1. Mergers and Take-overs

2. Mergers A merger means the amalgamation of two or more firms into a single business with approval of the shareholders and management.

3. Takeovers A take-over occurs when one firm makes a bid for another and secures over 50% of the equity, regardless of the approval of the target firm’s managment

4. Hostile Take-over Takeovers may be resisted and a battle can follow. Whether the take- over succeeds will depend upon whether the shareholders agree to accept the offer made.

5. Integration When two firms merge they seek to integrate the two businesses. This is based on the belief that the resources of the separate organisations could be better managed more efficiently together.

6. Various Types of Integration There are various types of integration: • Horizontal Integration • Vertical Integration • Conglomerates Task: Define the above terms

7. Why do firms merge? Merger activity tends to fluctuate. There was increased merger activity in the periods: • 1967-1972 • 1984- 2009 There are competing theories as to why mergers occur in waves (see further reading). Suggestions include, technological change, shocks and economic expansion.

8. Possible Reasons Why Mergers Occur Economies of scale Synergy Exploit brand names Entry to new markets Access technology and expertise Access to patents Reduce competition Efficiency savings Improve management Undervalued businesses

9. Reasons for Mergers and Acquisitions Mergers allow firms to secure: • Patents • Brand names • Technologies Developing theses assets may take many years if firms are to develop them on their own. A buying an existing firm with these assets can often be a cheaper option

10. Reasons for Mergers Acquisition of brands, technologies and patents may allow firms to improve their cashflow and profitability in the short-term. It may be one way for a firm to improve profitability and dividends to satisy shareholders in the short-term

11. Reasons for Mergers and Acquisitions Complementary products and markets The products of two firms may be considered to be an effective match. Mergers may help to reduce costs and increase strength in the market. Firms may also have strengths in different geographical areas, which would be complementary. Alternatively, two firms may have distribution networks which are complementary.

12. Reasons for Mergers and Acquisitions Undervaluation One firm may bid for control over another firm because it perceives the business to be undervalued (its market value – price x issued shares) is below the true vale of its assets. If successful in this strategy, the firm may sell off unwanted assets or subsidiaries in order to repay some of the cost of purchase. In some instance the new owners of a business may engage in asset stripping, gaining positive cash flow and a capital gain.

13. Reasons for Mergers and Acquisitions Managerial motives Managers may support a proposed merger or acquisition because of the possibility of enhanced status and greater rewards. Expansion can become an end in itself as the ambitions of senior staff are satisfied by a succession of mergers. Mergers may also be a strategy of appeasing shareholders, by increasing dividends and overall profits.

14. Mergers and Acquisitions Task Investigate the rationale for the following mergers and acquisitions. Company Target Companies Ford Volvo, Tata Steel Jaguar, Land Rover Kraft Cadbury’s Tesco Giraffe Restaurants Coca Cola Innocent Drinks Adidas Reebok

15. A Word of Caution Mergers may occur for many different reasons, and for some reasons which turn out to be unfounded. Many mergers occur when the stock exchange is rising (i.e. when there is a bull market). Business confidence may be misplaced and the resultant merged company under-performs.

16. A Word of Caution Mistaken Synergy Often the promised benefits of a merger or acquisition are not realised. Firms may become so diversified by acquisitions and mergers that they lose focus. This may result in demergers. Task Examine the consequence of Daimlers merger with Chrysler

17. Further Reading Donald M. DePamphilis (2008), Mergers, Acquisitions, and Other Restructuring Activities, Academic Press