What is a Merger?

• A combination of two previously separate businesses is achieved by forming a completely new business into which the two original businesses are integrated

Examples:

• 2010: British Airways and Iberia merge to form IAG

• 2000: Glaxo Wellcome plc and SmithKline Beecham plc merge to form GSK plc

• 2014: Dixons plc and Carphone Warehouse merge to form Dixons Carphone

• 2015: Paddy Power and Betfair merge to form Paddy Power Betfair

• 2015: H.J. Heinz Company & Kraft Foods Group merge to form The Kraft Heinz Company

The difference between a Merger and a Takeover?

• Merger:

  • A new business is created

• Takeover:

  • One business takes control of another business

Common features of mergers:

• Both businesses broadly "equals"

• E.g. in terms of size, value, activities

• Usually operate in the same industry

• Significant potential for "synergies"

• But the usual risks are there - e.g. trying to "merge" organisational cultures

Benefits of mergers:

• Economies of scale:

  • As production, operation, or distribution increases, the average cost per unit decreases. This can lead to significant cost savings, which can improve profitability. 

• Increased market share:

  • Mergers reduce competition and increase market share by combining the sales of both businesses. 

• Access to new technologies:

  • Mergers can provide access to new technologies and innovation. 

• Better financial planning:

  • Mergers can result in better planning and utilization of financial resources. 

• Shareholder benefits:

  • Shareholders of the acquired company typically receive a premium for their shares, which is higher than the market value before the acquisition. 

• Consumer benefits:

  • Vertical mergers can benefit consumers by increasing efficiency and creating downward pressure on consumer prices. 

Drawbacks:

• Financial risks:

  • Mergers can be expensive and place a large cash burden on companies, especially if terms aren't agreed upon. 

• Competition issues:

  • Merging with a rival business can create a monopoly, leading to higher prices and a bad deal for consumers and suppliers. 

• Culture clashes:

  • Merging companies may have different cultures, which can lead to conflict. 

• Integration challenges:

  • It can be difficult to integrate the two companies effectively, especially if they don't communicate well. 

• Loss of key employees:

  • Mergers can create uncertainty, which may cause high-performing employees to leave. 

• Risk of redundancies:

  • Merging companies may have employees who duplicate each other's duties, leading to job cuts. 

• Regulatory hurdles:

  • Mergers may have to navigate regulatory hurdles. 

• Customer dissatisfaction:

  • Mergers can lead to customer dissatisfaction. 

• Increased debt:

  • Mergers can increase a company's debt. 

• Dilution of ownership:

  • Mergers can dilute ownership. 

• Operational disruptions:

  • Mergers can disrupt operations. 

• Risk of failure:

  • Mergers can fail, especially if there's poor planning, unrealistic expectations, or culture clashes.

What is a takeover?

• It involves one business acquiring control of another business

What are the reasons for them?

• Increase market share

• Acquire new skills

• Access economies of scale

• Secure better distribution

• Acquire intangible assets (brands, patents, trademarks)

• Spread risks by diversifying

• Overcome barriers to entry to target markets

• Defend itself against a takeover threat

• Enter new segments of an existing market

• Eliminate competition

Why might they be preferred to organic growth?

• Existing products are in the later stages of their life cycles, making it hard to grow organically

• The business (in particular its management) lacks the expertise or resources to develop organically

• Speed of growth is a high-priority

• Competitors enjoy significant advantages that are hard to overcome other than acquiring them!

Benefits of takeovers:

• Market share:

  • A company can increase its market share and become more dominant in its industry by acquiring a competitor. 

• New markets:

  • A company can quickly enter a new market by acquiring a company already operating there. 

• New technologies:

  • A company can gain access to new technologies or expertise by acquiring a company with them. 

• Economies of scale:

  • A company can reduce costs and achieve economies of scale by combining the operations of two companies. 

• Intangible assets:

  • A company can gain a competitive advantage by acquiring a company with valuable intangible assets, such as brands, patents, or trademarks. 

• Diversification:

  • A company can spread its risk over a wider range of products and services by acquiring a business in an unrelated market. 

• Eliminate competition:

  • A company can eliminate a threat to its business by acquiring a competitor. 

• Defend against a hostile takeover:

  • A company may acquire another company to make itself a less attractive target for a hostile takeover. 

• Increase revenue and profits:

  • A company may acquire another company to increase its revenue and profits

The risks and drawbacks:

• High cost involved - with the takeover price often proving too high

• Problems of valuation (see the price too high, above)

• Upset customers and suppliers, usually as a result of the disruption involved

• Problems of integration (change management), including resistance from employees

• Incompatibility of management styles, structures and culture

• Questionable motives

Why do takeovers fail?

• The price paid for the takeover was too high (over-estimate of synergies)

• Lack of decisive change management in the early stages

• The takeover was mishandled

• Cultural incompatibility between the two businesses

• Poor communication, particularly with management, employees and other stakeholders of the acquired business

• Loss of key personnel & customers post-acquisition

• Competitors take the opportunity to gain market share whilst the takeover target is being integrated