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

2. 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

3. 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

4. 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)

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

6. strategy
Is all about
CHOICE

7. 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?

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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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)

18. 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

19. “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?

20. 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?

21. 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

22. 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

23. 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

24. Cadbury’s strategic fit with Kraft

25. Kraft / Cadbury – product strategy

26. Kraft / Cadbury – geographical leadership

27. Kraft / Cadbury – market leadership

28. 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

29. 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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