AQA A 2 Business Studies Unit 4 The

AQA A 2 Business Studies Unit 4 The impact of takeovers and mergers on the performance of the businesses involved

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

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

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

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?

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

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

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)

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)

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 shortrun). How do you measure the impact on performance on intangible factors like innovation, capability, motivation?

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.

BUSS 4 Research Bullets for 2012 1 2 3 4 5 6 Motives for takeovers and mergers and how these link with corporate strategy Problems of takeovers and mergers including difficulties integrating businesses successfully Factors influencing the success of takeovers and mergers Impact of takeovers and mergers on the performance of the businesses involved Impact on, and reaction of, stakeholders to takeovers and mergers Reasons why governments might support or intervene in takeovers and mergers

Strategic Motives Integration Problems 1 2 Success Factors Business Impact Stake. Holder Impact Govt Role 3 4 5 6

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