AQA A2 Business Studies Unit 4 The motives for takeovers and mergers and how these link with corporate strategy

Key points A wide variety of motives for M&A Takeovers or mergers are optional – just one part of a growth strategy Distinguish between strategic, financial & managerial motives

Key definitions Takeover: Where one business acquires a controlling interest in another business = a change of ownership Merger: a combination of two previously separate businesses into a new business External growth: use of takeovers & mergers Organic growth: growth from “within the business” e.g. new products; expansion into new markets Diversification: expanding into new markets with new products – the riskiest growth strategy

Key theories to consider Ansoff matrix: a model that analyses four growth options: product development; market penetration; market development & diversification Porter generic strategies: 3 strategies commonly used by businesses to achieve competitive advantage (cost leadership; differentiation; focus) Economies of scale: where unit costs fall as a result of increased scale or scope of operations (key to strategy of cost leadership)

How M&A fits into a strategy Methods Organic / internal growth Innovation Diversification International Expansion Cost leadership Takeovers / mergers Joint ventures or strategic alliances

strategy Is all about CHOICE

Why is strategy all about CHOICE? A key concept to remember and build into essay answers Takeovers and mergers are rarely forced on a business - they are optional If M&A is optional, then there must be some alternatives E.g. could a joint venture or strategic alliance be as effective as a cross-border takeover?

Strategic fit – lots of relevant theory! Links closely with corporate objectives (BUSS3) Generic strategy (Porter) Portfolio analysis (Boston Matrix) Growth strategy (Ansoff)

What is “strategic fit”? An important concept which can be used to evaluate the motives of a takeover or merger Does the transaction fit with the capabilities of the firm? the corporate objectives of the firm? E.g. a takeover involving diversification has a good strategic fit for an objective of spreading risk by investing in a variety of products and markets

Some key strategic drivers of M&A activity Technological change Need for scale to remain competitive Need to be able to supply customers globally Low growth in mature economies Access to wider distribution Invest in emerging markets

M&A: 3 main motives Strategic motives Financial motives Focused on improving & developing the business Closely linked to competitive advantage Financial motives Focused on making best use of financial resources for shareholders Concerned with improved financial performance Managerial motives Focused on the self-interest of managers Not necessarily in the best interest of shareholders Source: adapted from Exploring Strategy, Johnson, Whittington & Scholes, 2011

Key strategic motives for M&A Locations, Markets, Globalisation Extend the Business Consolidation, remove competition, economies of scale Change Competitive Structure Access better technology, stimulate innovation Improve Business Capabilities

Key financial motives for M&A E.g. businesses with high cash balances can potentially earn a better return by investing in other firms Make use of surplus cash and high share price Can the target be bought at a knock-down price? Potential to sell surplus assets & cut costs & still retain the business that was wanted in the first place Bargain hunting & Asset Stripping

Key managerial motives for M&A Director rewards may be linked to growth Big takeovers attract media – boosts ego / reputation? Takeovers as “vanity projects” Personal ambition & financial reward Pressure to do takeovers (if competitors are too) Concern that firm may be being left behind Over-confidence Pressure from advisers & media (e.g. investment bankers) Bandwagon effect / peer pressure

Some examples of motives Takeover / merger Main motives for the transaction Kraft / Cadbury Establish global market leadership in confectionery & access emerging markets Google / Motorola Acquire valuable smartphone patents & manufacturing expertise Tata / JLR Economies of scale & acquire expertise, brands, capacity and distribution RBS / ABN-Amro Management vanity; continue reputation for big deals; over-confidence Santander / Abbey Market entry (UK) & establish base for further acquisitions to build market share WM Morrison & Safeway Increase market share & exploit economies of scale to improve competitiveness HMV / MAMA Diversification into fast-growing markets & reduce reliance on retailing British Airways / Iberia Consolidation; economies of scale & survival: positioning for further takeovers

The role of private equity Professional investors who invest on behalf of specific funds Responsible for a large number of takeovers each year Wide range of industries, markets, types of investment Their aim - to earn a target rate of return for the investment fund

What makes private equity takeovers different? Financial motive is key (rather than strategic motive) Look to invest in fast-growing firms or those where financial performance can be significantly improved Takeover usually financed by both equity (shares) and debt (loans) Advise rather than get involved in day-to-day management of the target Synergies not usually important to the deal (unless the are links with similar investments in the portfolio)

Common criticisms of private equity takeovers Too many involve mature businesses which don’t really need the investment Over-geared: too much debt used to finance the transaction Short-termism: not always a long-term investor Too much focus on cost cutting and asset stripping

“Depends on” points… Is the firm at a competitive disadvantage? If so, then a strategic acquisition might have potential to transform its position. Does the acquiring firm have the financial resources to be able to pursue an external growth strategy? How supportive are its shareholders and lenders? Is the takeover/merger opportunistic or part of a long-term strategic plan?

Evaluation opportunities The size/scale of the takeover / merger: how significant is it? Does the firm have a track record of successful M&A? If so, this should reduce the risks involved in subsequent transactions, particularly if of a similar size/type. Is/was the takeover/merger consistent with the firm’s corporate objectives? Is/was there an alternative to takeover or merger which might have a similar benefit at a lower level of risk (e.g. a joint venture or strategic alliance)? Which of the three main motive types (strategic, financial, managerial) was the most significant or influential?

Summary: advantages of acquisitions Quick access to resources & skills the business needs Overcomes barriers to entry Helps spread risk (wider range of products and greater geographical spread) Revenue growth opportunities (synergy) Cost saving opportunities (synergy) Reduces competition May enable economies of scale

Summary: drawbacks of acquisitions High cost involved Problems of valuation Clash of cultures Upset customers Problems of integration (change management) Resistance from employees Non-existent synergy Incompatibility of management styles, structures and culture Questionable motives High failure rate Diseconomies of scale

Key Case Study – Kraft & Cadbury Transformational takeover which was seen by Kraft as the final piece in its strategic jigsaw All about achieving leadership in faster-growing confectionery and snack markets

Cadbury’s strategic fit with Kraft

Kraft / Cadbury – product strategy

Kraft / Cadbury – geographical leadership

Kraft / Cadbury – market leadership

BUSS4 Research Bullets for 2012 Motives for takeovers and mergers and how these link with corporate strategy Problems of takeovers and mergers including difficulties integrating businesses successfully Factors influencing the success of takeovers and mergers Impact of takeovers and mergers on the performance of the businesses involved Impact on, and reaction of, stakeholders to takeovers and mergers Reasons why governments might support or intervene in takeovers and mergers 1 2 3 4 5 6

1 2 3 4 5 6 Strategic Motives Integration Problems Success Factors Business Impact Stake- Holder Impact Govt Role 1 2 3 4 5 6

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