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Business Growth Takeovers and Mergers
This document discusses various strategies that firms use to grow, including organic growth from within the business and external growth through mergers and acquisitions. It defines different types of integration like horizontal, vertical, and lateral integration. It provides examples of mergers and acquisitions in different industries. It also discusses the motives behind M&A activity including strategic, financial, and managerial motives. It notes potential advantages and drawbacks of acquisitions and the importance of successful integration. Other growth strategies like joint ventures and de-mergers are also covered.
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Introduction to organic and external growth strategies, emphasizing varying methods like innovation, diversification, and market expansion.
Definition and examples of horizontal integration, showcasing key mergers like Tata with Jaguar and Verizon's acquisition of Vodafone's interest.
Advantages of horizontal and lateral integration include economies of scale, cost reductions, and increased market power.
Vertical integration types: forward and backward. Highlights advantages including supply chain control, access to raw materials, and competitive positioning. Strategic, financial, and managerial motives driving M&As, stressing benefits and potential self-interest of managers.
Evaluation points for mergers, Importance of strategic fit and synergy in assessing potential takeover success.
Definition of synergy and its two types; focuses on eliminating duplicated services and achieving higher efficiency and revenue.
Risks in M&As include wrong target selection, overvaluation, and high-profile failures like RBS's acquisition of ABN-Amro.
Emphasizes the importance of planning for cultural integration and synergy post-merger to ensure success.
Details common issues related to M&As including high costs, cultural clashes, integration challenges, and high failure rates.
Overview of joint ventures, their purpose, and examples of firms using collaborative projects for shared benefits.
Definition of demergers and motivations including focus on core businesses, reducing costs, and asset sales.
Examples of significant demergers and their implications on firms, focusing on streamlining operations and enhancing market power.
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Business Growth Takeovers and Mergers
- 1. The Growth ofFirms
- 2. Key definitions • Organicgrowth: growth from “within the business” e.g. new products; expansion into new markets • External growth: use of takeovers & mergers
- 3. With strategy –firms have a CHOICE Innovation Diversification International Expansion Cost leadership Strategy Methods Organic growth Takeovers / mergers Joint ventures or strategic alliances
- 4. Types of Integration •Horizontal Integration: two businesses in the same industry at the same stage of production becoming one
- 5. Horizontal Integration • Tatabuying Jaguar Land Rover from Ford • Volkswagen buying Porsche • Asda buying Netto (food supermarkets) • Amazon buying LoveFilm • Virgin Money buying Northern Rock • Verizon’s $130bn purchase of Vodafone’s interest in its US mobile joint venture • Suntory of Japan paid £1.35bn to buy GlaxoSmithKline’s drinks brands Lucozade & Ribena
- 6.
- 7. Advantages of Horizontal+ Lateral Integration • Internal economies of scale • Cost savings from rationalisation • Potential to secure revenue “synergies” • Wider range of products - (diversification) - Opportunities for economies of scope • Reduces competition by removing rivals – increases market share and pricing power • Can make the entry barriers higher for new rivals
- 8. Types of Integration •Vertical integration: acquiring a business in the same industry but at different stages of the supply chain – Forward vertical: Closer to the consumers e.g. a manufacturer buying a retailer – Backward vertical: Closer to the raw materials in the supply chain e.g. a manufacturer buying a raw material supplier
- 9.
- 10. Amazon – HugeMarket Power Volume Value % % Chain bookshops* 29 36 Independent bookshops 4 5 Bargain bookshops 9 4 Supermarkets 13 10 Other shops 12 8 Book clubs 6 6 Internet-only retailers# 27 31 * Waterstone’s, WHSmith, Blackwell # Internet only – e.g. Amazon, Play.com Internet Only Book Sales in UK (2011) Market share Amazon 70% The Book Depository 4-5% Play.com 3-4% Others (including publishers’ direct) 22%
- 11. Hotel Chocolat A vertically integrated businessthat owns and operates cocoa plantations in St Lucia (the Rabot Estate pictured above) and which roasts and manufactures chocolate in Cambridgeshire + owns many retail units across the UK
- 12. Amazon – MarketPower Volume Value % % Chain bookshops* 29 36 Independent bookshops 4 5 Bargain bookshops 9 4 Supermarkets 13 10 Other shops 12 8 Book clubs 6 6 Internet-only retailers# 27 31 * Waterstone’s, WHSmith, Blackwell # Internet only – e.g. Amazon, Play.com Internet Only Book Sales in UK (2011) Market share Amazon 70% The Book Depository 4-5% Play.com 3-4% Others (including publishers’ direct) 22%
- 13. Other examples ofvertical integration • Film distributors owning cinemas + digital streaming platforms • Brewers owning/operating pubs (forward vertical) or buying hop farms (backward vertical) • Record labels and radio / online music stations • Drinks manufacturers integrating with bottling plants • Pig processing business buying a pig farm • Technology companies growing vertically through hardware, software and services – PayPal, acquired by eBay for $1.5bn in 2002 – Google buying Motorola, a phone maker
- 14.
- 15. Advantages of VerticalIntegration • Control of the supply chain – this helps to reduce costs and improve the quality of inputs into the production process • Improved access to key raw materials perhaps at the expense of rival businesses • Better control over retail distribution channels • Removing suppliers and information from competitors which helps to make a market less contestable
- 16. Types of Integration •Lateral integration: companies joining together that produce similar but related products • Conglomerate: Disparate businesses
- 17. What type ofintegration here?
- 18. What type ofintegration here?
- 19. Mergers and Takeovers •Takeover: Where one business acquires a controlling interest in another business = a change of ownership • Merger: a combination of two previously separate businesses into a new business • Diversification: expanding into new markets with new products – the riskiest growth strategy
- 20. Some key strategicdrivers of M&A activity • Rapid technological change • Need for scale to remain competitive • Need to be able to supply customers globally • Low demand growth in mature economies • Access to wider distribution networks • Invest in faster-growing emerging markets
- 21. Takeovers: 3 mainmotives Strategic motives • Improve & develop the business • Closely linked to competitive advantage • E.g. economies of scale Financial motives • Make best use of financial resources for shareholders • Improve financial performance • E.g. higher profits Managerial motives • Self-interest of managers • Not necessarily in the best interest of shareholders • E.g. want to lead a bigger business
- 22. Takeovers: 3 mainmotives Strategic motives • Improve & develop the business • Closely linked to competitive advantage • E.g. economies of scale Financial motives • Make best use of financial resources for shareholders • Improve financial performance • E.g. higher profits Managerial motives • Self-interest of managers • Not necessarily in the best interest of shareholders • E.g. want to lead a bigger business
- 23. Takeovers: 3 mainmotives Strategic motives • Improve & develop the business • Closely linked to competitive advantage • E.g. economies of scale Financial motives • Make best use of financial resources for shareholders • Improve financial performance • E.g. higher profits Managerial motives • Self-interest of managers • Not necessarily in the best interest of shareholders • E.g. want to lead a bigger business
- 24. Shareholder value -example 0 2 4 6 8 10 12 14 16 Original Target Combined BusinessValue(£m) £10m £2m £15m
- 25. Examples of successfuldeals Successful takeovers and mergers L’Oreal & The Body Shop (more shops, higher profits) Google & YouTube (rapid growth & advertising revenue) Tata & Jaguar Land Rover (£1bn profits in 2011) Santander & Abbey, Alliance & Leicester, Bradford & Bingley (higher profits & market leadership in UK) Taylor Woodrow & George Wimpey (economies of scale for two leading house builders merged together)
- 26. Kraft / Cadbury– market leadership
- 27. Cadbury’s strategic fitwith Kraft
- 28. Key financial motivesfor M&A • E.g. businesses with high cash balances can potentially earn a better return by investing in other firms Make use of surplus cash and high share price • Can the target be bought at a knock-down price? • Potential to sell surplus assets & cut costs & still retain the business that was wanted in the first place Bargain hunting & Asset Stripping
- 29. Key financial motivesfor M&A • E.g. businesses with high cash balances can potentially earn a better return by investing in other firms Make use of surplus cash and high share price • Can the target be bought at a knock-down price? • Potential to sell surplus assets & cut costs & still retain the business that was wanted in the first place Bargain hunting & Asset Stripping
- 30. Key managerial motivesfor M&A • Director rewards may be linked to growth • Big takeovers attract media – boosts ego / reputation? • Takeovers as “vanity projects” Personal ambition & financial reward • Pressure to do takeovers (if competitors are too) • Concern that firm may be being left behind • Over-confidence • Pressure from advisers & media (e.g. investment bankers) Bandwagon effect / peer pressure
- 31. Key managerial motivesfor M&A • Director rewards may be linked to growth • Big takeovers attract media – boosts ego / reputation? • Takeovers as “vanity projects” Personal ambition & financial reward • Pressure to do takeovers (if competitors are too) • Concern that firm may be being left behind • Over-confidence • Pressure from advisers & media (e.g. investment bankers) Bandwagon effect / peer pressure
- 32. Some examples ofmotives Takeover / merger Main motives for the transaction Kraft / Cadbury Establish global market leadership in confectionery & access emerging markets Google / Motorola Acquire valuable smartphone patents & manufacturing expertise Tata / JLR Economies of scale & acquire expertise, brands, capacity and distribution RBS / ABN-Amro Management vanity; continue reputation for big deals; over-confidence Santander / Abbey Market entry (UK) & establish base for further acquisitions to build market share WM Morrison & Safeway Increase market share & exploit economies of scale to improve competitiveness British Airways / Iberia Consolidation; economies of scale & survival: positioning for further takeovers
- 33. The most importantevaluation point Strategic Fit Does the takeover or merger fit with the objectives of the business? Does it make sense?
- 34. 1 1 3 The next mostimportant evaluation point…. Will shareholders gain from synergy? Can 1 + 1 = 3?
- 35.
- 36. An example ofsynergy… Similar concept to “adding value”
- 37. Two kinds of“synergy” Eliminate duplicated functions & services Better deals from suppliers Higher productivity & efficiency from shared assets Cost Savings Cross-selling to customers of both businesses New distribution channels Brand extensions New geographic markets opened up Revenues
- 38. Two kinds of“synergy” Eliminate duplicated functions & services Better deals from suppliers Higher productivity & efficiency from shared assets Cost Savings Cross-selling to customers of both businesses New distribution channels Brand extensions New geographic markets opened up Revenues
- 39. Overview of thetakeover process Target Identification & Choice Valuation & Offer Due Diligence Integration
- 40. Key evaluation point:Things can go wrong in each part of the takeover or merger Target Identification & Choice Valuation & Offer Due Diligence Integration Wrong target Pay too much Don’t check what you are buying Poor integration planning
- 41. E.g. Paying toomuch! Valuation has to strike a balance Don’t pay too much! Get the best price!
- 42. Example of theWinner’s Curse - RBS • In 2007, RBS was part of a consortium that bid £49bn as it competed to buy ABN-Amro • RBS clearly overpaid for the takeover • The subsequent effect on RBS's capital reserves led to the forced nationalisation of RBS in 2008 to avoid a collapse of the UK banking system
- 43. Some truly awfuldeals (1) SOLD £25m
- 44. Some truly awfuldeals (2) Written Off + New Liabilities £15bn+
- 45. Examples of dealsthat failed Failed takeovers and mergers News Corp & Myspace (bought for £580m; sold for $25m) ITV & FriendsReunited (bought for £175m; sold 3 years later for £25m) Cisco & Flip (bought for $590m; closed down in a year) RBS & ABN-Amro (bought for £10bn; results in losses of at least £15bn & nationalisation) Terra Firma & EMI (bought for £4.2bn; sold 3 years later for loss of £1.75bn) – one of biggest private equity failures
- 46.
- 47. Imagine we areall responsible for managing this takeover… Identify three areas that would be likely to be the hardest part of integrating the takeover Marks & Spencer Poundland
- 48. Imagine we areall responsible for managing this takeover… Identify three areas that would be likely to be the hardest part of integrating the takeover Marks & Spencer Poundland
- 49. Building analysis &evaluation on takeover integration… • Importance of synergies • Extent to which firms are similar (e.g. products, markets) • Quality of integration planning and action (e.g. communication, leadership) Success of takeover integration will depend on… • Are the two cultures significantly different? • Type of takeover – e.g. cross-border, private equity • Can be a short-term problem, but in the long-term, one culture will prevail Evaluating the importance of culture in a takeover
- 50. Building analysis &evaluation on takeover integration… • Importance of synergies • Extent to which firms are similar (e.g. products, markets) • Quality of integration planning and action (e.g. communication, leadership) Success of takeover integration will depend on… • Are the two cultures significantly different? • Type of takeover – e.g. cross-border, private equity • Can be a short-term problem, but in the long-term, one culture will prevail Evaluating the importance of culture in a takeover
- 51. Summary: drawbacks ofacquisitions • High cost involved • Problems of valuation • Clash of cultures • Upset customers • Problems of integration (change management) • Resistance from employees • Non-existent synergy • Incompatibility of management styles, structures and culture • Questionable motives • High failure rate • Diseconomies of scale
- 52. Joint ventures • Jointventures occur when businesses join together to pursue a common project • The businesses remain separate in legal terms • Joint ventures are becoming common as firms want to benefit from collaborative work in reaching a mutually-agreed strategic target. An example might be joint-research projects to share the fixed costs
- 53. Examples of jointventures • Vodafone & Telefónica agreed to share their mobile network • BMW and Toyota agreed in 2011 to co-operate on hydrogen fuel cells, vehicle electrification, lightweight materials and future sports car • West Coast – joint venture between Virgin Rail & Stagecoach • Google and NASA developing Google Earth • Hollywood studios combining to fight internet piracy • Alliances in airline industry e.g. Star Alliance and One World • Starbucks - JV with Tata Beverages to break into the Indian retail market • Joint Ventures between universities to deliver Massive Open Online Courses (MOOCs) – a fast-expanding sector of the higher education industry
- 54. De-mergers • When afirm decides to split into separate firms • Some of the key motivations for de-merger include: – Focusing on core businesses to streamline costs and improve profit margins – Reduce the risk of diseconomies of scale and diseconomies of scope by reducing the range of functions in a business, lower management costs – Raise money from asset sales and return to shareholders – A defensive tactic to avoid the attention of the competition authorities who might be investigating possible monopoly power in an industry / market
- 55. Examples of de-mergers •The US pharmaceutical company Pfizer sold their infant nutrition business to Nestle • Demerger of Cadbury's US drinks business creating a business called Dr Pepper Snapple Group • Severn Trent Water demerged its waste management business Biffa • Demerger of British Gas into a gas pipeline business Transco + an oil and gas exploration company • Talk Talk demerged from Carphone Warehouse in 2010
- 56. Examples of de-mergers •Fosters Group de-merging its two main operating divisions – one focusing on beer, the other on wine • Punch and Spirit pub groups created out of demerger of Punch Taverns in 2011 • US food giant Sara Lee sold off coffee business Douwe Egberts • Quantas demerged their airline business and run stand-alone domestic and international airline businesses with each having their own profit and loss account • News International demerged their Film and TV and Publishing businesses
- 57. News InternationalFilmandTV • FoxNews • 20th Century Fox • Sky • Fox Television Publishing • Dow Jones • Wall Street Journal • New York Post • The Times • The Sun • Harper Collins
- 58. The Reality ofMarket Power Pricing Power Entry Barriers Monopsony Supply Chain Control Economies of Scale
- 59. The Reality ofMarket Power Industry Leadership Benchmark Businesses Profits to re-invest Habitual consumption