This streamed revision presentation looks at the impact of takeovers andmergers on the performance of the businesses involved

1. The impact of takeovers and
mergers on the performance
of the businesses involved

2. Key points
• Impact of a takeover or merger not just
measured in financial terms
• Consider the strategic motives and the
effect on achievement of broader
corporate objectives
• Performance impact best measured in
the long-term, but may be difficult to
identify data if there is close integration
between the businesses

3. Key Definitions
• Shareholder value: the return on
investment achieved by shareholders of
the buying/acquiring firm. The return
needs to be at least equal to the
required rate of return of shareholders
• Value destruction: where shareholder
value falls as a result of the transaction

4. Key theories & concepts
• Profitability: the overall level of profits
(a key return) in the enlarged business
• Market capitalisation: the monetary
value (usually represented by the share
price x shares in issue) of a business
• Porter’s Five Forces: a model of
competitive rivalry which analyses the
attractiveness of a market from the
point of view of existing competitors

5. Measuring the impact of M&A
• For the target business:
– Measure actual performance post-takeover with the
assumptions in the takeover plan & due diligence.
– Track achievement against planned synergies.
• For the buying business:
– Measure effect on profitability, cash generation and
other key financial ratios.
• For both businesses (combined)
– Assess effect on customer service levels & brand
reputation; efficiency (e.g. unit costs, productivity); key
labour ratios (e.g. staff retention)
– Has the transaction changed the competitive position of
the enlarged firm and the competitive structure of its
markets?

6. Potential positive & negative effects
Positive Impacts Negative Impacts
• Improved revenues and • One-off costs and effect of
profits integration (disruptive for
• Reduced competition both buyer and target
(market more attractive) business)
• Greater capabilities (e.g. • Too much focus on cost
technology, capacity, synergies can damage
innovation) revenue & growth potential
• Better market access (e.g. • Cultural conflicts
distribution; new territories) • Risk of overpayment for the
transaction

7. Some examples of M&A effects
Takeover / merger Impact on performance (+ or -)
Tata / Jaguar Land +ve: significant increase in profits & rapid expansion into
Rover Chinese market
+ve: rapid growth in video upload & viewing supported by
Google / Youtube
Google services
Cadbury / Green &
+ve: doubled turnover to £40m under Cadbury ownership
Blacks
Santander / Abbey +ve: substantial rise in profitability as a result of cost synergies
Pearson & Edexcel +ve: rapid rise in profits for Edexcel under Pearson ownership
-ve: dramatic loss of market share (to Facebook etc) & heavy
News Corp / Myspace
losses
-ve: collapse in market value as merger plan unravelled
Daimler & Chrysler
spectacularly
-ve: substantial fall in revenues & profits, partly due to
Terra Firma & EMI
opposition from EMI artists

8. How important is integration speed in
having an impact on performance?
• On the one hand
– Decisive action creates momentum for change
– Tough decisions probably easier to take in the early days
– Cost synergies will arise earlier if decisions made quickly
(e.g. job losses)
• On the other hand
– Important to take time to evaluate what has actually
been acquired
– Some elements of the integration likely to be complex
(e.g. systems integration)
– Need to retain support of key stakeholders (particularly
customers)

9. Impact on culture – can two cultures
work together?
• Yes - they can work, because:
– The buyer can respect the culture of the target (e.g. Tata and
JLR)
– Both businesses can benefit from sharing benefits of cultural
diversity
– Merger integration does not aim to damage or change target
culture
– The target business is left to get on and grow (e.g. Innocent &
Coca-Cola)
• No - they struggle, because
– Need for cost synergies will usually override need for cultural
respect
– If the target has an entrepreneurial culture, this is likely to be
lost (e.g. Green & Blacks now under Kraft ownership)

10. Depends on factors
• How are we measuring “performance”? Traditional
to look at financial measures where data most likely
to be available.
• Impact on performance closely linked with the
motives for the takeover or merger. Transactions
with a mainly financial motive will need to impact
mainly on financial measures / targets.
• Transactions with more strategic motives might be
harder to measure financially (certainly in the short-
run). How do you measure the impact on
performance on intangible factors like innovation,
capability, motivation?

11. Evaluation opportunities
• Distinction needs to be made between tangible
measures (e.g. revenues, profits, market share etc)
and more intangible measures such as brand &
customer service reputation.
• Are we looking at the impact on the businesses
involved over the short-term or longer-term? The
full impact (positive or negative) might take some
years to fully assess.
• Hard to measure impact for many takeovers, since
the businesses concerned “disappear” into the result
of the acquiring firm. Impact not so transparent in
many cases.

12. Visit the tutor2u BUSS4 Takeovers and
Mergers Blog for more resources