers in the past few years. The group operates in three lines of operations which include television, computer and rental services, leisure and other services. The computer and rental services division enjoy about 46 percent of the UK market and contribute about 37 percent of the total profit of the Granada group profit. The television division enjoys the second largest share of the UK television market. The division work together with other television companies such as Weekend television of London to supply ITV network programmes. The services and leisure division forms one of the largest provider of motorway services with a market share of about 35 percent of the UK motorway service.
The group is governed by several committees which include the board of directors, the remuneration, audit, nomination, finance and administration committees. These committees carry out different responsibities to ensure effective management of the company. The Granada has gone through several phases in its development before the hostile takeover. The phase between 1990s and 1991 was characterized by financial instability and the future of the group seemed to be uncertain as the asset values and consumer demand continued to fall. From 1991, the Granada management restructured the business as a way of strengthening its financial position. Some of their peripheral businesses such as Bingo were sold together with residential business in Canada which was making loss. The group also used right issues to strengthen its financial position which was unstable for almost one decade. The third phase stated with change in the group management where Gerry Robinson was appointed as the CEO in 1991 November. His new management team improved the performance of the group as a result of improved day to day operations as well as the strategic plans of the company. For instance, in 1993, the company recorded a profit of more than 100 percent and cash flow of about 127 million pounds. The last phase was characterized by great pressure for the management team to report more profit. They were required by the shareholders to use the generated cash to promote and maintain growth in the group. One of the strategies for relieving this building pressure was to look for acquisitions in order to ensure that the excess capital that company had generated was not misused. This led to the hostile take over in 1995.
As Park and Jang (2011, pp.141-149) argues, mergers and acquisition is an effective tool in organisation strategies since it help it to attain its ideal size. Prior to the hostile acquisition, the two companies were in a stable position where both companies were enjoying profit increase for continuous period. Though Granada had faced some financial instability there before, its performance had improved with the appointment of new management. The company reported a profit of 32 per cent increase in the financial year that was ending in September 1994. This means that even before take over, Granada was financial stable and the new takeover could help it to improve its position in the market. Fort plc also had a period of increased profit since Sir Rocco took over the management of the company in 1992. Prior to take over, the company had predicted a profit increase of about 28 percent in 1995. This means the company was financially stable and it could not accept a lower offer from Granada for the planned takeover. Again, the take over should increase the profitability of the new company more than the performance of any single company. Coming together of the two companies would combine the synergy of the two companies in order to improve their position in the market. According to Ullah et al (2010, pp.13-19), mergers and acquisition is one of the strategic tools that can be used by firms to expand their operations or avoid rules or laws such as taxation.
One of the reasons why firms use mergers or takeover tools is to enable them to increase their long-term profitability as they continue to expand their operations. Manson et al (2000, pp. 319-344) argues that one benefit that comes along with take over is increased share price of the company. Both the target and the bidding companies bring their synergies together in order to strengthen their position in the market. These occurs as the two firms bring their resources together which may be inform of capital, human resource, market share, good reputation among other different capabilities. The combined force of the two firms enables the new firm to be more cost effective which helps to increase the financial performance of the new company. There is high cost savings which increases the revenue of the new firm. Both the fort and the Granada had great growth strategies which they had been carrying out before the hostile takeover. The Granada has been carrying out different strategies in order to improve its financial position such as offering right issues and selling all the businesses that were making loss. The group attained financial stability and before the merger it was on upward trend in profit. The group had generated excess capital which could be used to takeover the fort plc. Thus successful takeover of fort will help the Granada to use its excess capital well in order to improve its operation. Fort plc had also been carrying out its growth strategies well before the hostile takeover. This was facilitated by the new management since sir Rocco took over the leadership of the company.
According to Teare et al (1997, p.2) when sir Rocco took over the leadership of the company in 1992, he changed most of the strategies of the fort plc in order to expand its operations. First he focused both financial and management resources of the company on the activities of the core restaurant and hotel. Secondly, he reorganized the company to make it more focused and sharper with short communication lines, low cost base and customer orientation that is strong. Thirdly, the management team was strengthened through recruitment of new directors who brought in new skills and international experience. Fourthly, he strengthened the financial position of the company by reducing the debts of the company by selling all the businesses that were making loss. There was also increased investment in the already existing assets and many new projects such as restaurant and hotel refurbishment were undertaken which increased capital spending to about 175 million pounds per year. The new management also focused on increasing their sales as well as their marketing efforts with more emphasis on quality services and reduced costs. Finally, the new management introduced new incentive plan which was long term to the managers in order to motivate them.
The decision of the Granada to takeover the fort plc, could therefore be resisted by sir Rocco and his management team given the above strategic growth plan which were very successful. The fort plc was now fully operating as Multinational Corporation which meant that its merger with Granada will change its whole course of operation. The company used to specialise on hotel and restaurant services while Granada used to specialize on television, computer maintenance, rental and leisure services. The combination of these services in the Granada will mean many changes in the strategic growth plan. These may require the Granada to drop some of its services or change the way they are offered in order to have a sharper and clear focus on its operations.
The corporate governance of the two companies was also different before the hostile takeover. The Granada comprises of three companies in one company which offer different services. This group is governed by several committees headed by the board of directors with other committees such as the finance committee, audit committee, nomination committee, administration committee, remuneration committee and pension scheme committee. All these committees work together for the smooth running the Granada group. On the other hand, the fort plc is a single company that is headed by the president together with CEO and the chairman of the board. The company has both executive and non executive directors who make the major decisions of the company. The takeover by the Granada group will therefore make the corporate governance of the new group to be more complex since it will have four companies in one corporation. More committees would be required in order to manage all the operations of the Granada group. The size of the board of directors would also be increased in order manage the Granada group more effectively.
The two companies also used different competitive strategies in the market which had given them a great share of their respective market. The Granada group was using product mix as its strategic tool for marketing. The Granada was comprised of three different companies that offered variety of services in different industries which enabled it to maximize its profit. For instance, the group offered computer maintenance services, television services, leisure and other services. These different services contribute varying proportion of profit to the total profit of the group. On the other hand the fort plc specializes on a few services mainly hotel and restaurant services both in UK and other parts of the world. The company use quality and standard service as its competitive advantage in the market. The new management under the leadership of sir Rocco invested heavily on improving the quality of the services they offer which has given the company a big market share both domestically and internationally. Thus coming together of the two corporations would mean increased market share given the competitive advantage possessed by the two companies separately. The takeover would mean that the two companies would combine their strength and capabilities in order to increase their market position. The Granada will use quality and standard services that were offered by the fort plc together with its product mix strength in order to gain more market share. This will increase the sales of the new corporation and hence its profitability.
The two companies also used different financial strategies. The Granada offered right issues and also sold some of its businesses in order to strengthen its financial position. This enabled it to raise enough capital which could be used in the takeover of the fort plc. On the other hand the fort plc used its increased sales and profit from its international operations to strengthen its financial position. Thus the coming together of the two companies will enable the combine their financial strength in order to expand their operation hence increasing their profit. These would enable the Granada to undertake huge capital projects which will facilitate expansion of their services.
THE OPERATIONS AFTER THE HOSTILE TAKEOVER
The Granada offered a bid of 3.2 billions pounds to fort plc in November 1995. This bid was offered just after the Granada reported a pre-tax profit of 32% in the financial year ended in September 1995. Though the bid price that was offered by the Granada was seen to be high given that the group was struggling financially a few years ago, the management of plc rejected the offer. The reason given by the fort management was that the company had restructured its management a few years before and it was looking at how to consolidate its business. According to Fort/ Granada bid tactics (1996), the main issue was about its control. The CEO of the Granada in his report during the 1995 AGM said that the acquisition of fort plc would be a big addition to the Granada group. He argued that the takeover would bring the synergy of the two companies together thus increasing their market share. Acquiring fort plc would bring the restaurant business in the Granada thus enabling the corporation to introduce the new hotel brands in the coming years. These would increase the sales of the new company hence its financial position. However, he commented that it may not be possible for the Granada to retain some of the Fort plc business which could not raise the returns of the shareholders. The shareholders were in the support of the new takeover despite the conflicts between the management of the two companies. Shareholders believed that directors were acting on their interest though it is hard for shareholders to trust them during the hostile takeover (Jocelyn, 2009, pp.6-24).
The forte management finally accepted the bid after it was increased to 3.8 billions pounds. Thus the main challenge that was a head of the Granada was how to run the big corporation after the takeover. The two companies were different in their management styles, financial strength and strategic plans and in many other ways.
As Han and Brian (2003, pp.447-454) argues, the rate of failure in mergers and acquisition is usually high. The major problem lies in the integration process where issues like management and strategy differences, different vision, cultural differences and delayed communication affects the running of the new organisation. Therefore after the hostile takeover, the Granada new leadership had to face these challenges. Though the Granada corp. took sometime before fully integrating the fort plc, it managed to do so a process which fully transformed the Granada corp. The merger changed the operations of the corporation as it managed to expand its operations in all parts of the world. Today, the Granada corp. is one of the leading corporations in the world in media and hospitality market. The corporation managed to harmonies its management after the takeover to make it more focused and visionary in its operations. This has enabled the management to make strategic plans such as expansion of the Granada corp. in many parts of the globe. For instance, the corporation was able to build a 22,000 sq. ft building in Preston wood Boulevard which cost about $ 1.5 million (Sayewitz, 1998, p.1).
The takeover has also helped to increase the value of the Granada corp. as the quality services that were employed by the fort get utilized in the services of the corporation. This is in accordance with the argument of Helene and Randi (2011, p.839) that acquisition brings value creation in an organisation. When comparing pre-merger and post merger, using operation performance analysis (Raj, 2009, pp.145-157), the values of costs, revenue and profit have improved showing that the takeover has been successful.
Though the hostile take over between the Granada and the Fort finally worked, there were several challenges which had to be overcome. The management of the two companies had to work hard in order to convince the shareholders of the Fort Plc who were major determinants of the bid acceptance. The process of integrating the two companies was a challenge though it finally succeeded. Thus there are several lessons that can be learnt from this case study which include the following;
- The company should seek the permission of the stakeholders before deciding to make a merger and acquisitions. This will eliminate hostility of the shareholders.
- The biding company and the target company should agree all the terms of acquisitions before the actual merger and acquisition in order to ensure understanding between the two companies.
- Both firms should also have a plan of how the two will work together after acquisition. This will minimize chances of failure after the two companies come together.
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