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Takeovers and Mergers

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  1. Takeovers and Mergers BUSS4 Internal and External Growth

  2. Growth • Organic growth or internal growth comes from within the business for example opening new branches • Inorganic or external growth comes from outside of the business for example buying another company (takeover or merger) • Organic growth can be a safer but much slower method than takeover • The safety is that there will be no clashes of culture • Steady growth also avoids to need to add debt to the company’s balance sheet since finance is most likely to come from retained profit • A reliance on organic growth could lead a firm to miss out on surges of growth within the industry – if the business does not grow as quickly as the industry they may miss out on opportunities • They may fail to meet growth in demand • Cadbury saw an increase in consumer interest in organic chocolate • It could have taken time and developed its own but instead it chose to buy a brand that was already known • However, there is a low success rate with takeovers and mergers • It is possible to grow quickly organically but it is challenging • Innocent grew its business from GBP0.4million to GBP130 million in 8 year entirely organically

  3. Mergers and Takovers • Every time a company’s shares are bought or sold on the stock exchange there is a change of ownership • The significant change occurs when a majority of shares are bought by an individual or company • 51% of shares gives control • To takeover a company the individual or organisation must buy at least 51% of the shares • A takeover is normally hostile whereby one organisation is bought without its agreement • A merger is when two or more companies come together to make one with agreement

  4. Why Merge or Takeover? • To grow – the fastest way to achieve significant growth • To gain cost synergies – cost savings are often the main argument for merging • Synergies are the benefits of two things coming together • One firm (made up of two firms put together) will have lower costs than the costs of the two put together • Economies of scale may be achieved (bigger company making more and spreading costs over larger output so unit costs reduce) • Diversification • To enter different markets • To reduce risk when there are changes in demand (demand for one product may reduce but you still have the other) • By buying another company you don’t have the product development time • Examples • Cadbury entering the organic market with Green & Black’s • Microsoft entering the telecommunications market with Skype • Market Power • If two markets in the same market merge the combined firm will have large market share and more power to increase pricing

  5. P336 Reasons for takeovers

  6. Why Merge or Takeover? • To grow – the fastest way to achieve significant growth • To gain cost synergies – cost savings are often the main argument for merging • Synergies are the benefits of two things coming together • One firm (made up of two firms put together) will have lower costs than the costs of the two put together • Economies of scale may be achieved (bigger company making more and spreading costs over larger output so unit costs reduce) • Diversification • To enter different markets • To reduce risk when there are changes in demand (demand for one product may reduce but you still have the other) • By buying another company you don’t have the product development time • Examples • Cadbury entering the organic market with Green & Black’s • Microsoft entering the telecommunications market with Skype • Market Power • If two markets in the same market merge the combined firm will have large market share and more power to increase pricing

  7. Farm growing hops horizontal integration(if the brewer were to buy another brewer) Brewer Brewer Brewer Brewer Types of Integration Vertical forward integration(if the brewer were to buy the pub or the farm were to buy the brewer and the pub Vertical Backward integration(if the pub were to buy the brewer or the hop farm Pub Conglomerate integrationA company buys an unrelated business customer

  8. Vertical Integration examples • L’Oreal buys Body Shop giving it retail stores • March 2008 Boeing purchased a key supplier to its 787 to help reduce delays in delivery of the planes to BA and Virgin

  9. Remember to think about the advantages and disadvantages to all the major stakeholders Table 47.2 Backward vertical integration P338

  10. Remember to think about the advantages and disadvantages to all the major stakeholders

  11. P337 A grade application

  12. Horizontal Integration examples • One firm buying out another in the same industry

  13. Horizontal Integration advantages • For the buyer there are several advantages • Cost cutting through duplication of salesforce, distribution and marketing overheads, and by improved capacity utilisation • Opportunities for major economies of scale • A reduction in competition should enable prices to be pushed up • The Office of Fair Trading will often ask the Competition Commission to investigate if it thinks that a horizontal merger is a threat to competition • Ryanair has been trying to buy AerLingus for years and may now be asked to reduce its share holding

  14. Retrenchment • Retrenchment is shrinking • Firms may get too large and start to see diseconomies of scale • They may then sell off parts of their business and start talking about focussing • April 2012 Sony sheds 10,000 staff in major reorganisation • Sony has been struggling to compete in the television business with Samsung and LG, while Apple and Samsung have taken significant share in the smartphone market. The job losses are part of a change in strategic direction for Sony which says it will focus its business on three areas - digital imaging, games consoles and mobile devices. • May 2011 Comet to close stores and service centres with loss of 110 jobs • Key reasons: rapid decline in consumer confidence leading to lower spending on high-priced electrical items; migration of spending from high street to online. Comet stores have now ceased trading (2013) • Thomas Cook sells Indian operation and aims for £35m of cost savings per year • Key reasons: UK’s second-largest tour operator hit in 2011 by a significant reduction in demand for its long-haul holidays (particularly Egypt). Several profits warnings led to a collapse in confidence with share price falling by over 90% in just a few days. Business has high debts but has agreed a £100m refinancing / lifeline from its bankers in return for agreeing to a significant rationalisation of the group.  Thomas Cook’s Indian subsidiary to be sold + 200 more high street travel agencies to be closed. Objective is to reduce annual operating costs by £35m per year. • More examples http://www.tutor2u.net/blog/index.php/business-studies/comments/researchbuster-retrenchment

  15. Demergers • Many takeovers are not successful • Research shows that the majority of takeovers fail to improve business performance • Managers think they will get economies of scale but they don’t think about the diseconomies of scale due to problems of communication and co-ordination • A demerger is when companies split up • Once a firm has seen that the expected economies of scale are not going to happen it may seek to sell off the business it originally bought Insert a grade application P339

  16. Evaluation • Leaders may claim that a takeover or merger will bring cost reductions or create a world leading company • In reality it may be because they just want to lead a bigger company – it may be arrogance and greed (RBS and ABN Amro • One of the reasons that firms find it difficult to successfully merge or takeover is the class of culture • If the cultures of the two firms are very different there may be resistance to change • Another issue is that if a firm wants to diversify it will buy another that it may not know much about • Strategic decision will be based on ignorance • Tom Peters (In Search of Excellence) said firms should ‘stick to the knitting’ meaning that they should stay with what they are good at.