Takeovers and mergers: Every merger deal that has ever occurred (explained in fewer than 1000 words)

With just two weeks to go before you wrestle with the BUSS4 paper no doubt you will be feeling somewhat saturated by the volume of information you are attempting to absorb as your revision peaks (or starts!)

It is my experience of this time of year that BUSS4 students run the risk of becoming so obsessed with remembering specific content (e.g. data & stats) that they neglect the context, and often very simple underlying principles, that explain the rationale behind business activity. Understanding why businesses choose to merge is vitally important as it is their specific motives which drive the actions that they take and the decisions that they make.

Thus, if you can appreciate the motives behind a merger I believe you are halfway towards making sense of any question that section A throws your way on the day of the exam. Understanding the reasons why businesses make the strategic choice to merge should be the starting point for any answer. Crack this and you have a great chance of picking up the bulk of the marks. “It can’t be that easy I hear you say?” The answer to your question is “yes it is” and I’m about to make it a whole lot easier!

All of the businesses that you are studying for BUSS4 (check out the tutor2u 12) are multi-national businesses (MNCs) meaning they operate in a number of countries and employ a sizeable workforce. They have achieved their multinational status through growth – growth which has been achieved organically or via some kind of joint venture (e.g. a merger). Organic growth simply refers to the process of business expansion due to increased output and increasing overall customer base and sales. Apple is a great example of a business that used organic growth successfully.

The alternative option is a joint venture. As the name suggest this involves using another business as a vehicle for growth. This can be done one of three ways:

1) A takeover / acquisition – this involves one business taking control of another business following a buyout of their shares. The target business is then usually absorbed into the operations of acquiring organisation. Examples include Kraft’s purchase of Cadbury and Santander’s purchase of Abbey National.

2) A merger – this is the process of two businesses joining together and is usually characterised by consensual agreement to merge. The two businesses integrate fully and become one business entity. Examples include Lloyds merging with TBS to become Lloyds TSB and BA merging with Iberia to become IAG.

3) A strategic alliance – this refers to the process of two businesses agreeing to work together or to share particular knowledge or expertise for mutual benefit. Here there is no change of ownership. This is often found in industries which have particular high R&D costs like pharmaceuticals the automobile industry. The strategic alliance between GM and Peugeot just after Christmas is a great example of this. http://www.ft.com/cms/s/0/ac3aa4ca-62f0-11e1-9245-0144feabdc0.html#axzz1wumQEsdH

Clearly attempting to join two MNCs is a titanic task which will almost inevitably experience problems. So why do businesses merge? It is my opinion that every decision to embark on a joint venture is rooted in one of the following motives (see the Map of Merger Motives). Crack these and there isn’t a deal out there you won’t understand. Sitting comfortably…here we go.

1) Market share – for many businesses organic growth is simply no longer a possibility. They have hit a growth ceiling usually as a result of a particularly competitive oligopolistic market structure where product differentiation is difficult to achieve. Merging presents the opportunity to grow market share, benefit from cost synergies improve competitiveness.
(Example: Orange and T-Mobile)

2) Expertise gaps – for all their strengths businesses can not be great at everything. Therefore in order to extend their range of expertise they may choose to merge or acquire a business which possesses strengths that they do not have. Facebook’s $1bn purchase of Instagram is a great example of this. Not only have Facebook bridged a gap in their expertise by acquiring a company which specialises in photo sharing but they have also prevented rivals such as Twitter from further extending their expertise and skills. This is a vitally important long-term strategic decision by Facebook which should help safeguard their future success. Vodafone and CWW is another great example - http://www.bbc.co.uk/news/business-17810568

3) Relative performance – for many businesses their performance (e.g. sales, profits, market share) may be poor or declining relative to their rivals in the same market. This is something which is unsustainable. Merging with or acquiring a rival business may help to improve competitiveness and performance when measured against that of their rivals. Morrison’s acquisition of Safeway in 2003 is a great example of this. It may be suggested that this was an acquisition of necessity given the market share of rivals such as Tesco and Sainsbury.

4) Growth potential – often merging with or acquiring another business means aside from the gains in market share there is also greater scope for further growth potential in the future. Co-op’s £1.57bn takeover of Somerfield is an example of a business hoping to improve their chances of growth in the future by gaining a large share of the market (roughly 8%) today. Expanding their nationwide network of stores now means future growth is more realistic. A diversifying and cross-boarder example of a takeover fuelled by an intention to enhance growth potential is Tata’s acquisition of JLR and Corus.

5) Eliminate competition – a merger or takeover presents a unique opportunity to eliminate rivals in the market thus reducing the level of competition. Virgin gyms acquisition of Esporta gyms left them with fewer rivals and hence more chance of success.

6) Reconfigure the 5 forces – some mergers serve to reconfigure the 5 competitive forces (Porter) of the marketplace. This can occur if, for example, the new (post merger) business has a greater degree of power, due to their increase size, over their suppliers or buyers. An example of this could be IAG’s (BA & Iberia) ability to negotiate better deals with airports for landing slots given their size and strength.

7) Synergies – this is a feature in almost all merger and takeover deals. Synergies simply refer to the revenue or cost gains of combining together. In simple terms this is an economy of scale. Staying with the airline industry where over-capacity is a constant challenge the cost synergies of sharing flights that are full on shared routes has obvious cost benefits to both BA and Iberia. Put simply, sharing aircraft significantly reduces operating costs and boosts profits.

So there you have it. With an understanding of these 7 motives at your disposal there is no deal you can’t unpick and make sense of. Notice the easy to remember acronym. Now back to the revision! Good luck.