DRAFT

2.The Problems of Takeovers and Mergers including Difficulties Integrating Businesses Successfully

The least risk option for expanding a business is the internal, organic method. However, this approach is time-consuming and requires a large amount of effort despite being low risk. A quicker option for expanding a business is the external, inorganic method. Two effective methods of growing externally are mergers and takeovers/acquisitions. Though external can be an effective method of increasing market dominance, there are also several problems that can occur that will make integration unsuccessful.

A problem that might occur with an acquisition could be that the acquiring business has issues accessing the performance of the target business. Before integration is accepted as a profitable option a certain amount of due diligence should be taken into studying the relevant facts and circumstances of the transaction to ensure that the acquiring company is able to take advantage of the potential growth and cost synergy. The problem with investigation stage of deciding whether to pursue a takeover is that it requires time and effort to get information that will allow them to make the correct decision. This time and effort needed before bidding leaves an opportunity for competitors to also take advantage of the situation as well to get a better hold on the market. This increases the risk of the bidding company rushing this investigation stage or using retrospective information to come to their conclusion potentially resulting in the wrong choices being made therefore losing a lot of money in the long-term. This fault was made perfectly clear when the Royal Bank of Scotland (RBS) acquired ABN Amro. RBS was fighting in a bidding war against Barclays to buy ABN Amro to acquire a larger hold on the market. RBS had done a certain amount of due diligence but the information they had was for before the banking crisis had started. RBS ended up paying for 3 times to value of ABN Amro. This lack of detailed due diligence exposed RBS to a substantial amount of financial risk which ultimately resulted in the government bailing them out which prevented the possible economic and societal damage from occurring. This mistake was made by senior managerial staff that over estimated the strength of the economy and had ‘tunnel vision’ on the prospect of the growth capabilities if the acquisition was successful.

Another problem that might occur with an acquisition/merger could be the cultural clash that can occur between the two integrating companies. Culture is the accumulation of how a business operates in all aspects.  Organisational culture could be attitudes, customs, beliefs and values which distinguish a particular organisation from another.  When two companies with entirely different cultures integrate, large problems can occur with performance due to the difference in opinion on how particular tasks should be carried out. An example of culture clash that has had an affect on performance is the unsuccessful merge of Daimler Benz and Chrysler in 1998. Chrysler had a significant hold on the American market, gaining $2.8 billion annual profits while keeping relatively lost costs with high efficiency. Chrysler also had connections with many car dealership networks to distribute their products. Daimler Benz identified their weakness in the American market, though they were successful and well known in European market, they desired the skills and connections to increase their market share within America. The two companies announced that they would integrate in a ‘merger of equals’ hoping to take advantage of the potential synergy effect (lower costs, R&D, distribution, etc) available to increase both companies effectiveness. The new resulting company would have 442000 employees and will be approaching a market capitalisation of $100 billion. The cost for the stock-swap deal was $37 billion. After the deal had taken place, problems started to arise between the both companies. Chrysler adopts a risk taking, informal, low cost management culture while Daimler Benz favours the formal, bureaucratic, high quality, innovative culture. Ultimately, this difference resulted in a clash. Due to the clash, many misunderstandings, resistances to change and disagreements occurred which would contribute to the failure of the merge. The merger was stated be a ‘merger of equals’, however, Daimler Benz was seen to have the more dominant position which resulted in employees of Chrysler resisting the change of culture as they were reluctant to give up their current culture. The efficiency, productivity and communication got increasingly worse due to the de-motivation of staff because of the unwillingness of both companies to compromise their belief system on how the business should operate to take advantage of the synergy available. Employees would ultimately start to leave which would contribute to the lowering productivity and increasing costs because of the time, effort and money required to train new prospective employees. Three years after the merge the DaimlerChrysler's market capitalization stands at $44 billion, which is roughly the same as Daimler Benz’s before the merge. Chrysler’s share dropped by a third of its previous pre-merge value.

In conclusion, I believe that difficulties can arise when two companies are integrating which could put both companies in danger. These difficulties could include clashes of culture, lack of experience, lack of due diligence or/and using information that isn’t relevant to the current economy or market. In both the examples above the businesses could have investigated the other company more thoroughly than they actually did. RBS may have been in a bidding war against Barclays but wouldn’t the most appropriate choice for long-term success to be more due diligent because in hindsight they could of easily dodged that deal and been more competitive because Barclays would of taken the fall instead. Daimler Benz and Chrysler could have avoided the unsuccessful merge by simply doing research into how the other company operates. If they had investigated they would predicted the culture clash before it happened and prevented the loss of profits. If they had investigated, why did they not act in the appropriate way to get past the culture change needed. A compromise between both cultures could have been produced which would of ensured long-term success for both companies. In the short-term, it would be difficult to change the culture but if for example they used Kotter’s 8-step change model, they could easily avoided the staff problems they had later.

DRAFT

6.Reasons why government might support or intervene in takeovers and mergers

The least risk option for expanding a business is the internal, organic method. However, this approach is time-consuming and requires a large amount of effort despite being low risk. A quicker option for expanding a business is the external, inorganic method. Two effective methods of growing externally are mergers and takeovers/acquisitions.When a high profile takeover/merger is discussed between two large companies, the government can analyse whether the integration will have a positive or negative impact on the economy and job availability. After analysis, the government can choose whether to support or act against a takeover/merger.  When a government allows takeovers to occur between businesses freely without intervention, this is called a ‘free market economy’.

A motive for the government to allow a takeover is to prevent either of the companies involved from failing and ultimately becoming bankrupt. These sorts of occasions only occur when a large business in a significant industry undergoes financial trouble which would in turn affect the economy negatively due to the reduction in tax received and the increased amount of people without jobs gaining unemployment benefit. Lloyds TSB takeover of Halifax Bank of Scotland (HBOS) in 2009 is an example of intervention to prevent failure in a large industry. HBOS had accumulated a significant amount of debt due to mortgages and unsecured loans. The losses made were at an all time low for a bank at about £11bn. These ultimately resulted in higher charges for mortgage customers (£400m to £700m) which in turn resulted in increased losses by the bank. Lloyds TSB bought out HBOS and took the company over with a final price of £12bn resulting in the creation banking giant which holding close to one-third of the UKs savings and mortgage market. The government chose to use the national interest clause in competition law to justify why the takeover was to continue and ultimately supported to the acquisition due to the potential economic damage that could be dealt by HBOS’s failure, whether be due to the large unemployment or the reduced amount of taxes received. A high level of unemployment will result an increased amount of people gaining employment benefits from the government which eats up the available capital resource that could be used else where. Taxes received are reduced meaning the government have less money to invest into schemes to help resolve the economic crisis and maintain societal well-being. However, the government are now heavily invested into this banking giant to the point where they would compel to protect it at any cost to prevent financial crisis. This allows Lloyds to be a position of power and influence that can easily be abused, not only due to monopolistic available to be extremely competitive (with prices, availability, etc) but Lloyds now has a large influence in political matters that they might see as damaging to their ability to make money.

A motive for the government to be against a takeover is to prevent a company from becoming too powerful with a specific industry or market by owning the majority within that market/industry. The majority hold of a market is prevented to stop the potential abuse of monopolistic power that would allow the relevant company to dominate competitively. The government sees this sort of abuse of power as damaging for the economy and customers, due to the ability of the company to have the lowest prices (price leader) which cause the survival within the market to be difficult. The high competitiveness will also increase the requirements for the barriers of entry for fledgling businesses attempting to enter the market making it almost impossible to get a foot hold. The company taking advantage of this power will have less need for high efficiency and innovation due to the decreased amount of competition which in turn affects the customer negatively as choice is reduced. An example of this sort intervention is the News Corporations takeover bid of BSkyB, which would of resulted in a large monopoly of the media sector. The government had already seen previously, with the phone hacking scandal, that News Corporation did have the potential to make controversial choices that would affect other people negatively. This caused the government to be sceptical about the takeover bid as it will allow News Corporation a large amount of influence within the media which could easily have serious long-term consequences for media plurality. The government told Ofcom to create a extensively report analysis on the takeover bid. Ofcom reported that after taking of BSkyB, News corporation would be able to reach 55% of newsreaders and could use BSkyB’s services for News Corporation’s own needs. Prices could of been easily increased if that the takeover bid had a been successful. However, it hard to say whether the acquisition would of had any affect at all prices, customer satisfaction and media plurality. The option to abuse the power would have been there but that doesn’t mean News Corporation would have used that option, especially considering that they had already under gone a lot of ‘bad press’ about another controversial choice that they had done. The takeover could have potentially opened up another option for higher flexibility in pricing and innovation through gained knowledge from BSkyB and investment from saving.

In conclusion, I believe that under certain circumstances the government intervening in a takeover/merger can be a decisive decision that could prevent a negative result for many people, as long as the decision is made after extensive analysis. The government only really considers intervening when large companies are attempting to integrate. Smaller takeover/mergers are seen as less important as they won’t necessarily have an effect on the economy. The large bidding company and the government usually have completely separate priorities, which can help determine the outcome of the takeover bid. The bidding company will always try to accumulate as much power as possible within a market to potentially increase their profits and reach to customers. The government will only concern themselves with anything that will have large positive effect on the economy. The Lloyds HBOS takeover had a certain amount of economic risk while the News Corporation and BSkyB didn’t necessarily have that risk. Takeovers that are approved by the government aren’t always successful for the companies involved, the takeover might of achieved what the government expected but that doesn’t mean that the acquiring company gained any significant profit from it. For example, Lloyds actually ended up struggling because they realised after the takeover that they had bought HBOS for more than it worth and were ultimately stuck with large debt that could have been avoided if they had investigated more previously. In this scenario, the government were able to avoid the economic crisis and Lloyds were able save HBOS customers in the short-term. However, Lloyds are now going suffer in the long-term because before they can make anything out of HBOS, they need resolve and cover all the debt acquired.

Links

DRAFT

5.The impact on, and reaction of, stakeholders to takeovers and mergers

The least risk option for expanding a business is the internal, organic method. However, this approach is time-consuming and requires a large amount of effort despite being low risk. A quicker option for expanding a business is the external, inorganic method. Two effective methods of growing externally are mergers and takeovers/acquisitions. A merger involves an agreement between management and shareholders of two, usually relatively similar-sized, companies to integrate operations and identities in hope for higher profit margins and increase in share value. Neither company takes full control over the other via this method of integration, instead both companies take up a new identity and are managed by a common board of directors. Takeovers are another way of external growth but in comparison to mergers its entirely one sided. Takeovers involve one company acquiring controlling stake of the target business (50% or more of the share capital). The acquiring company purchases and absorbs the operations of the target company resulting in the target company becoming a subsidiary or fully absorbed by the acquiring company. Acquisitions are a relatively quick and effective method of expanding but also involves a certain amount of risk due to the amount of capital investment involved and the tainted brand image that comes  another company taking control of the other (even when these acquisitions are on friendly terms). In an integration of companies will likely have a large effect on stakeholders, since change of any kind can be associated with feelings of uncertainty and anxiety. Stakeholders are any individual or group of individuals that have influence on a particular business, whether that is internally, externally, connected or unconnected. A takeover/merger could affect stakeholders in multiple negative ways. Shareholders will be concerned about the worth of the shares they own and the amount of dividends they produce. Employees will be concerned about the amount of potential job cuts needed which are expected as the business will need to pay off large overheads after a large acquisition. Suppliers will be concerned with the idea that they might not be needed anymore due to the synergy effect allowing the acquiring business to take advantage of other suppliers which are perhaps cheaper, more efficient or closer to target market. Customers will be concerned with the amount of choice that will be available if a large business is taking advantage of potential monopolistic power to be extremely competitive.

Employees are often some of the most affected stakeholders when a takeover and mergers occur. Employees often lose theirs jobs, get reduced pay and their working conditions and the amount of work itself could become increasingly more difficult. Kraft’s takeover of Cadbury showed that concerns like the above are rational since during the takeover Kraft stated that there were 4500 jobs that were not assured and could be cut if needed. Kraft also made an agreement before a takeover that it would watch an underperforming factory in Somerdale carefully, with no immediate option for redundancies, but after the takeover, Kraft ‘axed’ 400 employees’ jobs and shut down the factory. After this change of direction by Kraft, many employees from other factories feared for the loss of their jobs.  In the next few months Kraft announced that it was to axe another 200 jobs in other factories through voluntary redundancy or redeployment. These job cuts will result in less efficient and ultimately less productive workforce due to decreased amount of staff therefore hindering revenue and profits. It is possible that employees will be demotivated due to the higher workload expected of them. This is likely to contribute to lower productivity and increase in labour turnover and absenteeism resulting in potentially increased costs due to acquiring new suitable employees and supplying the appropriate training. However, the fact that Kraft was forced by law to give out the appropriate amount of redundancy pay, based on performance, to all employees who had lost their jobs due to it being made redundant should be considered.

Shareholders are another stakeholder who are affected by takeovers and mergers. Shareholders can often have the integrity of their investment questioned due to the potentially large difference in share price and dividends received once an acquisitions/merger has occurred. This difference in dividends could be due to disappointing performance post-acquisition resulting lower profits or loans used to acquire the company and expand the business could fluctuate the dividends due to a higher gearing ratio. Kraft takeover of Cadbury showed that shareholders can become displeased and will oppose a takeover if it affects them financially. Legal & General, one of Cadbury’s largest shareholders, expressed that they felt that Cadbury’s shares were worth more than people were willing to sell them foe and that Kraft’s offers were underestimating the long term value of the company. Felicity Loudon, a distant family member of the Cadbury founders, also felt that shares were worth more and urged shareholders to reject Kraft’s 850p a share proposal but this also could have been on grounds of sentiment as well. However, the dividends they received for the entire year (for 2009) were 18p which was a 10% increase on the previous year. The shareholders who sold also gained premium prices of 850p, an increase on the previous 770p, which were even promoted by the Cadbury’s chairman at the time who stated that it was fair price and urged shareholders to accept the offer as it wasn’t likely that the share price would be that high anytime soon.

The government are another stakeholder who can be affected by a large takeover/merger but unlike most other stakeholders, they can have a significant influence on the outcome of a takeover bid. The government look at two large companies integrating carefully as they have potential to affect the economy positively or negatively in significant manner. If a takeover/merger is unsuccessful it could result job loss which would in turn result in an increased amount of people applying for unemployment benefits, such as jobs seekers allowance, which can have large affect on the economy as its essentially tax money being spent in non-priority areas. In the case of Kraft’s takeover of Cadbury, the government did worry about this scenario above because Kraft could have had intentions to shut down at least 8 factories and move them to North America since that where the company’s headquarters is based and Kraft had already mentioned that several jobs were not safe. Other than job cuts contributing to more benefits being given out, the factories themselves were a good tax earner. However, all these aspects are usually considered during the long period of time when the acquiring company makes a takeover bid meaning if after all the appropriate research the government felt that the takeover/merger wouldn’t be successful and would cause a unnecessary job loss, decrease in competitiveness or economic decline in a industry then the government would decline the bid and justify it reasons.

In conclusion, I believe takeover/mergers have a potential to affect a lot of different people but whether that is positively or negatively is sceptical and depends primarily on the businesses involved, circumstances at the time of takeover and/or the economic climate. Ultimately, Shareholders and employees seem to be affected the most compared to other external stakeholders. In the case of Kraft and Cadburys, the events that followed the takeover was mostly positive even if the takeover it itself was essentially hostile and gained a lot of controversy due to Cadburys holding a large sentiment to many people and the uncertainty that it was going be successful under a North American company, despite whether the government felt that the takeover was an appropriate valid venture. After the takeover, it’s often hard to compromise when it involves all stakeholders. In Kraft’s case it was choice between pleasing its shareholders and pleasing its employees. Obviously shareholders hold more power as they have invested money into to business, however if employees are treated insufficiently then productivity will decrease and after a time-consuming and expensive takeover, the prospect of lower profits isn’t going to help achieve the original expectations which could contribute to a unsuccessful business venture and ultimately that will affect all stakeholders. Kraft chose to increase dividends to keep the shareholders happy but due to compromising that is needed they had to make a certain amount of redundancies to still allow them to pay there overheads which caused panic for all remaining employees because they know there jobs aren’t safe and could ‘axed’ if the company feels it has to or has a better option elsewhere. The choice to favour shareholders has also caused the government to suffer financially as well due to reduced tax being gained because of the factories closing and tax earnings being used for benefits.

Links

http://www.guardian.co.uk/business/2010/mar/04/cadbury-kraft-union?INTCMP=SRCH

http://www.guardian.co.uk/business/2012/apr/04/kraft-cadbury-irene-rosenfeld-22m?INTCMP=SRCH

http://www.guardian.co.uk/business/2010/apr/06/kraft-unions-cadbury-workers?INTCMP=ILCNETTXT3487

DRAFT

1.The motives for takeovers and mergers and how these link with corporate strategies

The least risk option for expanding a business is the internal, organic method. However, this approach is time-consuming and requires a large amount of effort despite being low risk. A quicker option for expanding a business is the external, inorganic method. Two effective methods of growing externally are mergers and takeovers/acquisitions. A merger involves an agreement between management and shareholders of two, usually relatively similar-sized, companies to integrate operations and identities in hope for higher profit margins and increase in share value. Neither company takes full control over the other via this method of integration, instead both companies take up a new identity and are managed by a common board of directors. Takeovers are another way of external growth but in comparison to mergers its entirely one sided. Takeovers involve one company acquiring controlling stake of the target business (50% or more of the share capital). The acquiring company purchases and absorbs the operations of the target company resulting in the target company becoming a subsidiary or fully absorbed by the acquiring company. Acquisitions are a relatively quick and effective method of expanding but also involves a certain amount of risk due to the amount of capital investment involved and the tainted brand image that comes  another company taking control of the other (even when these acquisitions are on friendly terms).

A motive for a takeover or merger is that it opens new opportunities of revenue and growth that could otherwise not be gained with one company alone. The acquisition/merging will have synergy effect meaning the two companies involved will gain the strengths of each resulting in larger, more competitive business activity than if the companies were separate. For example, the hostile takeover of Cadbury by Kraft foods has allowed Kraft to gain intangible assets such as new expertise in chewing gum (Trident) that allows them to be more competitive with Mars (Wrigleys); the ability to make new products and the huge brand awareness of Cadburys that gives Kraft food a better foothold in markets that were otherwise unsuccessful with their own brand. Krafts strengths and new dominating role, after the takeover, has shown an increase in revenue of 11% to $12.6 billion for Cadburys with the company still projecting for an annual increase in earning of 9% to 11% and an increase in earnings per share of 5%. This increase in revenue will offer the company the option of large reinvestment into products, marketing and operations to expand the business in either the current market and/or in potential new markets with vastly more stable and growing economies (BRIC). Growth will result in a further increase in competitiveness against big rivals such as Mars. However, considering that acquisitions can often be a large investment of time, effort and capital (33% of integration costs off of earnings per share), it is possible that growth could be potentially stifled due to Krafts urgency to generate new revenue as to take care of large overheads that threaten their corporate objectives. Costs could also be caused by other factors such as change in cost of resources. For example, there have been higher costs for commodities such as coffee and cocoa which could potentially lower profit margins resulting in the Kraft not meeting their corporate objectives for Cadburys. The revenue figures could also be exaggerated by at least a full percentage point due to the weakening of the dollar. These factors added towards the costs of the acquisition could cause slowing of growth into new markets.

Another motive for a takeover or merger is that it opens up opportunity to explore new geographical areas such as the emerging markets where one particular company brand could be more recognisable. Kraft foods brand has shown to be less than successful when selling to the emerging markets such as India and China. After the takeover of Cadburys, sales in India increased by 40% and increased in China and Indonesia by 20%. Krafts acquisition allowed them to take the market development approach, meaning selling their existing products in a new market using Cadburys as the distribution channel because of the higher brand awareness resulting in increased profits in the emerging markets with relatively low costs (economies of scale) compared to the alternative Kraft pursuing this option alone or by internal growth which would require a lot of investment of time and capital into operations and distribution channels. Increased profits will result in further potential for growth and competiveness which will allow the company to achieve corporate objectives that might of seemed unrealistic when selling in weakened, saturated domestic markets. However, the fact that a substantial investment is still required for implementation of new operations and marketing to meet corporate and marketing objectives should be considered (Kraft Foods increased its investments in its Indian subsidiary by 70 percent in the past two years).

Another motive of a takeover or merger is the benefit of being big otherwise known as economies of scale. Economies of scale takes advantage of the synergy between companies that are merging to reduce costs and risk. Being a larger business is able to buy in bulk which will allow them to secure lower prices from suppliers resulting in lower unit costs because of the spread of fixed costs and possible decrease in variable costs due to discounting. Lower unit costs will give the companies the ability to increase/decrease prices making their products more appealing to the masses. In Brazil, Russia and China, Rosenfeld planned to channel Cadbury’s Trident gum through Kraft’s existing distribution and manufacturing systems. If external distribution and manufacturing companies were used, they would increase the price of their services to allow a margin of profit for themselves. Krafts use of their own systems reduces this cost which ultimately results in more profit. The marketing costs can be shared between the two companies which is large advantage when developing in a new market. However, the fact that a large business will have communication issues between the different departments should be considered. Kraft especially should consider this considering that they lost key executives which could further decrease in communication and managerial capabilities resulting in a delay of product introductions and of cost-cutting needed to reduce Kraft's hefty $26-billion debt after acquisition.

In conclusion, I believe that the overall motive for a takeover or merger for many businesses is to add to profit margins and increase return for shareholders. This motive can ultimately be successful with the appropriate amount of investment but the choice to acquire a new business or merge with competitors should be considered thoroughly by well-informed and knowledgeable managers as to avoid pursuing a foolish acquisition/merger that will result in huge costs of capital and of brand image. Economies of scale, increased brand portfolio and potential increased efficiency due to the synergy between the companies could be deciding factors to whether the takeover/merger is a success.  If a acquisition/merger is successful, its still hard to say whether the companies are able to operate with synergy because ultimately its possible that they have different cultures and thus that will result in less efficient business activity than anticipated. It should be considered that even if a takeover seems like a financially good choice, the goodwill of customers and of shareholders might be paid in excess resulting in less revenue and less investment from shareholders. The fact that multiple businesses are joining will result in less choice for consumers (oligopoly), which is a benefit for the companies involved but it could contribute further to the decline of goodwill. It’s hard to say whether Kraft’s takeover of Cadburys was a success because looking at the result at face value, the takeover was a successful integration of two large well known businesses which has allowed a vast expansion into over 170 countries. This rapid expansion could be very successful in the long term with the appropriate marketing, potentially earning a lot of profit. However, considering that Kraft invested $1.3 billion on the integration, the short-term effects have resulted in a decrease in revenue per share of 33% opposed to the expected increase of revenue per share of 10%. I think that the takeover was a relative success but only time will tell if it will be a success over the long-term.

Links

http://go.galegroup.com/ps/i.do?id=GALE%7CA276687498&v=2.1&u=wnc_jisc&it=r&p=GPS&sw=w

http://go.galegroup.com/ps/i.do?id=GALE%7CA256198487&v=2.1&u=wnc_jisc&it=r&p=GPS&sw=w

http://go.galegroup.com/ps/i.do?id=GALE%7CA281438915&v=2.1&u=wnc_jisc&it=r&p=GPS&sw=w