Mergers and Takeovers

Question 1

Reasons for Michael Kors’ acquisition of Jimmy Choo:

Answer 1

a more balanced portfolio with greater product diversification”.
greater exposure to global markets, “particularly the fast-growing market in Asia”.

Question 2

What is a merger?

Answer 2

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

Question 3

What is a take-over?

Answer 3

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

Question 4

Reasons for mergers and takeovers:

Tactical

Answer 4

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

Question 5

Reasons for mergers and takeovers- Strategic

Answer 5

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.

Question 6

Adidas and Reebok

Answer 6

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.’

Question 7

L’Oréal and The Body Shop

Answer 7

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”

Question 8

Why did Orange and T-Mobile merge to creat EE?

Answer 8

To become market leader. Also to become more market oriented; expanded network coverage, better network quality and improved customer services. greater buying power

Question 9

What is a friendly takeover?

Answer 9

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

Question 10

What is a hostile takeover? Example

Answer 10

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

Question 11

Reason for Kraft taking over Cadbury

Answer 11

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

Question 12

Primary Sector

Answer 12

businesses that are involved in digging, fishing, mining to remove products from the planet at source E.g. a Farm or quarry

Question 13

Secondary sector

Answer 13

business that are involved in manufacturing raw materials into other products e.g. Clothes factory, cheese maker

Question 14

Tertiary sector

Answer 14

businesses that sell goods to the customers e.g. Shops, Banks, insurance companies

Question 15

Horizontal integration

Answer 15

Businesses operating in the same sector (e.g. tertiary) merge or takeover another business in the same sector e.g. ASOS and Topshop

Question 16

Vertical integration

Answer 16

Vertical integration is when one business in one sector takes over or mergers with a business in another sector.

Question 17

Financial risks and rewards

Answer 17

Original purchase cost
Cost of change into a new business
Redundancies of duplicate staff e.g. two marketing managers, two finance managers etc.

Question 18

Financial Rewards

Answer 18

Increased revenue, Economies of scale

Question 19

Problems of rapid growth- Staff

Answer 19

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.

Question 20

Problems of rapid growth – management pressure

Answer 20

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.

Question 21

What percentage of mergers and acquisitions fail?

Answer 21

Between 70% and 90% of mergers and acquisitions fail.

Question 22

Problems with mergers and acquisitions

Answer 22

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❤️

Question 23

Merger fail- Daimler Chrysler

Answer 23

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.

Question 24

Main difference between mergers and takeovers

Answer 24

Mergers= similar size, takeover= much larger organisation takes over a smaller one

Question 25

What is also known as acquisition?

Answer 25

Takeover

Question 26

Why did sky takeover O2

Answer 26

This acquisition
happened because O2 wanted to raise capital (to focus on their core
market) whilst also enabling Sky the ability to increase market share and
have access to new potential customers.

Question 27

Main advantage of mergers

Answer 27

New organisation can achieve better economies of scale and reduce unit costs, thus increasing
profitability.

Question 28

Depends on…

Answer 28

Will it be allowed due to competition
regulation?
Will cost synergies actually materialise?
Will it allow gaps for new entrants to enter
the market?
• Will it provide economies or scale?

Question 29

Horizontal integration leads to

Answer 29

These mergers tend to enable increased economies
of scale and bargaining power over
suppliers & reducing it for customers. Link to Porter

Question 30

Backwards vertical

Answer 30

Acquiring a business operating earlier in the supply chain - e.g. a retailer buys a wholesaler/ backwards vertical integration is when an organisation will merge / take over an
organisation in a different stage of production below their current operation.

Question 31

Forward vertical

Answer 31

Acquiring a business further up in the supply

chain - e.g. manufacturer buys a distributor

Question 32

Retrenchment

Answer 32

Retrenchment is when an organisation will look to shrink in size.
typically this strategy is used as a survival strategy and in tough economic periods

Question 33

What is it called when the acquisition has no clear connection
to the business buying it

Answer 33

Conglomerate