1. Business Growth Organic – Examples? External – Mergers – Acquisitions Focus on mergers …

2. Key definitions Organic growth: growth from “within the business” e.g. new products; expansion into new markets External growth: use of takeovers & mergers Diversification: expanding into new markets with new products – the riskiest growth strategy 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

3. 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)

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

5. 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

6. 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

7. M&A: 3 main motives Source: adapted from Exploring Strategy, Johnson, Whittington & Scholes, 2011 Strategic 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

8. 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

9. 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

10. 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

11. Some examples of motives Takeover / mergerMain motives for the transaction Kraft / CadburyEstablish global market leadership in confectionery & access emerging markets Google / Motorola Acquire valuable smartphone patents & manufacturing expertise Tata / JLREconomies of scale & acquire expertise, brands, capacity and distribution RBS / ABN-AmroManagement 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 / MAMADiversification into fast-growing markets & reduce reliance on retailing British Airways / Iberia Consolidation; economies of scale & survival: positioning for further takeovers

12. 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

13. 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)

14. 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

15. 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

16. 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

17. 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

18. Cadbury’s strategic fit with Kraft

19. Kraft / Cadbury – product strategy

20. Kraft / Cadbury – geographical leadership

21. Kraft / Cadbury – market leadership

22. “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?

23. 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?

24. Possible essay focus 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

25. Characteristics of a badly-managed takeover Limited due diligence Price too high Over-estimate of potential for synergies Lack of, or too simplistic, integration plan Indecision once the takeover is complete Poor communication with key stakeholders

26. Example of the Winner’s Curse - RBS In 2007, RBS was part of a consortium that bid £49bn as it competed to buy ABN-Amro RBS clearly overpaid for the takeover The subsequent effect on RBS's capital reserves led to the forced nationalisation of RBS in 2008 to avoid a collapse of the UK banking system

27. Another possible problem: friendly or hostile takeover? Hostile Target Board Rejects Offer Friendly Target Board Accepts / Supports Offer

28. Friendly takeovers Buyer approaches target Board with offer Target Board negotiates & agrees price / terms Shareholders of both firms approve the deal Legal completion of takeover The vast majority of takeovers are friendly

29. Hostile takeovers Buyer approaches target Board with offer Target Board rejects offer Buyer makes offer direct to target shareholders Target shareholders decide whether to accept Hostile takeovers are unusual, often bitterly contested and costly

30. Some common problems with hostile takeovers Senior management in the target often leave en masse = loss of experience & expertise Resentment amongst target stakeholders (local community, employees) Increased risk that the buyer pays too much for the takeover

31. Taking over a close competitor Usually horizontal integration Should be plenty of overlap, which creates potential for cost synergies – Distribution channels – Suppliers (increased buying power) Also much potential for conflict – Competing brands: which ones to retain & support? – One firm will inevitably be favoured; effect on employees on the other side? Competitors will seize on disruption and uncertainty

32. Key problems with takeovers High costs involved (including disruption to business) Paying too much for the takeover (over-valuation) Clash of cultures – makes it hard to communicate Lost customers – potentially lower revenues (dis- synergy) Resistance from target employees and management, which slows potentially necessary change High failure rate – 70%+ destroy shareholder value Management distraction – their attention is away from the core, existing business – which then suffers

33. The importance of integration In the heyday of M&A, whilst the champagne glasses clinked, you would often see an ashen-faced figure in the corner – the operations director, whose job it was to make it work” “ “

34. Post-takeover integration The hardest part of a takeover is making the deal work once it is completed

35. Ways to avoid integration problems Detailed due diligence – focused on the likely areas of risk (e.g. IT systems, impact on customers etc.) Careful integration planning – a detailed action plan based on pre-takeover due diligence. Act quickly: the first 100 days are often considered vital for the overall success of the takeover or merger. Clear communication about the objectives of the transaction and the honesty about the implications for key stakeholders (particularly employees). Respect the culture of the target business

36. What factors influence success? The price paid for the takeover: a business that pays over-the-odds for its target will struggle to make the investment work, particularly in the short-term Speed of integration: M&A tends to be more successful if post-takeover integration is quick & decisive Ability to retain key staff: can key management and staff (skills, experience etc.) be retained once acquired? The relative focus on cost synergies versus revenue synergies: too many takeovers rely on short-term cost savings rather than exploiting the longer-term opportunities for higher revenues

37. Examples of successful deals Successful takeovers and mergers L’Oreal & The Body Shop (more shops, higher profits) Google & YouTube (rapid growth & advertising revenue) Tata & Jaguar Land Rover (£1bn profits in 2011) Santander & Abbey, Alliance & Leicester, Bradford & Bingley (higher profits & market leadership in UK) Taylor Woodrow & George Wimpey (economies of scale for two leading house builders merged together)

38. However: the golden rule of M&A At least 70% of takeovers and mergers destroy shareholder value

39. Examples of deals that failed Failed takeovers and mergers News Corp & Myspace (bought for £580m; sold for $25m) ITV & FriendsReunited (bought for £175m; sold 3 years later for £25m) Cisco & Flip (bought for $590m; closed down in a year) RBS & ABN-Amro (bought for £10bn; results in losses of at least £15bn & nationalisation) Terra Firma & EMI (bought for £4.2bn; sold 3 years later for loss of £1.75bn) – one of biggest private equity failures

40. Government Intervention The UK has a “light-touch” towards Govt involvement in M&A Two key bodies: Competition Commission & Office of Fair Trading European Union competition policy also applies to M&A involving UK firms Most takeovers and mergers referred to competition regulators are ultimately cleared – although sometimes with conditions

41. Reasons for government intervention or support Where a takeover / merger might be considered likely to result in one firm having undue market power (typically market share of 40% or more) Specific situations in which the public interest might be threatened: e.g. Competition Act 2002 allows the Secretary of State to intervene in the media market to ensure there is a sufficient plurality of persons with control of media enterprises. To support (or waive through) a takeover that might be in public interest – e.g. partial nationalisation (Lloyds HBOS)

42. Key definitions Competition policy: Government policies to prevent and reduce the abuse of monopoly power Enterprise Act 2002: major reform of the control of mergers and takeovers in the UK, removing the decision-making powers of government, other than exceptional cases, and passing responsibility to Office of Fair Trading and the Competition Commission. Monopoly: where a firm has a dominant position in an industry or market – e.g. is able to control supply and pricing

43. Key theory & concepts Abuse of monopoly power: Abuse of monopoly power can lead to market failure and be against the public interest. Therefore Governments are concerned to intervene and protect the interests of the consumers Cadbury’s Law: a suggested change to UK legislation to make it harder for UK firms to accept takeovers (60% vote rather than 50% & only long-term shareholders may vote); not yet implemented. Laissez-faire: an approach to market regulation which largely leaves the market to look after itself

44. UK Competition Policy Competition Commission – an independent public body which conducts in- depth inquiries into mergers, markets and the regulation of the major regulated industries Office of Fair Trading – Wide-ranging activities, including mergers – The OFT is responsible for reviewing merger situations, and where they may lead to a lessening of competition, refers them to the Competition Commission for further investigation.

45. Examples of UK Govt Intervention Takeover / merger Government / regulator response Kraft / Cadbury No specific response – other than raising possibility of Cadbury’s Law News Corp / Sky TV Important case – UK Govt pressurised to refer the takeover bid to the Competition Commission as a result of phone-hacking scandal & concerns over media plurality; eventually News Corp withdrew bid as scale of public opposition became clear Lloyds TSB / HBOS Government decided not to refer the Lloyds emergency rescue of HBOS (despite obvious concerns over potential market dominance) because of the need to protect the viability of the UK banking system Ferrovial / BAACompetition Commission ruled that BAA had to sell Gatwick, Stansted and a Scottish airport as a condition of is takeover by Ferrovial – in the interests of passengers

46. European Union Competition Policy Main criteria used for evaluating a takeover / merger: – The market position of the merged firm (market share and other competitive advantages) – Strength of the remaining competitors – Customers’ buying power – Potential competition from new entrants

47. UK regulation – arguments for a “light touch” Encourages inward investment to help develop successful UK firms (e.g. HP & Autonomy; Tata and JLR) UK firms have shareholders from around the world Not the business of government to decide who owns a business (laissez- faire)

48. UK regulation – arguments against a “light touch” Some firms are strategic assets for the UK economy (energy, transport, utilities) - they need to be protected Increased risk that UK jobs will be lost Resist takeovers by short-termist investors who don’t have the long-term interests of the business at heart

49. Depends on factors How significant is the takeover or merger in terms of size or potential impact? Does the takeover or merger take place in a market in which the government wants to exert greater control / regulation? E.g. financial services, media or of national interest? The geographical reach of the businesses involved: e.g. determines whether competition regulation in the US and Europe applies.

50. Evaluation opportunities UK competition policy – often described as having a “light touch” towards regulation. Consensus is that it is relatively easy for firms to be bought and sold in the UK. A key benefit of relatively relaxed laws about takeovers and mergers is that inward investment in UK firms is encouraged. Counter-argument: light-touch regulation leaves UK firms exposed to hostile takeovers that are not in the long-term interests of the UK and its economy.

51. Key case studies – News Corp & Sky (2011) Sky News – important UK broadcaster, owned by BSkyB News Corp has a 39.1% stake in BSkyB – wanted to complete a takeover Govt initially prepared to allow the transaction to proceed Widespread concerns over media plurality & News Corp ethics (phone hacking) led to eventual withdrawal of the bid No formal involvement of the competition regulators

52. Key case studies – Lloyds TSB & Abbey National (2001) Lloyds TSB made a £18bn bid for Abbey National in 2001 Govt Minister (Patricia Hewitt) blocked the deal saying it was "against the public interest" Competition Commission had recommended the deal be blocked after a 4 month investigation They believed the deal would reduce competition in the current account market, in which the combined Lloyds/Abbey group would have a 27% share. In 2004 Abbey was sold to Santander for £8bn

53. Key case studies – Merger of Ryanair and Aer Lingus (2010) Ryanair launched a £1,5bn hostile bid for Aer Lingus after building a stake after it was privatised in 2006 2007: European Commission declared takeover was incompatible with EU competition rules EU reason; two airlines controlled more than 80% of all European flights to and from Dublin airport European Court of Justice finally blocked the takeover in 2010 but allowed Ryanair to keep its 29.9% stake The Irish Govt retains a 25% stake in Aer Lingus

54. Key case studies – Takeover of HP by Heinz (2006) In 2006 US conglomerate Heinz announced the takeover of UK sauce producer HP for £470m Together, the two brands would have over 80% of the branded sauce and ketchup market The Competition Commission reviewed the deal, fearing higher prices for brown sauce and tomato ketchup. Shortly after the deal was cleared to proceed In 2007 Heinz closed the HP factory in Birmingham, moving production to Holland with the loss of 125 jobs