1. Mergers and Takeovers Part 2 of 4 in section 3.2 Business Growth
AKA “Mergers and Acquisitions” or “M&A”

2. Learning structure:
Mergers and takeovers linked to tactical and strategic decisions.
Tactical reasons for takeovers include an attempt to ensure increased market share and access to technology, staff, or intellectual property.
Strategic motives might include access to new markets, improved distribution networks or improved brand awareness.
Examples
Horizontal and vertical integration examples and diagram
Comparison and contrast between the stated aims of a merger or takeover and the actual results. Problems? ie clashes in corporate culture that were not originally foreseen
Financial risks: eg original purchase cost and the costs of adjusting the new business, (eg redundancies of staff holding duplicate roles)
Financial rewards: eg immediate increased revenue from the new business and economies of scale leading to reduced costs
Problems of rapid growth include diseconomies of scale resulting from communication problems and the loss of strategic direction and focus on core competency that can result from the joining of two or more previously separate businesses

3. Reminder: Firm growth comes in two broad types
Internal (organic) growth
External growth (“M&A”)

4. Merger – usually a joining together of equals (on a ‘friendly’ basis)
DEFINITIONS:
Merger – usually a joining together of equals (on a ‘friendly’ basis)
Jan 2016: The $16.6 billion deal Tyco International & Johnson Controls
In January, car parts manufacturer, Johnson Controls and Ireland-based security systems maker, Tyco International agreed to merge in a deal that would help Johnson Controls dodge the high, about 35%, corporate tax rate in the U.S. by moving headquarters to Ireland.
Acquisition or Takeover (Same thing!)– One firm buys another, paying in cash, shares or a combination of the two.
PLCs can be taken over at will as the shares are publically traded (but buying will drive up the price!). On owning >=3% of shares the predator must inform the stock market. (Legal requirement to ensure all shareholders are aware).
Private Limited Co’s shareholders must invite the predator to bid for the majority of shares held by individuals

5. Benefits of external growth (“M&A”)
Rapid Growth often the overriding factor. Growth without takeover or merger is generally slow
Synergy (ie 2+2=5 or Whole > Sum of parts…benefits due to Revenue or Cost synergies)
EoS
Cheap to buy (an ailing) business
Use retained earnings
Merge to stop your firm being acquired
Adapt to an economic/tech/political change (globalisation could be seen as all three)
Asset strip (slice and dice the assets – close, sell, merge, re- structure)
Grow the firm to realise bonus targets of management (dictated by Board goal to grow value of company)
Growth – Kraft a boring company buys Cadbury to have a gearing to emerging markets as well as to increase in size
Cost saving – 1 head office, 1 marketing department, 1 operations etc. All takeovers talk about cost savings. Internet – cost savings from T mobile and Orange

6. Some examples of motives (Handout)
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
Takeover / merger
Kraft / Cadbury
Google / Motorola
Tata / JLR
RBS / ABN-Amro
Santander / Abbey
WM Morrison & Safeway
HMV / MAMA
British Airways / Iberia

7. Acquisition activity can rapidly move the share price up (failure to bid can push it down again!)
Example Sainsbury’s and Home Retail Group (HRG - Argos)
Sainsbury’s considers a bid for HRG (Argos and Habitat); up goes the price…

8. Impact of Global Financial Crisis on M&A Activity; financing an issue!
There were a total of 140 successful domestic and cross-border M&A involving UK companies in Quarter , valued at approximately £34.0 billion. This total included 72 domestic acquisitions valued at £3.2 billion; 41 inward acquisitions valued at £28.4 billion [ARM Holdings Plc, a UK technology company which was acquired by SoftBank Group Corp of Japan] and 27 outward acquisitions valued at £2.4 billion. (Min. size £1m to count)
Impact of Global Financial Crisis on M&A Activity; financing an issue!
Handout

9. Horizontal integration
Types of integration
Vertical integration
Horizontal integration
Examples?

10. Types of integration... External growth Integration Merger
Coming together of firms in the same industry but at different stages of the production process
Coming together of firms in the same industry but at the same stage of the production process & in the same market
Vertical integration
Horizontal integration
Conglomerate integration
The coming together of firms operating in unrelated markets
Poundland
Integration
Vertical Vs. Horizontal integration
Takeover (acquisition)
Conglomerate integration
Merger

13. Strategic fit – lots of relevant theory – how might this inform the business as to its growth strategy?
Links closely with business objectives and strategy
Generic strategy (Porter)
Portfolio analysis (Boston Matrix)
Growth strategy (Ansoff)

14. Disadvantages of acquisitions:
Harvard Business Review and Deloitte both est. failure rate for M&A >70% (Failure to deliver expected results)
Challenges: range of business, IT and cultural factors
M&A is asking two companies to integrate under one corporate mission, bringing together large groups of people with their own personalities, ambitions, behavioural traits and ways of working. The complexity ramps up when multiple branch offices, cross-border IT infrastructure and regulation are included.
 F _ _ _ _ _ _ Rate
_ _ S T (B _ _ _ _ _ _ Wars)
V _ _ _ _ _ _ _ _
C _ _ _ _ _ _
C _ _ _ _ _ _ _ _
I N T _ G R _ T _ _ _
DoS
Resistance from E _ _ _ _ _ _ _ _
NO S _ _ _ _ _ _
Incompatible M _ _ _ _ _ _ _ _ _ Style, Structures, Culture
?’able M _ _ _ _ _ _ (Management Bonus???)
Failure, Cost, Bidding, Valuation, Culture, Customers, Integration, DoS, Employees, No Synergy, Management, Motives

15. 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?

16. Homework: Present the case that the takeover of HRG is advantageous / disastrous for Sainsbury’s
In teams of 2 / 3, research the case (see next slide)
Prepare a 5 minute presentation (including slides)
Be prepared to “rebut” the opposition case
Format:
Pro case (<5 min)
Con case (<5 min)
1 min conference Pro and Con teams
Pro rebuttal (1 min)
Con rebuttal (1 min)
Vote (Secret Ballot)

17. Sainsbury’s takeover of Home Retail Group
sainsbury.co.uk/media/ /rule_2_4_announcement_5_january_2016.pdf/
7 May 2016: The Competition and Markets Authority is considering whether it is or may be the case that this transaction has resulted in the creation of a relevant merger situation under the merger provisions of the Enterprise Act 2001 and, if so, whether the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.
home-retail-group-plc-is-a-disaster-for-shareholders/
jobs-could-go-in-home-retail-group-merger
argos-roll-out-after-completing-14bn-home-r/