AQA A2 Business Studies Unit 4
The factors influencing the
success of takeovers and
mergers
What do we mean by “success”
•
•
•
•
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Depends on:
From whose perspective?
What is measured?
What the objectives were?
Short or long-term?
Key definitions
• Cost synergies: cost savings that arise as a direct
result of the transaction (in both the target and
buying business)
• Revenue synergies: increased revenues (for both
businesses) arising from the transaction
• Due diligence: verifying the financial, legal and
commercial position of the target business
• Shareholder value: the return on investment
achieved by shareholders in the buying/acquiring
firm
Key theory & concepts
• Sources of cost synergies: Eliminate
duplicated functions & services; better
deals from suppliers; higher productivity &
efficiency from shared assets
• Sources of revenue synergies: Cross-selling
to customers of both businesses; access to
new distribution; brand extensions; new
geographic markets opened up
• Opportunity cost: the cost of not taking the
next best alternative (the benefit foregone)
Short-term measures of success
• Share price (if the buyer is a quoted
company)
• Revenues, operating costs and profits
(mainly of the target business)
• Achievement of planned synergies
• Customer retention & service levels
• Staff retention (often cited as the main
HRM problem of takeovers)
Longer-term measures of success
• Market competitiveness (market
share; reputation, brand strength)
• Return on investment (ROCE,
profitability of enlarged business)
• Sustainable growth rate (revenues,
profit, profit quality, sustainable
revenue synergies)
Why synergies are so important?
• They justify paying more than the
standalone value of a target firm
• They are the means by which
shareholder value is created
• They focus management on making a
takeover achieve its objectives
• They are a means to improve
competitiveness and achieve
competitive advantage
Are cost synergies enough to justify a
takeover?
• Depends on the nature of the transaction
• Likely to be important where
– Transaction involves horizontal integration
– Economies of scale are vital to achieve cost leadership
– Target is believed to be operating inefficiently (e.g. too
many layers in org structure or low productivity)
• Likely to be less important where
– Takeover is led by a private equity firm (although
financial motives remain important)
– Target operates in a different market or country
– No significant changes proposed to the target business
How can success be measured?
• Has shareholder value been created? What is the return
on investment by the acquiring business? Does this meet
or exceed the required return of shareholders?
• Change in market position: does the combined business
have a higher market share or better competitive
position (e.g. enhanced distribution or potential for
innovation)?
• Financial performance: are revenues and profits
increasing as a result of the takeover?
• Has the transaction helped the business achieve other
corporate objectives (or at least supported them)?
Main valuation methods
Discounted cash flow (NPV)
BUSS
3
Payback period
BUSS
3
Shareholder value analysis
Shareholder value
• Similar to “return on capital” or “return
on investment”
• Based on the required returns of the
shareholders of the buying business
• Aim is to create a combined business
(buyer + target) that is worth more than
their separate (independent) values
Shareholder value - example
£15m
16
Business Value (£m)
14
12
£10m
10
8
6
4
£2m
2
0
Original
Target
Combined
Common ways shareholder value can
be destroyed by a takeover
• Paying too much (over-valuation or poor
negotiation)
• Poor quality due diligence (e.g. fails to identify
potential liabilities or highlight poor profit
quality)
• Lack of integration planning
• Too much focus on cost synergies rather than
revenue synergies
• Failure to retain elements which made the
target attractive in the first place (e.g.
innovation, culture, skills)
What factors influence success?
• The price paid for the takeover: a business that pays
over-the-odds for its target will struggle to make the
investment work, particularly in the short-term
• Speed of integration: M&A tends to be more successful if
post-takeover integration is quick & decisive
• Ability to retain key staff: can key management and staff
(skills, experience etc.) be retained once acquired?
• The relative focus on cost synergies versus revenue
synergies: too many takeovers rely on short-term cost
savings rather than exploiting the longer-term
opportunities for higher revenues
Examples of successful deals
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)
However: the golden rule of M&A
At least 70% of
takeovers and
mergers
destroy
shareholder value
Examples of deals that 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
Some truly awful deals (1)
CLOSED
Some truly awful deals (2)
SOLD
£25m
Some truly awful deals (3)
Written
Off + New
Liabilities
£15bn+
Sorry…
“In retrospect we bought ABN at
the top of the market, so everything
we paid was not worth it.
A significant part of the goodwill
write-off, £15bn, is ABN Amro, but I
couldn’t tell you how much we lost
on ABN. Basically, the bulk of what
we paid for ABN Amro, which was
£10bn, will be written off.
We are sorry we bought ABN
Amro.”
Success or failure might depend on…
• The quality of the due diligence performed – did it
highlight the key risks involved & support the initial
investment case for the transaction?
• The complexity of the transaction: a more complex
integration process often makes success harder to
achieve.
• The external environment: e.g. an adverse change in the
economic environment can damage the performance of
the business taken over; competitor response is also
difficult to anticipate (they may see a takeover as a great
opportunity)
Evaluation opportunities
• Challenge what the examiner means by “success” or
“failure”.
– By what measure is this judged? From whose perspective
(e.g. shareholders of the buying business, or stakeholders in
the target business?)
• Crucial difference between short-term and longterm:
– Value created by the transaction may not arise quickly.
• Can post-takeover performance actually be
measured?
– E.g. hard to measure if a firm is fully integrated by the buyer
– can the target’s revenues and profits still be separately
identified?)
BUSS4 Research Bullets for 2012
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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
Success
Factors
Business
Impact
StakeHolder
Impact
Govt
Role
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2
3
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5
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Mergers Blog for more resources