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.
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