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Mergers - inorganic growth

Delight over £80m Muller merger

North Shropshire | News | Published: Dec 28, 2015

An £80 million move bringing together processing giants Muller and Dairy Crest has been completed with a new company name.

The deal was completed on Boxing Day bringing Muller Wiseman Dairies and Dairy Crest's dairy operations together to create new organisation Muller Milk & Ingredients.

Chief executive of Unternehmensgruppe Theo Muller –the German parent company – Richard Kers said: "With this transaction now concluded we have the opportunity, together with our colleagues, customers, farmers and suppliers, to build on our progress in the UK and create an exciting new future for our dairy business."

Muller announced its plans to acquire the dairy operations of Dairy Crest on November 6, subject to approval by competition authorities – something approved on October 19.

The new business will employ more than 8,000 people and process 25 per cent of Britain's milk production, with 2,000 dairy farmers contracted as suppliers.

The move has also seen Muller re-name its Muller Dairy yoghurt and desserts business – based in Market Drayton, Minsterley and Telford– as Muller Yogurt & Desserts.

Managing director Bergen Merey said: "We've got great plans for 2016 and it makes sense to rename the business to reflect the products which we are proud to make."

Muller Milk & Ingredients managing director Andrew McInnes said: "It is clear that we have a committed workforce and a key priority is to get to know our new colleagues and ensure that they have the information they need to perform their roles and their questions are answered.

"For now it's very much business as usual and colleagues from Muller Wiseman Dairies and Dairy Crest deserve enormous credit for successfully delivering their obligations to customers over the key festive period."

Employees will be able to see plans for the new organisation in site meetings and online. Customers, farmers and suppliers will be sent information on the new organisation.

Inorganic growth

External growth
The fastest route for growth is through external growth – through mergers or contested take-overs. There are various forms of integration – explained below with some recent examples:
Horizontal integration: Horizontal integration occurs when two businesses in the same industry at the same stage of production become one – for example a merger between two car manufacturers or drinks suppliers. Recent examples of horizontal integration include:
• Nike and Umbro
• NTL and Telewest (new business eventually renamed as Virgin Media)
• Lloyds TSB (now Lloyds Banking Group) taking over HBOS

The advantages of horizontal integration include the following:

1. It increases the size of the business and allows for more internal economies of sale – lower long run average costs – improved profits and competitiveness
2. One large firm may need fewer workers, managers and premises than two – a process known as rationalization again designed to achieve cost savings
3. Mergers often justified by the existence of “synergies”
4. Creates a wider range of products - (diversification). Opportunities for economies of scope
5. Reduces competition by removing rivals – increases market share and pricing power

Vertical integration:

Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain. Examples of vertical integration might include the following:
• Film distributors owning cinemas
• Brewers owning and operating pubs
• Tour operators / Charter Airlines / Travel Agents
• Crude oil exploration all the way through to refined product sale
• Record labels, record stations
• Sportswear manufacturers and retailers
• Drinks manufacturers integrating with bottling plants

The main advantages of vertical integration are:
1. Greater control of the supply chain – this helps to reduce costs and improve quality of inputs.
2. Improved access to important raw materials used in manufacturing.
3. Better control over retail distribution channels e.g. pub companies who can ensure that their beers and wines are sold in tenanted pubs and clubs.

Lateral Integration

This involves companies joining together that produce similar but related products. Examples include:
• Microsoft and Skype
• Google and You Tube
• Gillette and Proctor & Gamble

Mergers...always a good idea?

Following are the four (4) greatest risk factors along with the corresponding questions for leaders and managers to apply on the road to success. This list has proven useful and helps clients and organizations focus on mitigating risk.

Poor or inadequate communications

What is/was the catalyst for the merger/acquisition? Now compare that answer to what those who will be most impacted believe the catalyst to be. Any discrepancies or conflict?
What is your communication strategy, who was involved in development, and who will lead it?
How do/will you know you are being heard, and who is listening?

A lack of transparency and inadequately preparing for the inclusion and retention of core competencies and staffing

How transparent do you really want to be? Differing stakeholder groups will need varying details and information. What is your plan?
Are there any changes/modifications to the organizational mission?
What core competencies will you need on board to achieve strategic outcomes?
Do the people you are keeping/adding/removing possess the core competencies you will need?
What metrics do you have in place to assess/determine when core competencies are not covered?
What is the plan to address dislocated workers (if there will be downsizing)? Does a reduction-in-force strategy exist? Are supervisors trained on it? Here is one as a guide: Reduction-in-Force: Best Practices for Managers and Employees.

Not incorporating and building upon the branding, marketing and sales efforts

What are the distinct aspects of each of the separate organizational brands that must be maintained or advanced?
Have you assessed the strengths and weaknesses of the marketing and sales strategies and determined which tactics you will apply in merging / separating these?
Who is better—can you be as objective as you need to when completing overlapping or eliminating one or the other marketing strategies?
Who is minding the customer and his needs? Are measures in place to conceal the dirty laundry and ensure the customer does not experience negative effects?

Having two distinct cultures and service standards and not taking time to balance and merge the two (keep the best of both and lose the worst of both)

What is the culture (personality, attitude, character) of each of the affected companies/organizations and how do you know this to be the case?
What are the standards for service within each organization? Do they matter, how were they established, and what is necessary to merge these?
What "unwritten" policies and processes need to be molded in/out? Shape the organizational culture early. Who is charged to focus on the culture?

Leadership Is Responsible for the Results and Should Be Strategic About It.

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Merger risks

In a workshop presented for AccountingWEB, Mr. Case outlined the seven risk areas that need to be addressed to protect the value of a merger.

These seven areas include:

Risk 1 - What will happen to your customer base while you wait to combine your companies? If a sales rep is unsure about the future of the company, the rep will not have the confidence to sell the product. Most companies budget for a decrease in sales when they could achieve a significant increase.
Risk #2 - Which of your acquisition costs will occur once and which will recur? It is crucial to identify which assets must be sold and then sell them quickly. Companies that wait too long risk letting them fall into disrepair and having to take a much lower price than they expected.
Risk #3 - How quickly will your company be able to make important decisions? Before the merger the two companies made decision just fine, but afterwards either no one is in charge or everyone tries to be in charge and the decision making process comes to a halt.
Risk #4 - What will happen to the major projects you have going or you have planned? There is a natural inclination to abandon major projects, such as installing new computer systems, during a merger when it is actually the best possible time.
Risk #5 - How many good employees will you lose during the transition? Proper use of the acquired and existing talent is key to the success of the ongoing company. Identifying and deploying those individuals so you keep the ones you want and lose the ones you don't during the merger process can save a lot on the backend.
Risk #6 - How will changes in organization affect the company as a whole? Every organization can be divided into three groups, 20% are leaders, 50% are on the fence and 30% are resistant to the change. Most companies spend too much time trying to make the 30% happy, by focusing on the top two categories you will have 70% of the organization on your side . However, do not ignore the resisters, some of the best talent may be in that group and they can become leaders if they are engaged in the process.
Finally, Risk #7 - Do you have the management team in place to get the results you need?

Mergers - risky!

Crucial to success, Commerzbank says, is knowing why you are merging.

For some companies it is clear. Former monopolist Deutsche Telekom, for example, has seen its domestic market share drop to 70% after the telecom markets were liberalised. Ever since, chief executive Ron Sommer has been looking for overseas partners to help recoup the losses.

Cut and thrust

It seems a ruthless approach is the key. When UK bank Lloyds bought Cheltenham & Gloucester and then TSB, it was not afraid to wield the cost-cutting scalpel.

But the shareholder 'value' delivered by sacking workers and closing branches has to be offset against the price of the acquisition to assess how much money has really been made.

Mergers born out of defensive intentions are generally deemed unlikely to fare well.

Stephen Barrett, head of mergers & acquisitions at accountants KPMG, said: "When they don't work, the two key management groups do not blend well together.

"The important thing in a merger is to make it crystal clear who is going to lead the operation."

Merger risks

The study goes beyond that counterintuitive conclusion. It also highlights possible reasons for it. “Our evidence suggests that managerial motivations may play an important role,” the two researchers write. “[T]he increased default risk may arise from aggressive managerial actions affecting risk enough to outweigh the strong risk-reducing asset diversification expected from a typical merger.”

Those unexpected conclusions emerged in large measure because Furfine and Rosen viewed mergers through a different lens. “Most of the academic research on corporate mergers has focused on addressing the questions ‘Why do firms merge?’ and ‘Do mergers create value, and if so, for whom?’,” Furfine says. “Our basic objective was to look at corporate mergers from a different angle: an acquisition not only affects a firm’s potential return stream but also changes the firm’s risk, including its chances of going bankrupt.”

An Unfamiliar Analytical Tool
To undertake their investigation, the pair relied on a tool uncommon in academic studies: the Expected Default Frequency (EDF) developed by Moody’s KMV. This provides an estimate of the probability that a particular firm will default within a year. “Because it is rather expensive, academics don’t typically consider using it,” Furfine says. “But it has great value in calculating the fate of firms in danger of default. The database calculates how far a firm is from default using traditional methods. Its advantage is that it then calculates from its historical database how often firms that far from default actually default in the next year.” Because they are based on historical evidence, he adds, “EDFs can be more accurate than traditional methods of measuring the risk of default.”

The two researchers applied the EDF data to information in the Securities Data Corporation’s Merger database on firms that completed mergers between January 1, 1994 and March 31, 2006. Ancillary data on the acquiring firms’ stock returns and changes in their balance sheets came from CRSP and Compustat.

Mixing, matching, and applying basic business mathematics to data from the three sources revealed the relationship between mergers and default risk. Specifically, the numbers showed a mean increase of 0.519 percent in default probability for the 3,604 mergers that the pair explored. Although that “may be viewed as inconsequential for the riskiest of acquirers,” Furfine and Rosen write, it “would imply multiple downgrades for a highly rated acquirer.”

The risk of mergers

Enterprises going through mergers and acquisitions reap the benefits of new products and other assets, but they also acquire all of the threat vectors that have been targeting the other organization. In addition, new internal threats can arise as employees often fear job security when they learn of M&A deals.

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Toyota and Suzuki

Toyota and Suzuki on Monday said they have agreed to begin formal talks aimed at forging a partnership in shared procurement, green vehicles, IT and safety technologies.

The agreement takes the two Japanese automakers a step closer to a tie-up that could give Suzuki, a maker of affordable minivehicles and compact cars, access to Toyota's technology. The world's second-biggest car maker in return would benefit from Suzuki's strong market position in India.

Tesco - does everyone win?

There is, in fact, something for everyone in the merger announcement. Green lobby? Tick. The deal will, we are told, reduce waste. Suppliers? Tick. It will present a “broader market opportunity” whatever that means.

And at the bottom of the announcement, consumers are there again. As well as delighting us the merger will “create attractive innovation opportunities” to serve us.
Mustn’t forget shareholders. They get synergies and some blah about Tesco retaining market leading retail and wholesale expertise. Tick!

Yep, this £3.7bn cash and share deal is a win, win, win! And Tesco is trying very hard to make you believe it.

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Tesco deal

According to the Euromonitor data, if the merger completes, almost every third pound spent in convenience stores throughout the UK would flow into the pocket of the newly merged company, potentially drastically changing the landscape for those kinds of outlets.
In 2016, Tesco already had a market share of close to 17 per cent in the convenience stores sector, beating second-placed Co-operative Group, which had a 14.9 per cent hold.

Spar held 9 per cent of the market, with big brands Sainsbury’s and Marks & Spencer clocking it at around 8.5 per cent and 7.5 per cent respectively. Thanks to its ownership of brand like Budgens and Londis, Booker already boasted a market share of 10.7 per cent.
“The position of Booker as a supplier to so many of Tesco’s rivals may raise some difficult questions about the retailers power to potentially set wholesale prices and control the flow of goods to a number of smaller competitors,” he said. In order to avoid complications, the combined group may be forced to sell some parts of the business, like the Londis or Budgens chains, he added.

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Merger is 'low risk'

The UK's biggest supermarket group, Tesco, has agreed to buy UK’s biggest food wholesaler, Booker Group, in a £3.7bn deal.

Tesco's chief executive Dave Lewis told the Today programme the two businesses had a complementary set of skills and he saw the merger as "low-risk" and something that would "enhance choice, quality and value".

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CMA and Tesco

Will the competition watchdog back the deal?

Tesco already controls nearly 30% of the UK grocery market – nearly twice as big as its closest rival, Sainsbury’s. It operates about 1,750 Tesco Express convenience stores and 780 One Stop outlets in the UK as well as more than 900 supermarkets.

The merger would give Tesco access to 5,400 more convenience stores in Booker’s brand groups and a further 2% share of the UK grocery market.

Tesco already has a 17% share of the convenience store sector, according to Euromonitor, and the merger with Booker would take that up to 27%. The Co-op, its nearest rival, has a 15% market share.

Tesco believes the merger will get the green light from competition authorities because it will not own the thousands of stores supplied by Booker. In theory, it would not be able to control prices in these stores as they are run and owned by independent operators.
It may also be hoping that the regulator will look at the grocery market as a whole, rather than separating out the convenience sector. When Tesco bought T&S Stores, the owner of the One Stop chain, in 2002, the deal was cleared because regulators judged the convenience store market to be separate from the supermarket business. But its view may have changed.

However, the deal would add to Tesco’s already massive power with food manufacturers, farmers and brands.

What does it mean for shoppers?

In theory, Tesco’s better buying clout and more efficient operations should lead to lower prices for shoppers.

However, in some areas Tesco could control the supply of groceries and alcohol, not only to its own local supermarket and Tesco Express but to dozens of local independent convenience stores, cinemas and cafes. Such widespread power could reduce competition and keep prices high.

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Why is Tescos buying Budgens owner?

What is Booker?

Booker is a grocery wholesaler supplying 125,000 independent convenience stores as well as 468,000 restaurants, pubs and leisure facilities such as cinemas.
The group employs 13,000 people, had sales of £5bn and made £155m in operating profit in the year to March 2016.

It is the UK’s largest cash-and-carry operator via its 172-store Booker chain and Makro, which has 30 outlets. Booker also controls the Premier, Londis, Family Shopper and Budgens symbol groups which make up about half of the retail clients it supplies.
Premier is the largest branded group with 3,358 outlets, while Londis has 1,903, Budgens has 150 and Family Shopper 52. Booker doesn’t own these stores – they are all independently run and owned – but it sells them a large proportion of their stock and assists with marketing, IT and a whole range of other services making for a close relationship.
The group’s Booker Direct service also delivers grocery supplies to most of the major cinema chains, including Odeon and Cineworld, the national prison service and provides the limited array of non-own label food sold in Marks & Spencer.

Booker also supplies 450,000 caterers including major chains such as Wagamama, Carluccios and Byron burgers and 700,000 small businesses.

Booker opened its first store in Mumbai in 2009 and now has six wholesale outlets in India, where it also runs the Happy Shopper brand.

Why does Tesco want to buy Booker?

There are four main reasons:

• Shoppers are moving away from big supermarkets and locating suitable new sites for its Tesco Express and One Stop chains has become more difficult. Tesco wants to extend its reach by supplying thousands of independent convenience stores.
• Buying Booker would also take Tesco into catering supplies – a new fast-growing market as people increasingly opt to dine out or eat takeaways rather than cook at home.
• If the deal goes through Tesco will have access to more than 5,000 corner shops where customers can pick up goods ordered online or access Tesco services such as banking and its mobile phone network.
• The merger will give it more clout with suppliers and cut costs by merging distribution and other operations. Analysts estimate Booker will add about £2bn-£3bn to Tesco’s current £45bn of buying power. Meanwhile, Tesco estimates it will save £175m a year in costs, £96m of which will come from improved procurement.

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Tesco merger

The UK's biggest supermarket group, Tesco, has agreed to buy UK’s biggest food wholesaler, Booker Group, in a £3.7bn deal.

When a govt intervenes to try to correct a problem of market failure, the problem of govt failure may result

How can the government avoid public sector failure?

Merger Control

Merger control refers to the procedure of reviewing mergers and acquisitions under antitrust / competition law. Over 60 nations worldwide have adopted a regime providing for merger control. National or supernational competition agencies such as the EU European Commission or the US Federal Trade Commission are normally entrusted with the role of reviewing mergers.
Merger control regimes are adopted to prevent anti-competitive consequences of concentrations (as mergers and acquisitions are also known). Accordingly, most merger control regimes normally provide for one of the following substantive tests:

Does the concentration significantly impede effective competition? (EU, Germany)
Does the concentration substantially lessen competition? (US, UK)
Does the concentration lead to the creation or strengthening of a dominant position? (Switzerland)

In practice most merger control regimes are based on very similar underlying principles. In simple terms, the creation of a dominant position would usually result in a substantial lessening of or significant impediment to effective competition.
The large majority of modern merger control regimes are of an ex-ante nature, i.e. the reviewing authorities carry out their assessment before the transaction is implemented.
While it is indisputable that a concentration may lead to a reduction in output and result in higher prices and thus in a welfare loss to consumers, the antitrust authority faces the challenge of applying various economic theories and rules in a legally binding procedure.

Which mergers are examined by the European Commission?

If the annual turnover of the combined businesses exceeds specified thresholds in terms of global and European sales, the proposed merger must be notified to the European Commission, which must examine it. Below these thresholds, the national competition authorities in the EU Member States may review the merger. These rules apply to all mergers no matter where in the world the merging companies have their registered office, headquarters, activities or production facilities. This is so because even mergers between companies based outside the European Union may affect markets in the EU if the companies do business in the EU. The European Commission may also examine mergers which are referred to it from the national competition authorities of the EU Member States. This may take place on the basis of a request by the merging companies or based on a request by the national competition authority of an EU Member State. Under certain circumstances, the European Commission may also refer a case to the national competition authority of an EU Member State.

Corporate restructuring is a fact of life. There is a natural tendency for markets to consolidate over take through a process of horizontal and vertical integration.

The main issue for competition policy is whether a proposed merger or takeover between two businesses is thought to lead to a substantial lessening of competitive pressures in the market and risks leading to a level of market concentration when collusive behaviour might become a reality.

When companies combine via a merger, an acquisition or the creation of a joint venture, this generally has a positive impact on markets: firms usually become more efficient, competition intensifies and the final consumer will benefit from higher-quality goods at fairer prices.
However, mergers which create or strengthen a dominant market position can, after investigation, be prohibited in order to prevent ensuing abuses. Acquiring a dominant position by buying out competitors is in contravention of EU competition law. Companies are usually able to address the competition problems, normally by offering to divest (sell or off-load) part of their businesses. For example, in 2007, the UK Competition Commission decided that Sky would be forced to sell some of its 17.9% stake in ITV.

How Germany killed a merger

Here is the tactful statement from BAE Systems and EADS explaining why they have buried their plans to merge:

"Notwithstanding a great deal of constructive and professional engagement with the respective governments over recent weeks, it has become clear that the interests of the parties' government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger."

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Mega Merger

The era of the mega-merger is well and truly here: BAT and Reynolds, tobacco giants, have agreed to merge with the former subsuming the latter.

This will create a giant tobacco firm, with a range of brands including Rothmans and Camel, and BAT hopes to make cost savings of $400m as a result. This implies that there are economies of scale resulting from the merger.

The companies are aware of the fact that in the developed world, there's is a sunset industry as smoking rates are declining, and this will help protect their market position. I suspect it's only a matter of time before they move into the e-cigarette market in a big way - Camel, for example, have had fashion interests in the past.

Reuters on the BAT/Reynolds merger, highlighting the 'shareholder value' available. It implies that there are risk-bearing economies of scale as well as the chance to acquire the technologies associated with heating rather than burning tobacco.

(Source: tutor2u)

Mergers and acquisitions

VERY IMPORTANT