Increasing Cost Of Expansions

Table of Contents
Introduction..................................................................................................................................... 1
About Suntory............................................................................................................................. 1
About Distill................................................................................................................................ 1
Task 1 Consider the pros and cons and possible reasons for such an investment and come to a
recommendation.............................................................................................................................. 1
1.1 Importance of different types of drivers of M&A and Private Equity.................................. 1
1.2 Value creation and the success of an M&A transaction ....................................................... 2
1.3 Current M&A and Private Equity strategies of and appraise suggestions for improvement
of current practices...................................................................................................................... 4
1.4 Evaluate the relative importance of the key elements in a successful M&A and Private
Equity transaction ....................................................................................................................... 4
Task 2 Maximum price to pay & justify Recommendation............................................................ 6
2.1 Understand how to value a target company for an acquisition transaction .......................... 6
2.2 Critical analysis of comparative issues in M&A and Private Equity.................................... 7
Recommendation for the deal ......................................................................................................... 8
Conclusion ...................................................................................................................................... 9
References..................................................................................................................................... 10

List of Tables
Table 1: Finance Performance of Distill......................................................................................... 6

1
INTRODUCTION
With the liberalization in trade policies, there are increasing number of new business
establishments taking place all over the world. In many countries where initiation of new
businesses by foreign companies is not easier; entrepreneurs adopt different other routes like
acquisition, mergers, joint ventures and foreign institutional investments. In respect with this
aspect, the following report is carried out to evaluate the feasibility and profitability of the
acquisition of a liquor brand. The firm aiming to acquire is Suntory which is established in
Japan, while the target business Distill is based in UK. The objective of the report is to analyze
the financial and strategic performance of Distill in terms of profitability and sustainability.
About Suntory
Suntory is engaged into brewing and distillation since 1899 and is considered as one of
the oldest in the alcohol industry. The enterprise also produces soft drinks and sandwich as part
of its expansion. Suntory jumped onto international platform and became one of the largest
distillation beverages with the acquisition of Beam Inc in 2014.
About Distill
Blavod Wines and Spirits plc is engaged into production and marketing of owned and
third party brands across the world. The firm changed its name to Distill in 2014 in order to
reflect the nature of the business. The previous company was result of the merger between
Blavod Black Vodka and Extreme Beverage.
TASK 1 CONSIDER THE PROS AND CONS AND POSSIBLE REASONS
FOR SUCH AN INVESTMENT AND COME TO A RECOMMENDATION
1.1 Importance of different types of drivers of M&A and Private Equity
Suntory has already acquired Beam Inc in 2014 in an effort to diversify business into the
international markets. The management is now planning to add few more valued brands to
expand business. Distill plc is selected as the company has been delivering good results for years
(Moeller & Schlingemann, 2005). But before the finalization of the deal, it is important to
determine the pros and cons to take necessary steps.

2
High cost & low profits – Any business has two most common objectives and i.e. to reduce cost
and earn higher profits. Acquisition of Distill will enable the larger enterprise to produce goods
in bulk and reduce cost of sales. This alternatively helps it to improve profit margins as savings
can be used to market business and start new projects (Hopkins, 2002). Both the firms belong to
same industry and sectors and are established brands across the world. This will help to benefit
from the existing brand image of each other and save on marketing and advertising cost as well.
Increasing cost of expansions – New business establishment from scratch requires huge
investments and research. The task becomes more tedious if the target location is a new market
from the existing ones. On the other hand, acquiring an established brand which is producing
good financial performance is much easier and feasible in present time (Schuler & Jackson,
2001). Thus instead of structuring business into new country, Suntory will save and gain benefit
from the existing position of Distill.
Increasing competition – With the acquisition of Distill, Suntory will focus more on brand and
new product development rather than marketing and advertising to combat competition. Presence
of huge number of brands in one sector increases the competition to such an extent that it
impacts the profit earning capacity (Mendenhall, 2005).
Market share – Suntory and Distill, both are operating into the international market. Thus with
the acquisition, Suntory will earn the existing market share of Distill. It is crucial even in
international market that the firm gains a sufficient market share to ensure sustainability and long
term growth (DePamphilis, 2009).
Portfolio expansion – An important advantage for the Suntory would be to expand its product
portfolio without any significant research and development. Existing brands of Distill which
includes owned and third party are well established in the market. With these brands, Suntory
can further add variants and sell more (Gaughan, 2010).
Management and governance issues – Both the companies are based in different countries and
run their operations in accordance with the rules and legislations of the nation. In addition to this,
the approach of management and leadership style may also be different which can raise issues
for the larger firm (Hijzen, Görg & Manchin, 2008).
1.2 Value creation and the success of an M&A transaction
The acquisition of Distill is not only for the purpose of business and market share
expansion. It equally requires sufficient strategies to support the plan and deliver desired results.

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Suntory can also develop the existing Distill brand and focus on leveraging the benefits
from the existing projects.
 Trust – It is essential for the management of both the brands to develop trust among
themselves, employees and customers to support in managing operations post acquisition.
This is important, so that existing and profitable projects of Distill remain as usual (Rigby
& Bilodeau, 2007). Trust among the employees is also an important factor in the success
of the acquisition to retain skilled employees.
 Common goals – The acquisition deal will succeed when the goals and objectives of both
the companies are similar for the long term aspects (Weihrich & Koontz, 2005).
Difference in the overall goals will impact the functioning and operation of the larger
firm.
 Cost control – The acquisition deal will certainly require huge investment in various
areas. So it is important that Suntory will control cost and eliminate excess capacity.
Business areas in terms of physical and human resources not leading to effective results
must be identified and evaluated for cost purpose (Robinson & Harris, 2000).
 Improved market share – Suntory will definitely benefit from the existing market share
of Distill. It is essential for the expanded firm to maintain the brand image and reputation
with the stakeholders to avoid any unwanted issues (Slack, Comtois and McCalla, 2002).
 Research & Development – An important success factor for Suntory will be the
acquisition of human skills and abilities from Distill (Rossi & Volpin, 2004). The
expanded firm can utilize this for R&D and other important business areas.
 Competitive advantage – It is also important for Suntory to continue maintain the
competitive advantage developed by the Distill. Any lost competitive advantage would
hamper the position of Suntory in present and future (Weihrich & Koontz, 2005).
 Combined synergies – The acquisition of Distill will enable Suntory to gain from the
exclusive products and service areas owned by Distill.
 Efficient use of employees’ capacities – The expanded larger firm will increase the
number of employees allowing the business to restructure and utilize full potential of the
human force (Slack, Comtois and McCalla, 2002). Existing employees of both the firms
can be shuffled and placed into new groups and projects.

4
1.3 Current M&A and Private Equity strategies of and appraise suggestions for improvement of
current practices
Suntory has earlier successfully acquired Beam Inc and is gaining positive results. This
time the enterprise is planning to target a UK based company. There are certain factors which
need to be considered by both the firms in the deal to avoid unnecessary issues and improve the
performance (Cartwright and Cooper, 2012). Following are discussed some of the points which
must be considered by Suntory and Distill before and after the acquisition -
A risk management approach should be the foremost task for both the firms. There may
be certain risks that are exclusive to both Suntory and Distill and may impact the functioning of
the expanded firm. A consultancy can be hired to identify and manage risk associated with the
market and business (Moeller & Schlingemann, 2005). Another important area is to evaluate the
supply sources. Based in different countries, it is possible that both companies were sourcing
from different suppliers. At present Suntory is not planning to move the manufacturing and the
factory area, but it may expand it in the near future. So it is important that current suppliers must
be checked to determine if they are ready to bulk material at low cost. It is recommended to
identify new sources of supply in the international market to drive economies of scale.
A change management program must be planned to help the acquisition deal go smoothly
with the equal support of employees. Change management enable employees of both the
organizations to accept the changes taking place in their job projects and the group they are
working with. Change management becomes more essential for Suntory and Distill as firms are
operating in different parts of the world (Hopkins, 2002). The culture, beliefs and values are
altogether different. It is also possible that some employees from both sides resist changes as
they are used with existing projects and groups. In this case, outside consultancies should be
contacted to guide and support employees to accept changes.
1.4 Evaluate the relative importance of the key elements in a successful M&A and Private Equity
transaction
There are key elements specific to every deal and organisation to support large
transactions. The acquisition deal must be supported by predefined strategies and objectives, so
that it results into overall improvements. Below are discussed some of the key elements that must
be taken care of for the success of the acquisition deal –

5
 Improve competitive behavior – Suntory is acquiring a brand which has its own
established market on the global platform. Distill has its own product portfolio which has
been developed through extensive research and development over the time period
(Schuler & Jackson, 2001). Thus Suntory must develop those brands in its existing
market, so that it earns more sales and profit. In addition to this, it distributes and market
own products in the existing market of Distill.
 Transformational deal – The acquisition must not be limited only to the expansion of
product portfolio and profit maximization. Rather, it should define strategies to transform
the entire organisation and restructure its functions. This is important to charge and
encourage the workforce to contribute towards the progress of the organisation (Hijzen,
Görg & Manchin, 2008). Employees working under the same boss and on the same
projects get bored and this is one of the reason they change employer. This can be
controlled through acquisition deal through job rotation and change of work groups.
 Leverage economies of scale – Suntory after acquiring the Distill will require additional
raw material and unfinished goods to support the requirement. This situation can be dealt
by leveraging the economies of scale offered by existing suppliers. Other than this, new
suppliers can be contacted who are in the establishment phase (Weihrich & Koontz,
2005). This will support the company to control the cost while producing and selling
more at the same time.
 Reach new markets – The expanded firm must develop its goals and target new markets
to establish competitive advantage and gain early share. The firm will have huge product
portfolio to be offered to the new customers.
 Develop Capacity – An important key success element for Suntory would be remove
excess capacity which is not generating any revenue. On the other hand, it must also
focus on expanding those business areas that are contributing to more revenue (Robinson
& Harris, 2000). This way the new firm will be able to optimize the functions and
operations.
 Global employee management – Human resources in present time are the most important
part of the organisation, as they contribute effectively in the success and progress by
leveraging the capacity of physical resources (Moeller & Schlingemann, 2005). The

6
expanded Suntory after the acquisition of Distill should deploy employees at various
global locations to further support in the business development.
TASK 2 MAXIMUM PRICE TO PAY & JUSTIFYRECOMMENDATION
2.1 Understand how to value a target company for an acquisition transaction
An important part of the business valuation is its financial performance which reveals the
result of the strategies and decision making ability of the management. The financial
performance of Distill is evaluated with the help of annual results of last three years (Hijzen,
Görg & Manchin, 2008). Below is provided a table that provides analysis of profitability and
liquidity position of the company.
Table 1: Finance Performance of Distill
Amount in GBP Million 2012 2013 2014
Cost of Sales 77.27% 76.83% 76.09%
Gross Profit 22.73% 23.17% 23.91%
Operating Profit -9.45% -16.35 -15.26
Net Profit -10.94% -19.5 -16.3
Current Ratio 0.94 1.53 2.45
Receivables Turnover 3.92 4.89 5.56
Inventory Turnover 7.72 8.37 8.61
Fixed Assets Turnover 172.83 184.63 185
Revenue %
Year over Year -20 -17.36 -36.46
3-Year Average -8.38 -23.08 -25.11
5-Year Average 7.1 -1.55 -16.58
10-Year Average 14.87 9.63 2.8

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Taking into consideration the profitability data, the table clearly shows that cost of
revenue is tightly controlled and maintained in the last three years. This supported increase in
gross profit over the same time period. The cost percentage was 77.27% in 2012 which improved
and reduced to 76.09% in 2014. The gross profit which was 22.73% in 2012, increased to
23.91% in 2014. So there is a direct relation between cost and gross profit of the company.
Taking into account the revenue, it is going in the negative direction from last three years. The
three year average was -8.38% in 2012, increasing to 36.46% in 2014. Five year average also
reveals the same evaluation and is contributing to loss year over year. The 10 year average is
again all time low (Rossi & Volpin, 2004). The operating profit although gains support from the
cost and gross profit margins and has been improved slightly from last year, but are still in
negative. Net profit of Distill was -10.94% in 2012 which increased to -19.5% in 2013, but
controlled to -16.3% in 2014. This is supported by the improved operating margins and lower
sales and administration cost.
Furthermore, the liquidity position of the company is improved despite negative profits.
The current ratio as calculated through current assets and liabilities was 0.94 in 2012. The ratio
improved to 1.53 in 2013 and to 2.45 in 2014. The increase in ratio is the result of excess funds
raised by Distill earlier in this year. A notable thing in this regard is that market forces are still
positive about the future prospects of the company. Despite all time negative sales and profits,
the ability of the management reveals in the fund raising (Slack, Comtois and McCalla, 2002).
This excess cash has been raised to support the need for market expansion and product
development. Thus Suntory will have both physical and human resources to leverage the benefits
and gain through the ability and skills. The cost and sales aspect is also important and reveals the
ability of the management in controlling it up to the certain level (Rigby & Bilodeau, 2007). This
also shows the skills and contribution of the workforce which have been working towards the
progress and betterment of the organisation. In many case, when firms are moving to negative
results, often shareholders and employees ditch at the first place.
2.2 Critical analysis of comparative issues in M&A and Private Equity
In business environment, huge deals that involve amalgamation of two companies are not
isolated from issues. As both Suntory and Distill are based in different countries, it is likely that
there were some issues that affect before and after the organisation functioning. It is thus

8
essential that the management of both the organisations need to identify the issues that are
existing and that may affect after the acquisition (DePamphilis, 2009). Following are discussed
some critical issues that may affect the potential deal and the functioning in future –
 Culture – No two have the same type of organizational culture and behavior. Moreover,
employees working with one organisation for long get used to it. Thus, it is here
important that the management should decide on the continuation of the particular type of
culture after the acquisition.
 Employee management – Another issue that may affect the business is the employee
management style and leadership. Like organizational culture, there is also huge
difference in the management style and leadership of both the organisations (Cartwright
and Cooper, 2012). If these issues are not dealt carefully, it is possible that it affects the
capability of the enterprise.
RECOMMENDATION FOR THE DEAL
The above strategic and financial evaluation of Distill carried out to judge the feasibility
of the potential acquisition by Suntory. From the strategic analysis, it has been analyzed that
despite poor financial performance year over year from the last four years, the management and
the market forces are still positive about the company prospects. The shareholders and investors
provided huge funds for the new projects (Moeller & Schlingemann, 2005). The decision making
ability of the management proved successful and is resulting into improving sales figures and
cost control. This justifies that future prospects of Distill look promising and will definitely
generate results. Acquisition of Distill will provide Suntory with the expanded catalog that has
built its brand image in the market. Along with this, the third party brand catalog will also add to
the existing portfolio of Suntory (Rigby & Bilodeau, 2007). Apart from this, Suntory will also
benefit from the skilled human force which is contribution effectively towards the progress of the
company. In addition to this, Suntory will also gain from the existing market reputation of
Distill. Both the companies are operating on the global level, but they have their own markets in
which they have occupied huge and increasing share year over year (Hijzen, Görg & Manchin,
2008). Thus Suntory will be able to market its own brands in the existing and high performing
markets of Distill.

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CONCLUSION
From the above report, it can be concluded that acquisition of Distill by Suntory will
proved to be beneficial for both the companies. The report provides a strategic and financial
performance analysis of Distill from the point of Suntory (Hopkins, 2002). Financial evaluation
of Distill is based on past three year annual data. In addition to this, decision making ability of
the management of Distill is also discussed which shows that despite negative performance, the
skilled workforce is able to work towards the betterment of the organisation.

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REFERENCES
Moeller, S. B., & Schlingemann, F. P., 2005. Global diversification and bidder gains: A
comparison between cross-border and domestic acquisitions. Journal of Banking &
Finance. 29(3). 533-564.
Hopkins, H. D., 2002. Cross-border mergers and acquisitions: Global and regional
perspectives. International mergers and acquisitions: A reader, 86-115.
Schuler, R., & Jackson, S., 2001. HR issues and activities in mergers and acquisitions. European
Management Journal. 19(3). 239-253.
Mendenhall, M. E., 2005. Mergers and acquisitions: Managing culture and human resources.
Stanford University Press.
DePamphilis, D., 2009. Mergers, acquisitions, and other restructuring activities: An integrated
approach to process, tools, cases, and solutions. Academic Press.
Gaughan, P. A., 2010. Mergers, acquisitions, and corporate restructurings. John Wiley & Sons.
Hijzen, A., Görg, H., & Manchin, M., 2008. Cross-border mergers and acquisitions and the role
of trade costs. European Economic Review. 52(5). 849-866.
Rigby, D., & Bilodeau, B., 2007. Bain's global 2007 management tools and trends
survey. Strategy & Leadership. 35(5). 9-16.
Weihrich, H., & Koontz, H., 2005. Management: A global perspective. Singapore: McGraw-Hill.
Robinson, W. I., & Harris, J., 2000. Towards a global ruling class? Globalization and the
transnational capitalist class. Science & Society. 11-54.
Rossi, S., & Volpin, P. F., 2004. Cross-country determinants of mergers and
acquisitions. Journal of Financial Economics. 74(2). 277-304.
Slack, B., Comtois, C. and McCalla, R., 2002. Strategic alliances in the container shipping
industry: a global perspective. Maritime Policy & Management. 29(1). 65-76.
Cartwright, S. and Cooper, C. L., 2012. Managing Mergers Acquisitions and Strategic Alliances.
Routledge.

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