1. AQA A2 Business Studies Unit 4
The problems of takeovers and mergers including difficulties integrating businesses successfully

2. Key points Every takeover or merger involves some kind of integration
But degree of integration will vary depending on factors such as:
Need for cost synergies
Compatibility of corporate cultures
Size, timing, nature of the deal

3. Key terms
Merger integration: the process of bringing together the functional areas of buyer & target business (e.g. organisational structure, systems, operations, marketing, people, merging cultures)
Dis-synergy: costs or lost revenues that arise as a result of the transaction (e.g. lost customers)
Cross-border: buyer and seller based in different countries (although both may be multinationals)

4. Key theories & concepts
Corporate culture: the “way that things are done”; often different, even amongst firms in the same market.
Stakeholders: different people and groups who have an interest in the effect of the M&A transaction (e.g. customers, employees, local community).

5. Overview of the takeover process
Target Identification & Choice
Valuation & Offer
Due Diligence & Completion
Post-acquisition Integration

6. Characteristics of a badly-managed takeover
Limited due diligence
Price to 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

7. Target choice Key issues to consider:
How does the target fit with the corporate strategy
How well will the target organisation and culture fit?
What is the potential for synergies?

8. Target choice – the ideal target?
Strategic fit
Consistent with corporate objective
Complements the strategy
Cultural fit
Similarity of cultures
Few significant barriers (e.g. language)
Top management can work together
Potential for value creation
Revenue synergies
Cost synergies
Target price is reasonable
Integration is achievable / realistic

9. Complications for public companies
The existing share price indicates the market value of the firm
However, takeover usually requires a substantial bid premium
Bid premium typically 30-40% more than share price prior to bid announcement
Regulation of bid via Takeover Panel rules adds complexity & cost

10. Target valuation Valuation has to strike a balance Don’t pay too much!
Interests of buyer shareholders
Interests of target shareholders
Don’t pay too much!
Get the best price!

11. But acquisitions usually fail
It is widely accepted that over 50-70% of takeovers destroy shareholder value

12. The danger of over-valuation
The easiest way to destroy shareholder value is to over-pay
Extra danger of over-paying is trying to cut costs too quickly to justify price paid

13. Paying too much - The Winner’s Curse

14. 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

15. Checking what you are buying: due diligence
Financial
Commercial
Legal

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

17. Friendly takeovers The vast majority of takeovers are friendly
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

18. 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

19. 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

20. 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

21. 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

22. 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” “

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

24. 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

25. Some examples of integration (+ & -)
Takeover / merger
Integration Experience / Issues
Kraft / Cadbury
Most senior Cadbury managers have left; but little effect on operations or sales
Daimler / Chrysler
Disastrous clash of corporate cultures – eventually split up in 2007
Tata / JLR
Excellent example of well-planned takeover & sensitive long-term integration plan
RBS / ABN-Amro
Very poor quality due diligence & absence of realistic integration plan
Santander / Abbey
Textbook example of how to integrate takeovers – focusing on IT systems
News Corp / Myspace
Entrepreneurial online culture fails to thrive in a bureaucratic, corporate culture
Coca-Cola / Innocent
Need for integration reduced by allowing target to continue operating independently
Orange UK / T- Mobile UK
Difficult integration due to many overlaps in systems, operations and management

26. “Hard” and “Soft” parts to takeover integration
IT and other systems integration
Distribution (conflicts, extension)
Elimination of duplicated activities and costs
Transfer of contracts
Financial reporting and responsibilities
Soft
Organisational structure
Management appointments
Communication
Handling different cultures

27. Integration success will “depend on”…
The speed of the deal: takeovers that are negotiated over a longer period may have fewer integration issues as both sides build better understanding
Friendly or hostile: has there been a battle for control? Hostile takeovers often result in greater resentment amongst stakeholders in the acquired business.
Experience of the acquiring firm: management with a track record of negotiating and integrating takeovers less likely to experience problems
The type of takeover: e.g. a private equity transaction involves relatively little integration – the deal is really about financial motives
The genuine differences or contrasts in corporate culture

28. Acquisitions and change
An acquisition poses significant challenges for management
Employees
E.g. Uncertainty about acquirer intentions & strategy (cost savings, rationalisation)
Customers
E.g. continued relationship; impact on quality
Management (of acquired business)
E.g. duplicated roles, new hierarchy

29. Why acquisitions fail
Price paid for acquisition was too high (over-estimate of synergies)
Lack of decisive change management in the early stages
The takeover was mishandled
Cultural incompatibility
Poor communication
Loss of key personnel & customers post acquisition
The creation of a lumbering giant that is soon outpaced by smaller rivals

30. Evaluation opportunities
How similar are the two businesses concerned in the takeover or merger?
E.g. is integration complicated by lots of duplication between the two operations?
How important are the achievement of synergies to making the transaction a success?
E.g. if significant cost synergies need to be achieved in order to justify the price paid for the business, then the integration may need to be more substantial. High job losses & resulting uncertainty may increase resistance to change & integration.

31. 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

32. 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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