Takeovers and Mergers - one that went badly wrong (BMW and Rover)

For the BUSS4 exam this June, it is useful to understand why a merger may fail to work and a retrospective look at BMW’s acquisition of Rover back in 1994 provides a good illustration of several possible pitfalls.

Background

Rover was the new name for what had been the car business of British Leyland (BL) – a business that included names such as Rover, Morris, Austin, Austin Healey, Wolseley, Riley, Land Rover and MG. It had been formed through a series of mergers aimed at making a group large enough to compete in the world car market. In 1985, the Thatcher Government had talks about selling BL’s car business to Ford and the truck & bus business to General Motors but neither deal got off the ground. In the end, it was sold to British Aerospace (BAe), was re-christened Rover and a partnership formed with Honda (which worked with Rover from 1979 to 1988) to provide the basis for new models. Honda also helped by introducing lean production techniques but Rover did not really have a ‘learning culture’. There were strong trade unions that resisted improvements to efficiency where this was seen to lose jobs.

BAe was itself in financial difficulties in 1991 and many effiencies were forced through in order to cut costs. This led to the sale of Rover to BMW for £800m in 1994. BMW itself was looking for ways to increase its volume and its board felt there were few possible purchases available. They were attracted by many of the iconic brands such as Mini and Land Rover – at this time, BMW did not make 4WD vehicles although one was under development.

BMW’s mistakes: Lack of proper due diligence; clash of cultures; poor leadership.

According to various reports and analyses of the takeover, there were three major problems facing BMW.

Firstly, BMW did not do enough due diligence, completing a deal in only 10 days. That is to say, they did not look closely enough at the operation of the businesses within Rover. Had they done so, they may have had a much better view of Rover’s problems such as inaccurate sales data.

A closer look at the business would also have revealed he second problem; a cultural clash.

As mentioned earlier, Rover did not have much of a learning culture. The company had a ‘not invented here’ attitude – that is to say that they were sceptical of other approaches to manufacturing. The business had become much more ‘lean’ under BAe but had done woefully little research and development; its designs were mostly out-dated, although the work with Honda had actually improved quality close to BMW’s standards.

The third problem was poor leadership. The BMW board was split over whether Rover should have been acquired and more directors resigned in the one year after the acquisition than in the previous forty. This must be a reflection on the inability of then CEO, Berndt Pietschrieder to lead his board and management through the merger. Because some of the BMW executives were not commited to the acquisition, Rover never received the investment it needed to develop a ‘BMW 2 Series’ equivalent to replace its ageing 200 series. At the lauch of the new Rover 75, some BMW executives were publicly saying that they planned to close the Longbridge plant.

Postscript

BMW owned Rover from 1994 to 2000 by which time the company was piling up losses at a rate of £2million a day. The Rover Longbridge plant was sold to Phoenix Consortium for just £10. Phoenix’ ownership saw further decline in what was now known as MG Rover; the plant was eventually sold off to a Chinese company for £53 million and MG cars are being produced in small numbers. BMW sold Land Rover to Ford for £1,800 million, sold other assets at market value and kept the Cowley Plant which has received major investment to develop the ‘new’ Mini.

At the time of the Rover acquisition, BMW was described as a company that ‘makes one saloon in three different sizes’. It had nothing like the diverse product range it does today with compact saloons, coupes and 4WD vehicles – all developed internally. The only parts of Rover it still owns are Mini and an engine plant at Hamms Hall.

The merger of BMW and Rover ‘failed’ because of cultural differences, poor leadership and poor due diligence; if BMW had fully understood what it was buying, they may not have done the deal, done a different deal for selected assets, or bought at a lower price. BMW has, however, re-launched the Mini with great success and in fact sold other assets from the Rover Group at a profit or at market value. BMW leadership at the time was worried that it was being left behind – with VW Audi having acquired Skoda and Seat whilst rival Mercedes Benz had beaten them to the launch of a 4WD vehicle. In fact, BMW now has a product portfolio (including Mini) that is highly competive with both these companies - albeit without a ‘volume’ car business. Although there was a lot of pain in the BMW acquisition of Rover, perhaps it should not be seen as an outright failure after all.