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Questions:

A.Discuss the Synergies / lack of Synergies arising from the Merger. For data before the Merger, use data from 2010 to 2013. To evaluate the effects of the Merger, use data for 2014 and 2015.

B.Test if the Merger Theory [PV (Acquirer) + PV (Target) < PV (Combined Firm)] is supported by this Merger. Use the data periods specified in part a. Note: PV (Firm) refers to Market Capitalization.

C.Evaluate the failure of the Merger from the perspective of Coopers and Lybrand.

 

Answers:

Overview:

A.In this competitive era, the companies have been striving hard to remain competitive with their competitors. This is done with the objective of maximizing the value of share and maximizing the value of the organization as well. In respect to the smartphone companies, Google is the largest supplier of the operating system. On the other hand, apple is a standalone company and the smartphones and the operating system are produced by them only.

Due to the expansion of the global market in the smartphones, it was realized by Microsoft that it would lose in the figure. In regard to this, a new strategy was initiated by the company to break into the market. The merging together with the products of Nokia on the phone assets was announced by the company on 3rd September, 2013. The merging was done with an amount of US $ 7.9 billion. A synergy is created as a result of merging of the companies which signifies that the resources of both the companies are combined for the development of the new product and the enhancement of the existing product. The entity is able to gain market power due to merging and it also leads to the diversification of risk and quick entrance into the new industry. It also leads to the high price earnings ratio, internationalization of transactions and economies of scale  (Marie 2013).

Synergy in more than one organizations:

When the two businesses or individual come together then it leads to the creation of value which exceeds the vale when the entity works or function independently. This is nothing but synergy. It can also be said that the value of the product produced after merger is more than the value of the product which was produced independently. The merger of Nokia and Microsoft leads to the creation of the synergy and the synergy was in the form of the vertical production which would limit the cost of production and economies of scale which would save millions dollars and also leads to the diversification of investment (Honghua and Juan 2014).

 


Economies of scale:

Economies of scale is the first synergy of merging. It was mentioned by the Microsoft that synergy would let them save costs of US $ 600 million. The fixed cost is spread over the large volume of output as per the economies of scale theory. This means that selling the products to the consumers relies on the large volume of output. Before the merger, the Nokia was selling the smartphones at US $ 10 per unit as compared to the selling price of Microsoft which stood at US $ 40 per unit. The cost savings are foreseen by Microsoft due to the adoption of this strategy.

Economies of vertical integration:

Economies of vertical integration is the second synergy. The organization which is acquiring is able to control the raw material output as a result of the international transactions or the vertical integration. As mentioned by Dhar Dhar 2013, the theory coincide with the forward and backward integration. Rather than inventing the smartphones, it would be suitable for the Microsoft to merge with Nokia because development process of smartphones is a long time process and cost are also high. The Microsoft would also lose the market in terms of sales due to high costs. Nokia which produces tablets, smartphones would be merged with the Microsoft to reduce the amount of time to develop the smartphones  (Westfall 2015).

Merging would help the Microsoft in tremendously reducing the time taken for the research and development. Integration with Nokia help the Microsoft in directly developing their operating system and breaking the barrier of the market which they are facing.

Diversification:

Diversification is the third synergy and it is regarded as the dubious reason. This is so because the Microsoft is regarded as the company which is cash rich but when it comes to the stagnant company, the diversification is mainly for the purpose of diversifying their investment. For the individual stockholders, diversification is considered to be easy and cheap as compared to the stockholders. If the shares of the company drives interest of the stockholders, then he or she would purchase the shares form the stock market  (Microsoft News Center 2013).

The Microsoft would be overtaken by the companies such as Apple ios and Google Android and Microsoft would face tough competition from this. As a result of this, the company is looking forward to the diversification in the market of smartphones and remain competitive in relation to its rivals. Microsoft would be able to catch up with its rival if the resources between the Nokia and Microsoft are fully utilized and the strategy is properly implemented.

 


2012-2013 Sales revenue:

The sales revenue of the Microsoft in the year 2012-2013 witnessed a steady growth rate annually but there is a yearly decline in the sales revenue of Nokia and the contribution of Nokia towards the sales revenue is reflected by the figure. Nokia has been producing the phones since 1984, which was the beginning of the era of the phones. The reason why Nokia did not make into the market of the smartphone was given by the conference paper which was conducted by the Bouwman and his team, who made the analysis that the primary reason attributable to this was that in the technological system, Nokia did not strongly position themselves  (Bouwman 2014).

The smart phones producing companies such as Apple and Samsung managed to introduce themselves by bringing the first smartphones to the consumers in the world due to the weak position of Nokia. This was done either by using the iOS developed by Apple or android developed by Google. Nokia was losing its market share and there was a drastic fall in its market share as it faced strong competition from these two competitors. This also resulted in the lower sales revenue.

Graph 1:

(Source: created by author)

Aftermath of merging-

After the devaluation of the asset of Nokia by the third quarter of 2015, Microsoft reported a net loss of US $ 7.5 billion. Due to the poor sales of the smartphone on top of devaluation, Microsoft intends to cut about 78000 jobs in the company. Microsoft has devaluated its assets by US $ 7.5 billion due to lack of synergy. The amount is US $ 0.4 billion less than the amount spend to buy over Nokia (Singh 2014).

The poor performance of sales is the factor which is attributable to the huge loss suffered by Microsoft as it tried to compete with its rival such as Apple’s iOS and Google’s Android. The failure of merging was mainly because of the poor performance of sales which resulted in the lack of synergy. Lack of core competencies, analysis of the industrial environment also suffered shortage and the shortage of resources were the factors responsible for the lack of synergy.

Resources shortages:

Tangible and intangible assets can be referred to as the resources and it could be in various terms such as equipment, human resources, and technological, reputational resources of company, financial instruments and innovation resources. Tangible assets has got it limitation but it generates income for the company and is fixed.

 


The company is able to attain the core competencies and capabilities due to its intangible assets and it is something which is not visible. The core advantage given by the intangible assets is that the competitors would not be able to duplicate it. It is unique to the organization and the value generated by it is far more than the value generated by the tangible assets.

One of the things that is vital and crucial to the capabilities and core competencies of the Microsoft is the innovation resources. This was the thing which Microsoft is lacking. With the expansion of the market on global level, the competitors enter the market seeking to gain competitive advantage. Apple and Google was well aware of the fact that in the 20th century, mobile phone is the leading vessel and in light of this fact, they collaborated with the organizations such as Samsung and Apple which produced smartphones.

Microsoft was not able to compete in the smartphone market and fell behind due to the lack of innovation resources. This made the barrier to entry very difficult.

Lack of industry environmental analysis:

The analysis of industry environment is very fundamental as it helps in the analysis of the industry which the organization is seeking to enter into. The reason of Merging of Microsoft with Nokia was that it wanted to compete with the leading organization such as Apple and Google by breaking into the market of smartphone.

The analysis of industry is done by using the Michael Porter’s Five forces. Since the Apple and Google are the leading developer of the software’s for the smartphones, Microsoft was posed with a great challenge. This was depicted by the competitive rivalry bucket  (Teixeira 2015).

Apple produces their own bucket and the smartphone producing companies such as Sony, Samsung have contract signed with Google for using their operating system and due to this the buyer bucket is low.

Since the consumers are only using the operating system of Google and apple, the substitute is also regarded as low. For example, the blackberry has specialized features on setting emails which provides the flexibility of amending the settings. Unless the product of Microsoft would give special features like Apple and Google does.

The students graduating from the University are able to come up with the organization they would like to choose under the Suppliers bucket. It provides them with the option of to work in the field such as Apple, Google and Microsoft as well. The organization would be able to achieve the product of high value if the are able to attract the employees who are highly skilled and utilizes them successfully.

The last bucket is the threat of new entrant and this views the companies which are new in producing the smartphones or the development of the operating system.

Lack of core competencies:

One of the thing that helps the company in getting core competitive advantage are the core competencies which are primary drivers. Since it is developed through the process of deploying the capabilities and resources and is developed over time, which make it different from the other competitors. As the organization evolves and manages the resources, the core competencies also gets changed which becomes unique to the organization itself  (Blandford 2012).

As the consumers switched over to the other product, the innovation which Microsoft did in the core competencies lose out to the Google’s android. The use of iOS and Android over the operating system of Window. As each passing day, the use of smartphone, the position of Microsoft was becoming weaker and on the other hand, smoother and better features of the operating system was developed by Google and Apple (Honghua and Juan 2014).

2014-2015 Sales revenue and net profit:

Microsoft experienced growth in the sales revenue at an average of 10% after merger with Nokia. However, Nokia continue to experience a drop in the sales revenue but the drop in the year 2013 was comparatively less than 2012. The trend line become less steep in this year.

 Graph 2:

(Source: created by author)

 

The net profit of Microsoft, however dropped by US $ 9.9 billion and Nokia also witnessed a drop in the net profit in the year 2015  (Alcacer et al.  2014).

Graph 3:

(Source: created by author)

Summary:

It can be concluded form the case study that the merger was a fail strategy. The major reasons attributable to the failure of the merger was lack of resources, lack of innovation and lack of analysis of environment of industry. Microsoft came up with the strategy of merger to remain competitive in the market as it was losing out in the smartphone market. The strategy adopted could have been good but Microsoft has missed the boat to enter in the smartphone market.

 


B. 2013:

Combine value of Microsoft is equal to PV (Target) + PV (Acquirer)= Nokia (US$30B) + Microsoft (US$310B)= US$340B. The market capitalization as on 31st December, 2013 was US$342. This indicates that the combine value of Microsoft and Nokia is lower than the market capitalization by US $ 2 billion. The net advantage as a result of merger is – US $ 2 billion.

2015:

Combine value of Microsoft is equal to PV (Target) + PV (Acquirer)= Nokia (US$28B)+ Microsoft (US$440B)=  US$468 Billion. The market capitalization as on 31st December, 2015 was US $ 478 billion. This means that the combine amount of Nokia and Microsoft is lower than the market capitalization by US $ 2 billion. The net advantage resulting from merger is –US $ 11 billion.

Comment:

The net advantage form merger are negative for both the year. It can be said that the total combine value is lower than the market capitalization. Therefore, it can be concluded that synergy resulted in the loss rather than benefitting and ultimately leading to the failure of merger.

C.The attitude of the management of the target company and the difference in culture is attributable to the reason of the failure of merger. Another reason of the failure of the merger is the lack of the sufficient knowledge of the industry by the organization which is acquiring  (Abol 2015). The acquiring companies might not have the core competencies to attract the target audience.

Some other reasons are the poor management by the target such as the working attitude of staffs and the structure of the organization. All this in turn contribute to the failure of the organization being merged or willing to merge.

 

References:

Abol, S.M., 2015. Cultural perspective of acquisitions between Microsoft and Nokia in Kenya (Doctoral dissertation, University of Nairobi).

Alcacer, J., Khanna, T. and Snively, C., 2014. The Rise and Fall of Nokia.Harvard Business School Publishing.

Blandford, R., 2012. Understanding Nokia's smartphone strategy decision.Retrieved June, 12, p.2014.

Bouwman, H., 2014. How Nokia Failed to Nail the Smartphone Market. Belgium, Econstor.

Dhar Dhar, 2013. Two Case Studies in Mergers and Acquisitions: Why Some Succeed While Others Fail?. [Online]
Microsoft News Center, 2013. Microsoft to Acquire Nokia’s Devices & Services Business, License Nokia’s Patents and Mapping Services. [Online]

Honghua, Q. and Juan, C., 2014. An Analysis on the Mergers and Acquisitions (M&A) between Microsoft and Nokia from the Perspective of Patent Information: a Comparative Study. Journal of Intelligence, 2, p.012.

Marie, A., 2013 Strategic Analysis of Nokia Corporation. An undergraduate student journal–Volume 3, p.59.

Singh, N.P., 2014. Microsoft Acquired Nokia in Unipolar Operating System Market. Independent Journal of Management & Production, 5(3), pp.598-622.

Teixeira, D.F.P., 2015. Microsoft-Nokia: stategy and valuation (Doctoral dissertation, Instituto Superior de Economia e Gestão).

Westfall, C., 2015. After the M&A Boom: now comes the hard part: chief financial officers, treasurers, chief accounting officers and other financial executives around the globe will be dealing with the hangover from an merger and acquisition binge that shows little signs of slowing. Financial Executive,31(2), pp.40-46.

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