1. AQA A2 Business Studies Unit 4
The impact of takeovers and mergers on the performance of the businesses involved

2. Key points
Impact of a takeover or merger not just measured in financial terms
Consider the strategic motives and the effect on achievement of broader corporate objectives
Performance impact best measured in the long-term, but may be difficult to identify data if there is close integration between the businesses

3. Key Definitions
Shareholder value: the return on investment achieved by shareholders of the buying/acquiring firm. The return needs to be at least equal to the required rate of return of shareholders
Value destruction: where shareholder value falls as a result of the transaction

4. Key theories & concepts
Profitability: the overall level of profits (a key return) in the enlarged business
Market capitalisation: the monetary value (usually represented by the share price x shares in issue) of a business
Porter’s Five Forces: a model of competitive rivalry which analyses the attractiveness of a market from the point of view of existing competitors

5. Measuring the impact of M&A
For the target business:
Measure actual performance post-takeover with the assumptions in the takeover plan & due diligence.
Track achievement against planned synergies.
For the buying business:
Measure effect on profitability, cash generation and other key financial ratios.
For both businesses (combined)
Assess effect on customer service levels & brand reputation; efficiency (e.g. unit costs, productivity); key labour ratios (e.g. staff retention)
Has the transaction changed the competitive position of the enlarged firm and the competitive structure of its markets?

6. Potential positive & negative effects
Positive Impacts
Improved revenues and profits
Reduced competition (market more attractive)
Greater capabilities (e.g. technology, capacity, innovation)
Better market access (e.g. distribution; new territories)
Negative Impacts
One-off costs and effect of integration (disruptive for both buyer and target business)
Too much focus on cost synergies can damage revenue & growth potential
Cultural conflicts
Risk of overpayment for the transaction

7. Some examples of M&A effects
Takeover / merger
Impact on performance (+ or -)
Tata / Jaguar Land Rover
+ve: significant increase in profits & rapid expansion into Chinese market
Google / Youtube
+ve: rapid growth in video upload & viewing supported by Google services
Cadbury / Green & Blacks
+ve: doubled turnover to £40m under Cadbury ownership
Santander / Abbey
+ve: substantial rise in profitability as a result of cost synergies
Pearson & Edexcel
+ve: rapid rise in profits for Edexcel under Pearson ownership
News Corp / Myspace
-ve: dramatic loss of market share (to Facebook etc) & heavy losses
Daimler & Chrysler
-ve: collapse in market value as merger plan unravelled spectacularly
Terra Firma & EMI
-ve: substantial fall in revenues & profits, partly due to opposition from EMI artists

8. How important is integration speed in having an impact on performance?
On the one hand
Decisive action creates momentum for change
Tough decisions probably easier to take in the early days
Cost synergies will arise earlier if decisions made quickly (e.g. job losses)
On the other hand
Important to take time to evaluate what has actually been acquired
Some elements of the integration likely to be complex (e.g. systems integration)
Need to retain support of key stakeholders (particularly customers)

9. Impact on culture – can two cultures work together?
Yes - they can work, because:
The buyer can respect the culture of the target (e.g. Tata and JLR)
Both businesses can benefit from sharing benefits of cultural diversity
Merger integration does not aim to damage or change target culture
The target business is left to get on and grow (e.g. Innocent & Coca-Cola)
No - they struggle, because
Need for cost synergies will usually override need for cultural respect
If the target has an entrepreneurial culture, this is likely to be lost (e.g. Green & Blacks now under Kraft ownership)

10. Depends on factors
How are we measuring “performance”? Traditional to look at financial measures where data most likely to be available.
Impact on performance closely linked with the motives for the takeover or merger. Transactions with a mainly financial motive will need to impact mainly on financial measures / targets.
Transactions with more strategic motives might be harder to measure financially (certainly in the short-run). How do you measure the impact on performance on intangible factors like innovation, capability, motivation?

11. Evaluation opportunities
Distinction needs to be made between tangible measures (e.g. revenues, profits, market share etc) and more intangible measures such as brand & customer service reputation.
Are we looking at the impact on the businesses involved over the short-term or longer-term? The full impact (positive or negative) might take some years to fully assess.
Hard to measure impact for many takeovers, since the businesses concerned “disappear” into the result of the acquiring firm. Impact not so transparent in many cases.

12. 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

13. 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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