The Decision of Johnson & Johnson Acquires Dabao.
The decision of Johnson & Johnson Acquires Dabao. Di Wang MGT 540 MI004 Professor: Arthur Annechino 20th February 2013 Table of Contents Executive Summary3 Introduction4 The reasons of decision6 Decision making style7 The problem in decision making process8 Recommendations9 Conclusion11 Reference12 Executive Summary This paper is talking about the Johnson & Johnson Acquires Dabao. It starts with review the two companies’ history, and then shows the problem of them before acquiring.
Further analysis of Johnson & Johnson’s decision with the problems that in their decision making process and also the decision making style that could be found in the acquisition. At last, give some recommendations to JNJ and the conclusion for this whole paper. Introduction Johnson & Johnson (NYSE: JNJ) is an American multinational medical devices, pharmaceutical and consumer packaged goods manufacturer founded in 1886. Its common stock is a component of the Dow Jones Industrial Average and the company is listed among the Fortune 500.
Johnson & Johnson is located in New Brunswick, New Jersey with the consumer division being located in Skillman, New Jersey. The corporation includes some 250 subsidiary companies with operations in over 57 countries and products sold in over 175 countries. Johnson & Johnson had worldwide pharmaceutical sales of $65 billion for the calendar year of 2011. Among JNJ’s well-known consumer products are the Band-Aid Brand line of bandages, Tylenol medications, Johnson’s baby products, Neutrogena skin and beauty products, Clean & Clear facial wash and Acuvue contact lenses.
Johnson & Johnson came to China in 1985, but until now, in majority of the Chinese people’s hearts, it still stay in the baby care products. In fact, Johnson & Johnson brand in the United States has more than a century history, is the products supplier with most comprehensive and the most diverse medical and health care products and consumer care in the world. The strong outstanding international performance did not make Johnson & Johnson achieve the comprehensive development of a leap in China.
Especially in consumer and personal care products, Johnson & Johnson has Johnson & Johnson’s Baby, Clean & Clear, Neutrogena and other brands. These brands almost cover each segment of the cosmetics industry. But in each market segment, the market share of Johnson & Johnson’s product did not reach the top ten. Johnson & Johnson seems to be considered as a niche brand, which makes JNJ very depressed. In Johnson & Johnson’s view, in order to catch up with other multinationals in China, the best and quickest way is to acquire a local brand and expand its own brand extension and channel coverage.
Dabao is undoubtedly the best choice to achieve this strategic goal for Johnson & Johnson. Beijing Dabao Cosmetics Co. , Ltd. its predecessor factory is Beijing Sanlu Factory, is a state welfare enterprises established by the Beijing Government for the employment of the disabled. And with as many as 35% of the disabled workers. The company was founded in 1958, 1985 converting cosmetics develops, produces, sells, and exports herbal cosmetic products in China and internationally. It offers various varieties of skincare, hair care, beauty care, perfume, and clinical series products.
The company’s products include slimming creams, breast configuring creams, hair stimulators, senile fleck dispeller creams, eye-bag creams, anti-wrinkle creams, ginseng shampoos and conditioners, and ginseng both lotions. Its most famous product is “Dabao SOD cream”. It sells its products through department stores and shops. The company exports its products to the United States, Switzerland, Sweden, Greece, Tunisia, Bangladesh, and Cyprus. From in 1997, Dabao won the championship of the domestic sales of skin care products for eight consecutive years. In 2003, market share of Dabao in the skincare industry was 17. 9%, much higher than the other competitors. Dabao was trying to get rid of the low-end positioning, but the market performance is far from satisfactory. It seems that Dabao would never enter the high-end market in the industry. In 2004, its brand market share of negative growth, accompanied by declining net profit. Industrial output value and tax sales revenue declined slightly. The total profits and taxes in the decline stage, indicating that there was fierce competition in the market at that time, Dabao brand was facing the increase impact of foreign brands, price wars, increased costs, and many other heavy pressure.
On February 27th , 2007, Dabao listing to start the transfer of 100% equity at a price of 2. 3 billion yuan in the China Beijing Equity Exchange. Its transfer form is equity overall transfer. Listing period, Johnson & Johnson (China) Investment Co. , Ltd. , Unilever (China) Investment Co. , Ltd. , Kao Corporation and other international well-known cosmetics companies to come to counseling and due diligence. Johnson & Johnson and Unilever are interested transferee. The Unilever offer only 1. 7 billion yuan, much lower than the listing price. Finally JNJ won at the price of 2. 3 billion, the equity transfer agreement signed on April 18, 2008.
July 30, Johnson & Johnson completed the acquisition of Dabao transactions from Beijing Sanlu Factory and the Dabao employee stock holding committee. Acquired the 83. 42% of state-owned shares and 16. 58% of employee shares from both of them. The reasons of decision There are three main reason why Johnson & Johnson make the acquire decision. Firstly, in order to catch up with other multinationals in China, the best and quickest way is to acquire a local brand and expand its own brand extension and channel coverage. Dabao is undoubtedly the best choice to achieve this strategic goal for Johnson & Johnson.
Johnson & Johnson can access to the business development department directly, gain the time advantage in order to avoid time delays in plant construction. Secondly, Reduce a competitor, and directly get its position in the industry. Thirdly, get the use of high energy market forces. The two corporate uniform price policy, earnings higher than the revenue they gained when they were compete with each other. For example, a large number of information resources will be available for disclosure. Such as accounting income data can be used to illustrate the profitability of the enterprise, lso can be used to evaluate the changes of industry profitability. The acquisition will bring Johnson & Johnson the efficiency of production and operation, the most obvious performance was to achieved economies of scale to help Johnson to improve the control ability of Chinese market. Dabao in the second and third line markets has a strong marketing network and great attraction. Dabao have the mature path in these markets , especially advantage in the wholesale field of the second and third line markets, there will be conducive to the expansion of the Johnson & Johnson products field.
Also can filling in gaps for Johnson & Johnson in the field of low-end mass cosmetics market. Share the Dabao development experience can reduce the learning cost of accumulated experience for Johnson & Johnson. And save the enterprise development expenses. Low-end cosmetics is very easy to research and development, but to cultivate a mature terminal need to spend more time. So acquire Dabao no doubt go a shortcut for Johnson & Johnson. But its original intention is to clear away the barriers to enter the industry and the market to get priority in China.
From Dabao’s view, Dabao acquired by Johnson & Johnson who is more efficient and the replacement of managers has become inevitable, management efficiencies will brought new opportunities to Dabao in the future development. Decision making style For the decision making style in the decision making process, first I found the overestimation bias. “Overestimation occurs when people overestimate their performance, chances of success or control of the situation” (Bazerman & Moore, 2009, p. 91). JNJ has full confidence for acquiring Dabao company and they believe they will gain most of the market share after they acquiring Dabao.
So they give a high price to buy Dabao company, at the price of 0. 6 billion yuan more than their competitor Unilever. Actually, Dabao was facing many problems at that time and even can not survival in the market. So JNJ should did more research for the background of Dabao, and consider that seriously then give the right price to leave more chance for its self to the further development. Another bias I found is the Motivated Optimism bias. The Motivated Optimism bias is the tendency to feel positively about a situation turning out well despite evidence that proves otherwise.
This bias was reflected in the staffs’ placement plan that accepted by JNJ. JNJ was positively about giving the disable employees continue working in Dabao even thought JNJ knew that is one of the mean reasons that caused Dabao developed slowly. I also tell the cultural bias from this issue. First there are culture differences between the US and China in doing business. And the two companies have totally different cultural with each other. Dabao is a state welfare company. So there must have many culture issues that JNJ can not avoid.
It seems JNJ never make any prepares for that and acquired Dabao in a hurry. The problem in decision making process Because the purchase price failed to reach an agreement, the negotiations had reached an impasse after entered into an equity transfer intention agreement. Dabao listed price 23 million yuan is five times its net assets, 3. 4 times sales. Dabao audited total assets of 6. 45 billion yuan, net assets of 495 million yuan. In 2006, the main business income of 676 million yuan, net profit of 41 million. According to the 2006 assessment report, the total assets of Dabao is 2. 26 billion yuan, liabilities of 295 million yuan, the owner of the equity of 2. 241 billion yuan. The data shows that Dabao listed price of 23 million audited is of five times as net assets of 459 million yuan, which is not a cheap price. The reasonable price should be about 1. 5 billion yuan. In the others’ eyes, the price is debatable, but JNJ still acquisition of Dabao with the price ahead of the competition’s price of 600 million yuan. Another problem is the staff resettlement problem. Dabao has a characteristic, Dabao is a state welfare enterprises with as many as 35% of the disabled workers.
And according to Chinese law, employees with disabilities have not been laid off, which is one of the reasons that makes Dabao development difficult. The staff placement problem hindered the acquisition process for a time. Therefore, in the acquisition, placement of workers become the most central issues in addition to price issue. After negotiated for many times, the staff placement plan has reached a consensus. After the acquisition the Dabao employees still be the employees in Dabao’s original parent company: Beijing Sanlu Factory , continues to serve Dabao brand.
The employees who have not get the new jobs or do not accept the jobs of the new company’s will continue as employees in Sanlu Factory. Recommendations In my opinion, I disapprove Johnson & Johnson’s decision of acquiring Dabao. Before a company makes a decision to acquire another company, two main issues must be taken into consideration: to recover the cost of investment in a short period of time; another is able to play the role of complement and enhance their own original brand. Before the acquisition, the two companies are in the decline stage.
Acquired Dabao company for Johnson & Johnson is a certain risk, if Dabao continued its downward trend after the acquisition , then it will certainly contrary to the original intention of Johnson & Johnson to acquired Dabao. That will not only exacerbate the problem of Johnson & Johnson’s products market positioning in China, and it will also affect the overall development of Johnson & Johnson. If Dabao can not become a listed company, Johnson & Johnson will be difficult to recover the $ 23 billion investment cost for acquisition Dabao. Also the difficulty of integration will be to some extent prevent the development of Johnson & Johnson.
The huge capital injection and Dabao placement of workers problem will increase the difficulty of the Johnson & Johnson Development. National circumstances and foreign investment risk will be a severe test. The products of the two companies does not match, the future development challenges than opportunities. After the acquisition, the biggest problem is if JNJ could make good use of the Dabao’s channel resources, after all, there are too many differences and even conflicts of the management style between multinationals and local companies.
JNJ valued Dabao’s channel resources, however, these are not the hardware resources, if JNJ could not make good use of these channel resources, that may cause the channels unrest as well as loss of dealer. So I think JNJ should maintain the independence of Dabao, make Dabao like its other subsidiaries in the world, became a separate entity, independent operation. And achieve the integration of sales and channel. Dabao has weak research and development ability, so JNJ retain Dabao’s original flagship product and at the same time research and development of new products, in order to seize the market.
Johnson & Johnson should change a senior management team for Dabao. Conclusion In order to catch up with other multinationals in China, Johnson & Johnson completed the acquisition of Dabao, a state welfare company has many channel resources but also has develop issues. During the decision making process, Johnson & Johnson met many problems such as the price issue, the employees settling issue. Johnson & Johnson gave a high price and accepted the employees settling plan that came up by Dabao.
I do not think that is a good decision for Johnson & Johnson to acquire Dabao because it is difficult to recover the cost of investment in a short period of time and the development will be affected by the issues appeared in the decision making process in the future. Also for the further development I give the recommendations of make good use of these channel resources, maintain the independence of Dabao, retain Dabao’s original flagship product and at the same time research and development of new products, and change a senior management team for Dabao.
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