Unit 3 Micro: Revision on Takeovers and Mergers

This blog focuses on some of the reasons why many takeovers and mergers fail to bring about the synergy gains and improvements in shareholder value that were predicted before the integration of the businesses.

The fastest route for growth is through external growth – through mergers or contested take-overs. Looking at the history of business acquisitions over recent decades, it is possible to identify a wide range of reasons why they have been made:

* Speed of access to new product or market areas
* Increase market share
* Access economies of scale (perhaps by combining production capacity)
* Secure better distribution / find new channels for selling products
* Acquire intangible assets (brands, patents, trademarks)
* Overcome barriers to entry to target markets
* To eliminate competition
* Spread risks by diversifying
* To take advantage of market deregulation

There are various forms of integration

Horizontal integration: Horizontal integration occurs when two businesses in the same industry at the same stage of production become one – for example a merger between two car manufacturers or drinks suppliers. Recent examples of horizontal integration include:

* Nike and Umbro
* Tata buying Jaguar Land Rover from Ford Motors
* Iberia and BA merger
* Virgin Active buying Esporta Gyms
* Costa Coffee (Whitbread) buying Coffee Nation

Vertical integration: Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain. Examples of vertical integration might include the following:

* Film distributors owning cinemas
* Brewers owning and operating pubs
* Tour operators / Charter Airlines / Travel Agents
* Crude oil exploration all the way through to refined product sale
* Record labels, record stations
* Sportswear manufacturers and retailers
* Drinks manufacturers integrating with bottling plants
* Hewlett Packard purchasing Autonomy, a UK based software firm (Aug 2011)

Evaluation: Why do so many takeovers and mergers fail to improve shareholder value?

Many takeovers and mergers fail to achieve their aims.

1/ Huge financial costs of funding takeovers including the burden of deals that have relied heavily on loan finance

2/ The need to raise fresh equity through a rights issue to fund a deal which can have a negative impact on a company’s share price. Over the three to five years after the deal on average, the share price of the acquiring company tends to drop.

3/ Many mergers fail to enhance shareholder value because of clashes of corporate cultures and a failure to find the all-important “synergy gains“ - Cultural incompatibility is common in the case of cross-border acquisitions

4/ Newly-integrated business may suffer a loss of key personnel & customers post acquisition

5/ With the benefit of hindsight we often see the ‘winners curse’ - i.e. companies paying over the odds to take control of a business and ending up with little real gain in the medium term. A good example would be the doomed takeover of ABM-AMRO by Royal Bank of Scotland just prior to the credit crunch

6/ Integration often leads to sizeable job losses with important economic and social consequences for local areas

7/ Bad timing – mergers and takeovers that take place towards the end of a sustained boom can often turn out to be damaging for both businesses. A good example occurred in the UK property market with Taylor Woodrow’s merger with Wimpey in a £5bn all-shares deal sealed just as property prices were peaking. Then house sales collapsed due to the credit crunch and the merged business suffered big losses.