Merger of Companies in Business Game Exercise Page 118 - Developments in Business Simulation and Experiential Learning, volume 39, 2012 ABSTRACT Business games are designed to simulate real business en- vironments. Merger and acquisition of companies are usual processes in real world. However, designers of business games are somehow ignoring this hot topic. This paper aims to present a simulated merger process. To do so, a business games was modified to encompass the horizontal merger process of companies. Moreover, a pilot admin- istration of the merger process was conducted in a business game exercise. Simulated results are presented focusing on the performance of the merged companies. All merged companies had a superior performance in comparison to their competitors. Finally, evaluations of participants in the pilot exercise are also presented. These evaluations are focused on learning results, simulated performance and teamwork. Overall, participants stressed learning about the merger process and teamwork was improved by providing organizational learning, out-of-box thinking, benchmarking information, and intercultural interaction. INTRODUCTION Merger and acquisition is a hot topic to both academic and corporate levels, especially after the emergence of the globalized business world. Usually, acquisition is related to companies with different economic power whereas merger involves companies with similar structure and size. The merger can be horizontal and vertical. Vertical merger in- volves a company and either a customer or a supplier. Hori- zontal merger involves competitors or other merger not characterized as a vertical one. Although the merger of companies in real world is a common activity to gain synergy and to improve results, in simulated world such topic is practically unexplored. AB- SEL literature contains one experiential exercise (Veiga, Yanouzas, & Sanders, 1984) and two computer-based sim- ulations (Sord, 1982; Thavikulwat, Chang, & Sanford, 2008) about merger and acquisition. In the Sord’s simula- tion all acquisition candidates are included in the model. The participants are expected to analyze different alterna- tives for acquisitions based on data provided by the simula- tor. The goal is maximize economic value of the combined company (parent company and acquired company). Yet, in the Thavikulwat et al.’s simulation an endogenous incen- tive was included in the algorithm to stimulate horizontal integration: the experience curve. An exercise was per- formed and results indicated that horizontal integration did occurred, but authors could not indicate that this integration was related to the endogenous incentive devised or by other incentives present, such as tax and financial ones. This pa- per extends business games literature by demonstrating another merger process. Moreover, this simulated process is tested and evaluated by the participants of the exercise. METHODOLOGY The subjects for the study were 65 undergraduate stu- dents enrolled in two-hour class of a required management simulation capstone course at Universidade Federal de San- ta Catarina – Brazil, during the semester of 2009/2. A sin- gle professor taught two classes (simulation A and simula- tion B). He used a manufacturing simulation – SIND (2009), a top management game with more than 30 deci- sion inputs per round. Such simulation is considered a com- plex one according to Keys and Wolfe’s (1990) definition. In each class the students formed 8 teams to manage 8 sim- ulated companies. Each team started with 3 or 4 students. At the beginning the professor has communicated all students that the simulation would have companies’ merger and additional information would be provided later. At the middle of the simulation the professor wrote an article in the simulated newspaper describing the merger’s process of the companies. Main information were: (a) only two com- panies’ merger would be accepted by the regulatory agen- cy; (b) the merger’s process could involve only two compa- nies; (c) the candidate companies should write a prospect justifying the merger reasons, (d) once accepted the mer- ger, a CEO should be designated and this director should fire half of the students-directors. The fired students would be reallocated in the remaining companies of the simula- tion. Once the news was published, the interested compa- nies had one week to prepare the prospects. The professor, playing the role of the regulatory agency, has judged the applications based on the quality of the justifications. Indi- cators of this quality were synergies created, operational and financial gain and economies of scales. No merger was rejected because in one simulation only one demand of merger was asked and in another simulation two mergers were asked. At the end of the simulation an open-ended questionnaire was administrated for all students to gather their perceptions about the consequences of the merger’s process. MERGER OF COMPANIES IN BUSINESS GAME EXERCISE Ricardo R. S. Bernard Universidade Federal de Santa Catarina bernard@cse.ufsc.br mailto:bernard@cse.ufsc.br Page 119 - Developments in Business Simulation and Experiential Learning, volume 39, 2012 SIMULATED MERGER PROCESS In real world the process of merging companies is highly complex. It involves different aspects such as legal, economic, financial, accounting, operational and cultural (Barmeyera & Mayrhofer, 2008; Huyghebaert, N., Luypaert, M., 2010; Ruiz & Requejo, 2011). In simulated environment some aspects can be simplified or even elimi- nated. For example, legal aspects are not dealt in business games. Accounting procedures are equal for all simulates companies. Cultural aspects are results of the co-existence of different cultures. In business games the employees are usually dealt quantitatively only, such as number and productivity. Qualitative aspects are marginally considered, such as motivation. As a result, employees’ cultural prob- lems are not expected to occur in modeled simulated mer- ger. The simulated merger process in question will empha- size the operational, financial and economic aspects, as discussed below. Operational: Production’s employees, machinery, equip- ment, raw material, and finished product are summed to form a new company (Company X + Company Y). The higher salary will be considered by the new company. Productivity and motivation of the employees are calculat- ed proportionally. Investments in research & development (R&D) are cumulated and only the highest quality product will continue to be produced. A single administrative struc- ture remains. Thus, unnecessary employees are dismissed and facilities are sold. Financial: Cash flow balance, receivables, payables and loans are summed. Some land and building are sold im- proving financial figures. Economic: Some activities of the merger process can in- crease economic performance of the new company. The sales of the assets will capitalize the company, reducing its indebtedness. Earnings can also increase by the reduction of administrative fixed costs and by the reduction of the unitary cost provided by the economy scale. RESULTS Two kinds of results were analyzed at the end of the simulations: variation in the performance of the merged companies and the students’ perceptions about the conse- quences of the mergers. Variation in performance was ana- lyzed directly by the reports issued by the simulator. Stu- dents’ perceptions were gathered by an open-ended ques- tionnaire. This questionnaire asked positive and negative aspects of the merger considering company performance, student learning and teamwork. All students were asked to answer the questionnaire. Fifty six students answered the questionnaire giving an answer rate of 86% (56 out of 65). Performance will be analyzed considering the simula- tion A and the simulation B separately. Simulation A had 10 simulated rounds. Two mergers occurred in the round 6, involving 4 companies. Before the mergers, Guepardos Company has been dominating the stock market, the indi- cator to evaluate the companies’ performance. This compa- ny has decided not to merge. After the mergers, Guepardos Company lost position to Influenza and Inditec companies. Figure 1 Simulation A - Stock market values of the simulated companies Page 120 - Developments in Business Simulation and Experiential Learning, volume 39, 2012 Both companies are result of the merger’s process. Figure 1 shows the stock values of all simulated companies along the 10 simulated rounds. It is possible to observe that in round 6 three companies had their stock with zero value. Two of them were consequences of the merged companies. The other was related to a scheduled activity; that is, clos- ing one company in the middle of the simulation. In simulation B only one merger occurred, in round 7, involving the companies Steel Brazil and One Factory (resulting in the One Brazil Company). Before the merger Steel Brazil and One Factory ranked the fourth and the fifth place in stock value, respectively. The leader was UniFab- rica Company. The leadership remained one round more. One Brazil had an increased performance after the merger and it got the first place in stock value at the end of the simulation. Figure 2 shows the stock values of all simulated companies along the 12 simulated rounds. In round 6 one company was closed as part of the scheduled activity (equal to simulation A). In round 7 one merger occurred and in round 12 another company closed because of a conditional activity: the closure of companies which equity reduces to less than 70% of its equity in round 1. In the three situa- tions the stock value of the related companies achieved zero values. Second kind of result was analyzed using data from an open-ended questionnaire administrated for all students at the end of the simulation. Gathered data were reduced us- ing the Miles and Huberman’s approach (1994). Table 1 through Table 5 show three main answers frequencies to each question. Table 1 compiles the reasons why the participants de- cided not to merger the company. The majority of the an- swers had as motivation the participant’s evaluation, that his/her company had a good structure and that the merger was unnecessary. Some of the participants also stressed his/ her regret about the wrong evaluation made. Other cited motives were the lack of an appropriate company to merge to and the interruption of the merger’s process by one of the involved companies. Positive aspects declared by the participants often in- cluded terms such as ‘teamwork’ and ‘improvement’. Actu- ally, teamwork improvement can be used as an aggregated Figure 2 Simulation B - Stock market values of the simulated companies Table 1 Motives given by the participant for not merging his/her company Frequency Number of companies Reason to not merger the company 10 6 Company has decided that continuing alone would be the best option 6 3 Company did not find partner for merging 4 3 The candidate company gave up Page 121 - Developments in Business Simulation and Experiential Learning, volume 39, 2012 construct to define participant’s declared and undeclared concepts such as organizational learning, out-of-box think- ing, benchmarking, and intercultural interaction. All of these concepts can be associated with the merger’s process. Another positive aspect stressed by the participants in- volved in the merger process was related to the perfor- mance of the new company. Operational and financial gains occurred by the economies of scales and synergies. As a result, the profitability was enhanced. A third positive aspect highlighted was the participant’s learning about the merger process and its consequences. Learning, no matter if characterized as organizational or individual ones, is an important point because the main goal of the business games is to provide learning. If students perceive that learning occurred, then the business game methodology achieved its objectives. Table 2 shows the frequency of the major positive aspects stressed by participants involved in the merger process. According to Table 3, the major frequency of negative aspects from the participants that merged their companies was, actually, that no negative aspects occurred from the merged companies’ viewpoint. Simulation A had two mer- ger processes involving four companies. As a result, partic- ipants of two teams were distributed to the remaining com- panies (companies not involved in the merger process). A negative consequence of the two mergers was having some teams with 5 participants instead of 3 or 4 from the begin- ning of the simulation. This large number of participant was stressed as a negative aspect by 4 participants. An in- teresting point to highlight is that two participants of a merged company stressed the loss of competitiveness as a negative aspect. The negative view was not related to the performance of their companies, but to the market competi- tiveness and their motivation to continue to making deci- sions. The merger of competitors generated new challenges to the participants not directly involved in the process. Nine participants have declared that the merger of their competi- tors was a motivation to work harder. Two different strate- gies were disclosed: compete with the new company by the leadership and work for remaining in the market. As to the participants involved in the merger process, the individual Table 2 Positive aspects of the merger stressed by participants directly involved in the process Table 3 Negative aspects of the merger stressed by participants directly involved in the process Table 4 Positive aspects of the merger stressed by participants not directly involved in the process Frequency Number of companies Positive aspects resulted from the merger 13 6 Teamwork improvement 11 6 Operational, financial and economical improvements 2 2 Individual learning about the process Frequency Number of companies Negative aspects resulted from the merger 6 4 No negative aspect 4 4 Too many participants in the new team 2 1 Loss of competitiveness Page 122 - Developments in Business Simulation and Experiential Learning, volume 39, 2012 learning about the process was also stressed by some par- ticipants not directly involved. Some participants also de- clared no positive aspect given by the competitors’ merger. Table 4 presents the frequency of the major positive aspects stressed by participants that were not directly involved in the merger process. Almost the totality of the participants not involved in the merger process declared as one negative aspect the powerful of the merged companies. According to them, it was practically impossible to compete with the merged companies. Three additional participants emphatically stressed their demotivation with the new situation. A third major negative aspect was the team size. As to the merged companies, some remaining companies also had 5 partici- pants because of the reallocation of participants from the merged companies. Table 5 shows the frequency of the major negative aspects stressed by participants that were not directly involved in the merger process. CONCLUSION A horizontal simulated merger was designed and tested using two pilot exercises. In simulation A two mer- gers occurred while in simulation B a single merger oc- curred. In both simulations the winners were merged com- panies. In simulation A the second place was also achieved by a merged company. Such results indicate that the mod- eled environment in the simulation benefits the merger pro- cess of companies. These companies receive a lot of opera- tional, financial and, as result, economic advantages. In real world the merged companies usually have problems when they are integrated by two main reasons: there is no suffi- cient synergies as initially alleged and there are so many conflicts because of the differences between cultures that mitigate or become unfeasible the integration of the compa- nies. In simulated world the alleged synergy does occur because it is mathematically modeled and cultural problems do not occur at the employee’s level. In the managerial level, that is, among students playing the role of directors of the simulated companies, cultural problems are not also expected to occur because the interests usually are similar. Students usually prioritize friendship and grades are mar- ginally related to simulated company performance. If there is a positive bias, so why is the merger process important in simulated environment? As a learning labora- tory, business games should show main aspects of the busi- ness real world and companies’ merger is a major issue. Thus, the professor can use his/her expertise to discuss the consequences of the merger process with the students and to make a parallel between the real and simulated worlds. Consequently, the discussion generated could be an oppor- tunity to improve learning as demonstrated by the answers given by the student that have participated of this pilot ex- ercise. Considering the participants’ evaluations about the merger process, some point must be highlighted. First, the merged companies had operational and financial benefits that become such companies practically invincible. Second, the learning about the merger process occurred to all partic- ipants, no matter whether they were involved in the pro- cess. Finally, activities involving closing companies during the simulation, such as mergers, must be planned consider- ing the inclusion of one or two additional participants in the teams. REFERENCES Barmeyera, C., Mayrhofer, U. (2008). The contribution of intercultural management to the success of internation- al mergers and acquisitions: An analysis of the EADS group. International Business Review, 17, 28 – 38. Huyghebaert, N., Luypaert, M. (2010). Antecedents of growth through mergers and acquisitions: Empirical results from Belgium. Journal of Business Research, 63, 392–403. Keys, B. & Wolfe, J. (1990) “The role of management games and in simulation in education and research.” Journal of Management, 16, 2, 307-336. Miles, M. B. and Huberman, A. M. (1994). Qualitative Data Analysis: An Expanded Sourcebook. Thousand Oaks, CA: Sage. 2nd Ed., 338 pages. Ruiz, I. F. Requejo, S. M. (2011). Cross-border Mergers and Acquisitions in different legal environments. Inter- national Review of Law and Economics, 31, 169 – 187. SIND – Manufacturing Simulation. Bernard Sistemas (2009). Florianópolis, Brazil: www.bernard.com.br Sord, B. H. (1982). A Merger and Acquisition Simulation. Development In Business Simulation & Experiential Table 5 Negative aspects of the merger stressed by participants not directly involved in the process Frequency Number of companies Negative aspects from the merger of the competitors 25 9 Merged company too big to compete 3 3 Demotivation caused by the size of the new company 4 2 Too many participants http://www.bernard.com.br Page 123 - Developments in Business Simulation and Experiential Learning, volume 39, 2012 Exercises, 9, 191-194. Thavikulwat, P., Chang, J., & Sanford, D. (2008). Shared Experience as Incentive for Horizontal Integration. Development In Business Simulation & Experiential Exercises, 35, 212-219 Veiga, J. F., Yanouzas, J. N., & Sanders, P. B. (1984). The H.E. / L&P Merger. Development In Business Simulation & Experiential Exercises, 11, 219-220. Huyghebaert, N., Mathieu Luypaert, M. (2010). Anteced- ents of growth through mergers and acquisitions: Em- pirical results from Belgium. Journal of Business Re- search ,63, 392–403. Table of Contents Volume 39, 2012 Designing the Training Challenge Follow The Leader: Are we Teaching our Students to be Thinkers or Followers? Two Free-Rider-Accepting Methods of Organizing Groups for a Business Game Additional Benefit Through Competency Models Assessing Brand Portfolio Normative Consistency & Trends With The Normative Position of Brands & Trends Package Modeling the Impact of Marketing Mix on the Diffusion of Innovation in the Generalized Bass Model of Firm Demand Play it Forward! The Design and Development of a Forward Contract Simulation Positioning the Company: Increasing Profits in Social Networks Merger of Companies in Business Game Exercise Towards a Knowledge-Based Approach for Autonomouse Trading Agent An Exploratory Study of the Impact of a Simulation Exercise on the Managerial and Personality Traits and the Decision Making Styles of Marketing Students Should the Concept of Potential Customers be the Foundation of Demand Theory in Business Simulations? Teaching Sustainability Experientially Drawing Upon Experience and Research to Improve Future Communications Improving Assessments of Student Learning Outcomes (SLO) Over Time The Effect of Affective Domain Characteristics on Behavioral or Psychomotor Outcomes Gossip? No, Not Me! An Experiential Exercise Student Advisement Using Gantt Charts: An Experiential Exercise in Management Theory Practicing Teachers as Digital Game Creators: A Study of the Design Considerations Designing and Solving Crossword Puzzles: Examining Efficacy in a Classroom Exercise Difficult Times Call for Innovative Measures: Microfinance as Experiential Learning in Higher Education Catalysts, Client Services, and Community Change: Interdisciplinary Collaboration in a Nascent Microfinance Initiative Build A Business . . . In An Hour or Less: Getting Closer to Reality into the Classroom Smart Goals: How the Application of SMART Goals can contribute to achievement of Student Learning Outcomes The Use of Data in "Live" Cases to Encourage Systems Thinking and Integrative Analysis: An Exercise Linking Human Resource Programs and Financial Outcomes in Real Organizations Experiential Education as a Process of Changing Mental Frames by Inducing Insight Learning Process and Content Integration in an Experiential Learning Guided Internship Program Good-bye Discussion Thread: Creating a Community of Inquiry in an Online Master's Program Fiction as a Constructivist Tool for Learning Process Consultation in an Online Environment: Shaping the Context, Introducing the Dialogue Can Simulations Provide a Better Experience? A Capstone Application Modeling a Modest Proposal for Increasing the Efficiency of Academic Reserarch Dissemination Experience GEO: A Massively Multiplayer Game SysTeamsGames Three Games for Management Simulation SimVenture - A Start-Up Business Simulation Stellarbucks Simulation Developing Games Using Strategy Maps and Balanced Scorecards Strategy Dynamics Models - Powerful But Simple In-Class Games Simulating Scenarios for Financial Statement Analysis A Valuation Model of the Simulated Firm Writing the Land: An Interdisciplinary Experiential Approach On the Estimation of the Probability of Meeting Financial Commitments: A Behavioraial Finance Perspective Using Business Simulations