Fig. 1
A. Lino
Mphil. Student in System Dynamics, University of Bergen, Norway - Allesanlifi.uib.no
Doctoral Student in Financial Science, University of Palermo,
Italy - Ricopaunipa.it
Abstract : The term merger is commonly used to describe
an organizational restructuring in which the management of two
firms agree to combine ( merge ) the companies into a single entity.
Some of the most important sources of merger gains are :
economic efficiency, unused tax shields and reduction in capital
costs. These potential gains explain why many large mergers and
acquisitions occurred during the 1980's. However, even if undoubtedly
advantages can be obtained from a merger, careful policies must
be adopted during and after this decision. An example of a merger
turned sour concerns the Ames Department Stores which was
a successful company before it bought Zayre. As noted in
the story, the merger provides a near textbook example of how
not to merge two seemingly well-suited companies. The above problem
characterized by delays, side effects, feedbacks and nonlinear
relationships, a single case-study based on the system dynamics
approach could be used as research design to test hypotheses.
A preliminary SD model has been built using primary data provided
by the New York Times ( Eric N. Berg, "Ames's Rocky
Retailing Marriage", New York Times, April 11, 1990
). Problem description, preliminary results and future enhancements
are discussed in this paper.
Introduction
The term Merger is used to describe an organizational restructuring in which the management of two firms agree to combine ( merge ) the companies into a single entity. One firm is the surviving firm and is called the acquirer. The firm merged into the acquiring firm is called target company.
Why did many large mergers and acquisitions occur during the 1980's
? Usually, many sources of merger gains exist, the most important
are: economic efficiency, unused tax shields, reduction in capital
cost. These potential gains explain why many large mergers and
acquisition occurred during the 1980's. Some of the most important
mergers were: Philips Morris/Kraft (1988), Bristol-Myers/Squibb
(1989), British Petroleum/Standard Oil (1987), Kohlberg Kravis
Roberts/RJR Nabisco (1989). However, even if undoubtedly advantages
can be obtained from the merger, careful policies should be adopted
during and after the merger considering that gains regard , in
particular, the short term. An example of a merger turned sour
concerns the Ames Department Stores which was a successful company
before it bought Zayre. As noted in the story, described briefly
in the next section, the merger provides a near textbook example
of how not to merge two seemingly well-suited companies.
The problem
Ames Department Stores Inc. had visions of greatness when it acquired nearly 400 Zayre discount stores in October 1988. And Ames, which had steadily increased its sales and profits, would use its acclaimed management techniques to revive business at Zayre, which was sagging. As it turns
| Fig. 1 | out, Ames has failed miserably, providing a near textbook lesson of how not to merge two seemingly well-suited companies. It has been unable to revitalize the Zayre Stores , since renamed Ames, sales at those stores declined after a series of strategic blunders. As a consequence, Ames, which had a reputation as one of the nation's best-run merchants, has itself begun to stumble. It was not until |
1988 that Ames became a leading force in discount retailing. That fall, Mr. Hollis, who had become chief executive two years earlier, completed Ames' largest merger: $778 million purchase of the Zayre stores.. The pattern of the profits of the merger company, represented by the graph in figure 1, gives us a vivid problem focus. After merging ,the company doubled its profits. After almost 1 year (Profits tend to value A), company management decided to take away promotions (used by the Target Company before the merger for a long time) and to change the name of the target company from Zayre to Ames (Acquirer name). When profits reached the value B, to prevent a bad situation from becoming a debacle, the chief operating officer chose to cut investments on capital improvements. The consequence of this decision on profits can be deduced from the behavior shown in the figure 1.
Research method
As a research strategy a longitudinal study based on a single
case study and experiments (Multi-method approach) will be used.
To explore the way in which the structure of the system (which
drives the dynamics of profit) reacts to post-merger policies,
the System Dynamics approach will be taken because it is naturally
connected to our focus and the direction from which we want to
look at the research problem. The purpose is to improve our understanding
about the dynamic behavior of this kind of corporate problem (characterized
by delays, feedbacks, side effects and non-linearity), building
a System Dynamic model which could replicate the Reference
Mode. Furthermore, to show, from this real case, how " When
a certain policy is adopted, its potential positive effects (relatively
to the goal that we can reach) can be canceled carrying out other
policies whose their impacts are not clear or underestimated".
(For Ames's Company, the merger with Zayre represented the good
policy. On the other hand, to take away promotions , to change
the target company's name to Ames and to cut investments, represented
underestimated policies).
Preliminary results and future enhancements
A base model has been built to test the conceptual hypothesis formulated as follows : the principal reasons of the merger's failure were due to the following implementation of other policies whose impacts were unclear or underestimated. Experiments have improved our understanding about the relationship between policies, behaviour and structure. Specifically, preliminary conclusions have been carried out ( see also the figure 2 and associated description ) :
Ames' managers learned that it is very difficult to wean the customer from a promotional vendor.
Ames' leaders changed the name of the Zayre stores into Ames. Not only was Zayre one of the oldest companies in the discount store sector, dating from the 1950's, but also many of the stores were in poor neighborhoods of big cities like Washington, Baltimore and Chicago. Most of these stores were visited, especially, by blacks and Hispanic Americans, who tend to favour well-known national chains. The Ames name was not as well known in those areas as Zayre.
Cutting on capital improvements has its limits. Usually, this
approach gives benefits in the short time period but It has negative
effects on the long period because, for instance, it means ving
fewer service employees in the stores, more losses in quality
and therefore giving advantage to the competitors. This
preliminary research although based on few sources of information
could represent a good point of departure for more accurate research
designs to investigate either the same case (using more real data
and removing some assumptions) or the merger phenomena from different
perspectives. Future works could be related, for instance, to
these two different interesting issues : the Market
Power Factor and the Merger Wave. The market power
could be a real problem because mergers reduce the number of industry
competitors. A reduction in competitors leads to higher prices
for consumers and higher profits for the post merger company.
The United States, as well as other countries, has laws which
prohibit combinations of restraint of trade and other monopolistic
practices. On the other hand, another issue has not been addressed
in a conclusive manner : the cyclical dynamics of merger
waves. Historically, mergers occur significantly more in some
periods than in others and each of the expansion phases is followed
by a decline one. Especially in some sectors of the economy, the
boom phase represents a problematic behaviour when monopoly power
can lead to inefficiency.
 | Line 2: The Acquirer company after the merger doesn't make any policies Line 1: The Merger Company, seeing own profits to increase steadily, decides (after 12 months) to take away promotions and to change the Target Company's name from Zayre to Ames ( which is the Merger Company's name ). Line 3: The Merger Company, to break profits loss, decides (after 24 months) to cut investments on quality improvement after those bad policies. |
References
Alexandra M. Post, Anatomy of a Merger-The causes and Effects of Merger, Prentice Hall 1994
Forrester J. W., Industrial Dynamics, Cambridge, Mass : MIT Press 1961
Golbe, D L, and L J White, Theories of Merger activities, in Corporate Takeovers, Chicago, The University of Chicago Press, 1988
Richardson and Pugh, Introduction to System Dynamics Modeling with Dinamo, P. Press 1981
Senge P.M. , The Fifth Discipline, Doubleday
Currency N.Y. 1990
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