Mergers and Takeovers Flashcards
Reasons for Michael Kors’ acquisition of Jimmy Choo:
a more balanced portfolio with greater product diversification”.
greater exposure to global markets, “particularly the fast-growing market in Asia”.
What is a merger?
A merger is a legal deal to bring two businesses together under one board of directors The businesses are usually the same size and the name is normally changed
E.g. Orange + T Mobile = EE
What is a take-over?
Take-over is also known as an acquisition.
This is a legal deal where one larger business purchases a smaller one
If the deal is unwanted by the management or board of directors then this is a “hostile take-over” E.g. Michael Kors takes over Jimmy Choo
Reasons for mergers and takeovers:
Tactical
Attempt to ensure increased market share
Access to technology, staff or intellectual property- e.g. US drugs giant Pfizer has sealed a deal to buy Allergan- avoid US tax by moving to Allegan’s headquarters in Dublin
Reasons for mergers and takeovers- Strategic
Access to new markets- e.g. Adidas and Reebok
Improved brand awareness- e.g. L’Oréal and the Body Shop
Improved distribution networks- could increase earnings overseas to offset slowing sales at home.
Adidas and Reebok
The firm added that the deal would bring it wider geographic reach and a more balanced sales portfolio. Among the benefits, it listed Reebok’s presence in North America and Adidas’ ability to bring its greater expertise in Europe and Asia to bear on Reebok’s profile there.’
L’Oréal and The Body Shop
e.g. L’oreal buying ‘The Body Shop’, The French firm L’Oreal said Body Shop would enhance its business because of its “sizeable and complimentary brand”
Why did Orange and T-Mobile merge to creat EE?
To become market leader. Also to become more market oriented; expanded network coverage, better network quality and improved customer services. greater buying power
What is a friendly takeover?
A business may be struggling with cash flow problems and invite a takeover from a stronger business – known as a “white knight” as they come in to rescue the struggling business
What is a hostile takeover? Example
The board of directors will try an resist the takeover, but if another business gets 51% shares they can take-over management and control
EXAMPLE-
Jan 2010 Kraft the MNE food giant bought 71.7% of Cadbury’s shares
Reason for Kraft taking over Cadbury
The takeover was part of Kraft’s long-term strategy to drive profitable growth in emerging markets, and Cadbury’s had well established brands in Brazil and India
Primary Sector
businesses that are involved in digging, fishing, mining to remove products from the planet at source E.g. a Farm or quarry
Secondary sector
business that are involved in manufacturing raw materials into other products e.g. Clothes factory, cheese maker
Tertiary sector
businesses that sell goods to the customers e.g. Shops, Banks, insurance companies
Horizontal integration
Businesses operating in the same sector (e.g. tertiary) merge or takeover another business in the same sector e.g. ASOS and Topshop
Vertical integration
Vertical integration is when one business in one sector takes over or mergers with a business in another sector.
Financial risks and rewards
Original purchase cost
Cost of change into a new business
Redundancies of duplicate staff e.g. two marketing managers, two finance managers etc.
Financial Rewards
Increased revenue, Economies of scale
Problems of rapid growth- Staff
Morale may drop if staff cannot cope with the extra work so productivity can decrease. As a result,
The quality of the products and services could drop, causing an increase in customer complaints.
The business may even lose customers to their competitors.
Staff turnover may increase due to heavy workloads. Vital knowledge could be lost as staff leave. Hiring and training new staff takes time and money.
Problems of rapid growth – management pressure
Management may be under pressure, operating reactively rather than proactively.
The quality of the products and services could drop, causing an increase in customer complaints.
What percentage of mergers and acquisitions fail?
Between 70% and 90% of mergers and acquisitions fail.
Problems with mergers and acquisitions
Clash of cultures❤️
Possible communication problems❤️
Possible move away from core competencies of original business may cause issues of control ❤️Unreliable merger partners❤️
Diseconomies of scale❤️
Lack of understanding of local markets leading to wrong promotional message❤️
Merger fail- Daimler Chrysler
Differences between the companies included their level of formality, philosophy on issues such as pay and expenses, and operating styles.
The German culture became dominant and employee satisfaction levels at Chrysler dropped off.
Main difference between mergers and takeovers
Mergers= similar size, takeover= much larger organisation takes over a smaller one
