Question bob Finance & Economics

Motives behind Sainsbury's acquisition of Home Retail Group

what are the motives behind the Sainsbury's and Home retail group merger deal?

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Answer Internal Staff

Johnson, Whittington & Scholes (2011) divided motives for mergers and acquisitions into three main groups. These are strategic motives, financial motives and managerial motives. The commentary here is on the motives behind Sainsbury’s’ acquisition of Home Retail Group (HRG), and two motive groups provide explanations as to the rationale behind the acquisition of HRG namely, strategic and financial motives.

• Strategic motives – focused on improving and developing the business; closely linked to competitive advantage. A Sainsbury's spokesperson said: "The combination of both businesses will create a multi-product, multi-channel proposition with fast delivery networks, benefiting customers by accelerating our strategy to give them what they want, where and when they want it. We look forward to the successful completion of the deal," (BBC News 2016). This form of horizontal integration indicates that the motive is to increase both the scale and the market share of the combined firm. Access to wider distribution and improved business capabilities are the other strategic motives behind the takeover as the firm will improve its delivery networks – Argos (which is part of HRG) is known for its excellent online delivery network. All in all, this will improve Sainsbury’s Argos’ competitive position. Moreover, Sainsbury’s wants to reinvent itself as a digital retail leader.

• Financial motives – focused on making best use of financial resources for shareholders; concerned with improved financial performance. In its reasoning for acquiring HRG, Sainsbury’s said it expects to achieve Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) synergies of “not less than £120 million in the third year after completion.” Furthermore, cost synergies provide financial motive. It should be noted that all takeovers and mergers have financial motives of one kind or another. In the case of Sainsbury’s this holds true but it does not appear to be the most important driver of the deal.

References

BBC News (2016) Sainsbury's takeover of Home Retail to be probed. Available from: http://www.bbc.co.uk/news/business-36401857

Johnson, G., Whittington, R., & Scholes, K. (2011) Exploring Strategy. NJ: Prentice Hall.