AMP Incorporated, one of the largest manufacturers of connector and interconnect device, started in 1941, experienced several rounds of fluctuation and grew up with the bloom of U. S. economy. Literally, AMP could be seen as the leader and the guideline of the electrical industry. However, there does not exist a forever winner in business world. The rapidly changing environment, complex condition and intense competition may influence the result of a decision dramatically and push the company into a dangerous abyss like the situation AMP Incorporated met after the financial storm in Asia-Pacific.
If there are some other possible strategies AMP could make out to deal with the issue it met under such kinds of situation? Could AMP do better by making the same decision?
To obtain the answer, we will then make insight and comprehensive analysis to those issues happened on Amp Incorporated. Issue of aggressively purchasing: From the beginning of AMP history, one of the core philosophies of AMP was that it was an engineering and manufacturing factory.
It almost becomes a tradition of AMP that it will spend as much as 9 percent of its sale annually on research and development department which is far less than 1 its competitor. An article of faith is created by AMP that it remains self-contained and develops its own technology during a period of 40 years. However, time always changes.
The appropriate strategy in 40 years ago may not proper to the company 40 years later and might even stagnant the development of a company. According to the case, why AMP starts to aggressively purchasing companies is mainly based on two reasons.
First is the external reason that the rapid growth of the electrical industry makes it harder for company to continue competing by simply depending on itself. To curb the mounting risks and prohibitive costs of increasingly complex technologies, AMP have no choice but to join to each other through consortia, joint ventures and other partnerships.
Second reason is the internal ambition of AMP to diversify it products and try to monopolize a whole realm of electrical products. AMP expects to broad its product lines and providing complete assemblies to its consumers instead of supplying some discrete electrical components. The good thing for AMP to insist on those purchasing is really obvious and remarkable that AMP constructs it powerful force on the oversea market. Through such an aggressive purchasing strategy oversea, AMP achieve huge amount of revenue from the investment on those fast developing countries such as China and India.
Apparently, AMP has a bunch of sufficient reasons to apply its aggressive purchasing strategy. While, could we just assert that this aggressive purchasing strategy is a great strategy without any flaw? Although by acquiring or entering joint ventures with other enterprises may help AMP to expend into new products and market, the pace of buying of AMP seems too rapid on the other hand. 2 In other words, the purchasing strategy of AMP is not prefect as it looks like because that it is too aggressive and impatient.
Overly aggressive purchasing not only brings high revenue to AMP but also bring high rate of risk at the same time. Overly rapid speed of acquisition may lead to a large numbers of unreasonable and irrational buying. For instance, the first venture in the history of APM which cost it 13 million dollars does not proved fruitful at all. In fact, this purchase is a quite obvious failure of acquisition because the AMP has to close this first subsidiary company itself in just 4 years, and AMP has to lay off one-third of the employees.
How could we improve the aggressive purchasing policy? To avoid the danger of over aggressive acquisition, we just need to convert aggressive acquisitions to rational acquisitions. First of all, AMP should have a long pre-planning for the target of the purchasing according to its long-term development direction. And then, AMP should be calm down and be patient to choice its target carefully. After chooses a list of companies it interest in, AMP should conduct a thorough assessment to those companies.
Ask itself whether this acquisition is benefit or helpful to our ambition? At what field could this subsidiary help AMP? Is it difficult for the subsidiary itself to survive in the market? Then based on the statics from the assessment and considering all other kinds of conditions, AMP could then select those most profitable to purchase rather than aggressively buy every company it likes. Doing so, AMP could deduct much cost of wasting on inappropriate acquisitions and become more efficient on purchasing. Issue of pursuing “one-stop shopping”:
As the internal reason drives AMP to carry out its aggressive storm of purchasing and joint 3 venture, “one-stop shopping” strategy express the strong ambition of AMP to broaden its market and expand the variety of its production. In order to offer one-stop shopping to its customers, AMP can no longer keep still in its specialized area for supplying some specific electrical products, instead, it need to set foot in those fields which are unfamiliar to AMP company such as the fields of new fiber optic, additive printed wiring boards, and cable assembly technologies.
The example of joint venture with Akzo N. V, a Dutch chemical company, shows AMP’s determination to keep on following its “one-stop shopping” strategy. But whether a strategy is appropriate for that company to practice under a specific time background could not simply depend on the determination of that company to execute its decision. In the case of AMP incorporated, in order to achieve the goal of provide “one-stop shopping” for its consumers, AMP has to make a huge amount of acquisition to fill up those fields of technology which is not familiar to it.
However, such an enormous amount of investment to other fields of technology may not bring a significant profit to AMP immediately because this investment could be seen as a kind of long-term investment and it costs lots of time for those newly-bought subsidiaries to adapt the operating system of AMP Inc. Thus, the decision to carry out the “one-stop shopping” strategy will bring a heavy burden to the financial condition of AMP and a high risk of participating into some unfamiliar realm.
When undergoing such a heavy financial condition, the continuous acquisition and joint venture of AMP almost rely on its abundant capital which is created by the well running in its specialized business field and accumulated from the found of the enterprise. Based on the sufficient capital to invest, AMP’s goal of providing “one-stop shopping” for its consumers really 4 bring numerous opportunities and benefit the company in many aspects. With the expansion of market, AMP has chances to meet lots more enterprises specialized in totally distinctive areas.
Then AMP could develop relationships with those companies which are both the seniors and competitors in that field of business. Those relationships developed between those various types of companies will benefit AMP more or less in the future growth of AMP. Also, what AMP could benefit from pursuing “one-stop shopping” is to diversify its product and control larger amount of market share in long run. Nowadays, AMP has already become one of the biggest overlords controlling the whole electrical connector industry.
This significant achievement of AMP has to be attributed to the insistence on “one-stop shopping”. Without this strategy of conversion, AMP, continuing to run as a specialized company, may be constrained in a limited aspect of development. As an example of successfully application “one-stop shopping” strategy, Apple Inc, once a computer technology focused company, in order to supply complete assemblies of products related to computer, Apple broaden its research into the area of MP3 and cell phone. Such a movement brings Apple considerable profit and makes it becomes a worldwide leader in electrical technology.
We could say that “one-stop shopping” strategy, although goes with risk, greatly stimulate the potential and infinite possibilities for AMP to develop itself. Therefore, in an overall point of view, the benefit brought by pursing “one-stop shopping” is greater than the risk and harm carried with this strategy. Issue of Agency relationship: When time goes into 1998, two suitors for AMP are attracted by extremely low stock price. Facing the first hostile bid from Allied Signal Incorporated, the management and board of directors of AMP reject the tender offer at a price of $44. 5 per share. Then, the conflict comes out between shareholders and management upon this purchasing. Representing by Hixon family, most of the stockholders of AMP Inc tend to agree with the tender offer.
They are willing to sell the share they possess to Allied Inc. On the other hand, the management of AMP feels angry about the price per share provided by Allied Inc. They want their shareholders choose to trust their ability to returning value to AMP’s stockholders. After failing to persuade shareholders stop selling their stock to Allied Inc, the management has no choice but to conduct a self-tender to prevent their famous worldwide enterprise to be purchased at a cheap margin price. This self-tender offer further stimulated the dissatisfaction of the shareholders. As a result, they start to pressure the management of their company to stop fighting with Allied Inc.
It is clear that the management of a company is hired by the shareholders and work for them to run the whole company. Their ultimate responsibility is to represent the interest of shareholders and maximize the value owned by those shareholders. However, in this case of purchasing, there is a difference between maximize the value owned by shareholders and just do what the shareholders desire. Simply following the direction of shareholders may not be a rational decision for the management of AMP.
After undergoing the influence of financial storm in Asia-Pacific area, AMP’s shareholders may lose their confidence and patience due to the weak performance as a whole company during this difficult period. When problems involving with people’s own interest, people will always lose their 6 calm judgment and long run sightseeing. The shareholders of AMP, being anxious to save their principle, do not trust the management members who have worked for this company for many years even thought the management of AMP has already start to take a series of action such as trimming its workforces and closing some plants to reduce the cost.
Several long letters written by AMP management to explain why they are fighting against the bid of Allied Inc do not bring any change of these shareholders’ altitude towards the tender. The relationship between the shareholders and management of AMP is breakdown gradually because of the shareholders’ impatience to save their money. Although there is no wrong for those investors to protect their principle from continues decreasing, they should try to believe their most important partner – the board of the company that they will try their best to create the maximum value for AMP Inc.
The final result of this struggle with Applied Inc is AMP’s merging with Tyco at $51 per share which is apparently higher than the price provided by Applied Inc. Both the investors and management of AMP get a happy ending compare to be purchased by Applied at a cheap price at last. But on the back of successfully raising the stock price for sale, the decision of self-tender made by the board of AMP is really a dangerous movement. Shareholders have to endure a risk of continuous losing their investment in AMP because no one could guarantee that Tyco must purchase AMP or purchase it at a higher price.
Instead of announced the decision of self-tendering, the management of AMP should let the shareholder know about this decision even though there may be gigantic resistance for management carry out that decision. All in all, the choice of fighting with Allied’s tender offer at a cheap price is rational and insight tactic. 7 While, how does the AMP Inc, once the most powerful companies and the No. 1 enterprise in the industry of electrical connectors, incur such a serious problem to survive? How does it have to face the destiny of being merged?
Issue of undergoing the economic slowdown: The factors which push AMP into such a dangerous situation when experiencing a terrible economic condition could be illustrated in two aspects. As the case says, AMP’s share price had dropped mainly attributable to economic slowdown in Asia-Pacific and a strong U. S. dollar, although U. S. sales were also off. The reliance to the foreign sales of AMP leads to the dramatic decreasing of its amount of sales in worldwide range when the economic slowdown affects the region beyond U. S. The other factor that causes AMP to lose its sale amount in the domestic market is mainly caused by structural adjustment of AMP in 1996 and 1997, the same year as the financial storm.
As the data shows us in this case, the sales amount in the region of Asia/Pacific occupy one-fifth of the total sales in the whole world. Affected by the serious finance storm in 1997, currencies in most of Asian countries like Japan, Korea and Thailand experience a horrible depreciation. Such depreciation dramatically weakens residence’s purchasing power in those ountries. However, a strong U. S. dollar makes the gap between dollar and other kinds of currency even deeper. Bunches of firms, who signed contracts with AMP could not afford the high exchange rate, finally have to give up the contract. For those common people who are the clients of AMP, how can people who are worrying the problems of their basic lives pay any more attention on those inessential electrical appliances?
As a result, AMP may lose a large numbers of clients in Asia/Pacific region that 8 riginally contribute as much as 20 percents in its total sales. While most of the AMP’s competitors are focusing on the domestic market and hence, affected less by the economic slowdown in Asia/Pacific. In case of the happening of such a tragedy, what AMP could do is basically to reduce its cost, supply a series discount, and offer a flexible contract to its big client. By reducing the cost of products and supply discount for clients, AMP could decline its price at the largest extent and keep a low rate of profit.
Doing so could not only stimulate the sales amount of the company, but also accelerate the inventory turnover of its products. What’s more important is that by decreasing the price, AMP could help those depressed consumers to find back the willingness of purchasing its products. Also, a flexible contract makes the big clients of AMP feel comfortable because they could feel they are treated reasonablely and friendly by AMP. Restructuring is the other factor that contributes to the weakness of AMP during the awful economic condition.
Although this reconstruction is designed as a preparation for the next round of development, and should meant to be beneficial to the company in a long run, the company is still fail to take the change of economic condition into consideration. So, when the finance storm comes up, AMP in U. S. is also influenced because it has wreaked a lot of havoc in this re-born company. But it is not impossible to avoid the happening of such situation.
AMP should design a better pre-planning of structure which taking more factors such as change of economic conditions, development of its competitors and the renovation of technology in that industry. After thorough consideration of variety of changing factors, AMP could then establish many specific countermeasures aimed at these situations. 9 In conclusion, although the AMP Inc owns a glorious history of expand and development, several decisions which are not fully thought will directly lead to the collapse of the whole enterprise. Thus each strategy made by a company should be considered over and over again. 10