This streamed revision presentation considers the motives for takeovers and mergers and how these link with corporate strategy

1. The motives for takeovers
and mergers and how these
link with corporate strategy

2. Key points
• A wide variety of motives for M&A
• Takeovers or mergers are optional –
just one part of a growth strategy
• Distinguish between strategic,
financial & managerial motives

3. Key definitions
• Takeover: Where one business acquires a controlling
interest in another business = a change of ownership
• Merger: a combination of two previously separate
businesses into a new business
• External growth: use of takeovers & mergers
• Organic growth: growth from “within the business”
e.g. new products; expansion into new markets
• Diversification: expanding into new markets with
new products – the riskiest growth strategy

4. Key theories to consider
• Ansoff matrix: a model that analyses four
growth options: product development; market
penetration; market development &
diversification
• Porter generic strategies: 3 strategies
commonly used by businesses to achieve
competitive advantage (cost leadership;
differentiation; focus)
• Economies of scale: where unit costs fall as a
result of increased scale or scope of operations
(key to strategy of cost leadership)

5. How M&A fits into a strategy
Strategy Methods
Organic / internal
Innovation growth
Diversification
International Takeovers / mergers
Expansion
Cost leadership Joint ventures or
strategic alliances

6. strategy
Is all about
CHOICE

7. Why is strategy all about CHOICE?
• A key concept to remember and build
into essay answers
• Takeovers and mergers are rarely forced
on a business - they are optional
• If M&A is optional, then there must be
some alternatives
• E.g. could a joint venture or strategic
alliance be as effective as a cross-
border takeover?

8. Strategic fit – lots of relevant theory!
• Links closely with
corporate objectives
(BUSS3)
• Generic strategy (Porter)
• Portfolio analysis (Boston
Matrix)
• Growth strategy (Ansoff)

9. What is “strategic fit”?
• An important concept which can be
used to evaluate the motives of a
takeover or merger
• Does the transaction fit with
– the capabilities of the firm?
– the corporate objectives of the firm?
E.g. a takeover involving diversification has a good
strategic fit for an objective of spreading risk by investing
in a variety of products and markets

10. Some key strategic drivers of M&A activity
• Technological change
• Need for scale to remain competitive
• Need to be able to supply customers
globally
• Low growth in mature economies
• Access to wider distribution
• Invest in emerging markets

11. M&A: 3 main motives
Strategic Financial Managerial
motives motives motives
• Focused on • Focused on • Focused on the
improving & making best use self-interest of
developing the of financial managers
business resources for • Not necessarily
• Closely linked to shareholders in the best
competitive • Concerned with interest of
advantage improved shareholders
financial
performance
Source: adapted from Exploring Strategy, Johnson, Whittington & Scholes, 2011

12. Key strategic motives for M&A
Extend the Business
• Locations, Markets, Globalisation
Change Competitive Structure
• Consolidation, remove competition, economies of scale
Improve Business Capabilities
• Access better technology, stimulate innovation

13. Key financial motives for M&A
Make use of surplus cash and high share price
• E.g. businesses with high cash balances can
potentially earn a better return by investing in other
firms
Bargain hunting & Asset Stripping
• Can the target be bought at a knock-down price?
• Potential to sell surplus assets & cut costs & still
retain the business that was wanted in the first place

14. Key managerial motives for M&A
Personal ambition & financial reward
• Director rewards may be linked to growth
• Big takeovers attract media – boosts ego / reputation?
• Takeovers as “vanity projects”
Bandwagon effect / peer pressure
• Pressure to do takeovers (if competitors are too)
• Concern that firm may be being left behind
• Over-confidence
• Pressure from advisers & media (e.g. investment bankers)

15. Some examples of motives
Takeover / merger Main motives for the transaction
Kraft / Cadbury Establish global market leadership in confectionery & access emerging
markets
Google / Acquire valuable smartphone patents & manufacturing expertise
Motorola
Tata / JLR Economies of scale & acquire expertise, brands, capacity and distribution
RBS / ABN-Amro Management vanity; continue reputation for big deals; over-confidence
Santander / Market entry (UK) & establish base for further acquisitions to build market
Abbey share
WM Morrison & Increase market share & exploit economies of scale to improve
Safeway competitiveness
HMV / MAMA Diversification into fast-growing markets & reduce reliance on retailing
British Airways / Consolidation; economies of scale & survival: positioning for further
Iberia takeovers

16. The role of private equity
• Professional investors who
invest on behalf of specific
funds
• Responsible for a large
number of takeovers each
year
• Wide range of industries,
markets, types of
investment
• Their aim - to earn a target
rate of return for the
investment fund

17. What makes private equity takeovers
different?
• Financial motive is key (rather than strategic
motive)
• Look to invest in fast-growing firms or those
where financial performance can be
significantly improved
• Takeover usually financed by both equity
(shares) and debt (loans)
• Advise rather than get involved in day-to-day
management of the target
• Synergies not usually important to the deal
(unless the are links with similar investments in
the portfolio)

18. Common criticisms of private equity
takeovers
• Too many involve mature businesses
which don’t really need the investment
• Over-geared: too much debt used to
finance the transaction
• Short-termism: not always a long-term
investor
• Too much focus on cost cutting and
asset stripping

19. “Depends on” points…
• Is the firm at a competitive disadvantage?
If so, then a strategic acquisition might have
potential to transform its position.
• Does the acquiring firm have the financial
resources to be able to pursue an external
growth strategy? How supportive are its
shareholders and lenders?
• Is the takeover/merger opportunistic or
part of a long-term strategic plan?

20. Evaluation opportunities
• The size/scale of the takeover / merger: how
significant is it? Does the firm have a track record of
successful M&A? If so, this should reduce the risks
involved in subsequent transactions, particularly if of
a similar size/type.
• Is/was the takeover/merger consistent with the
firm’s corporate objectives?
• Is/was there an alternative to takeover or merger
which might have a similar benefit at a lower level of
risk (e.g. a joint venture or strategic alliance)?
• Which of the three main motive types (strategic,
financial, managerial) was the most significant or
influential?

21. Summary: advantages of acquisitions
• Quick access to resources & skills the
business needs
• Overcomes barriers to entry
• Helps spread risk (wider range of products
and greater geographical spread)
• Revenue growth opportunities (synergy)
• Cost saving opportunities (synergy)
• Reduces competition
• May enable economies of scale

22. Summary: drawbacks of acquisitions
• High cost involved • Non-existent synergy
• Problems of valuation • Incompatibility of
• Clash of cultures management styles,
• Upset customers structures and culture
• Problems of • Questionable motives
integration (change • High failure rate
management) • Diseconomies of scale
• Resistance from
employees

23. Key Case Study – Kraft & Cadbury
• Transformational takeover which was
seen by Kraft as the final piece in its
strategic jigsaw
• All about achieving leadership in
faster-growing confectionery and
snack markets

24. Cadbury’s strategic fit with Kraft

25. Kraft / Cadbury – product strategy

26. Kraft / Cadbury – geographical leadership

27. Kraft / Cadbury – market leadership

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