Mergers and acquisitions play a vital role in corporate finance. For many companies, mergers and acquisitions are a source of external growth when growth is not possible, whereas to other companies they represent a constant threat to their continuing independent existence. Mergers and acquisitions is one of the important topics in the area of finance and strategy. The terms "mergers and takeovers" are used interchangeably; this is because in any instance it is not clear whether one or the other is occurring. However for certain purposes, it is necessary to distinguish between the two forms of business combination. When two companies of equal size come together with the shareholders and the directors of the companies supporting the idea of the combination and continuing to have interest in the combined business, it is merger. However when a large company makes a cash bid for the shares of a smaller company, the directors of the small company advice the shareholders not to sell but the shares are sold anyway and neither the pre-bid shareholders nor the directors of the purchased company have any continuing interest in the enlarged business, it is clearly an acquisition or takeover.
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There is a great deal of interest in the subject of mergers and takeovers. It is an area of corporate finance that attracts much publicity. In this study Britvic Plc will be used as a case study.
A Merger can be defined as a friendly re-organization of assets into a new organization i.e. Company A and B merging to become Company C with the agreement of both sets and shareholders. A Takeover is the acquisition of one company ordinary share capital by another company, financed by a cash payment, an issue of securities or a combination of both. Here the bidding company is usually larger than the target company.The two types of acquisition that have been widely practiced in most organizations are asset acquisition and stock acquisition. An asset acquisition is an acquisition in which the buyer acquires all or part of the assets and business of the seller. In contrast, a stock acquisition is an acquisition in which all or part of the outstanding stock of the seller is acquired from the stockholders of the seller. For this study,the words acquisition and takeover carry the same meaning since the criterion is that the acquiring companies should have atleast 51% of the outstanding shares of the target companies
1.2 FORMS OF MERGERS
HORIZONTAL MERGER: Involves two firms operating in the same kind of business activity.
VERTICAL MERGER: Involves different stages of production operations.
CONGLOMERATE MEGER: Involve firms engaged in an unrelated types of business activity.
.Ajit Singh (1971) said that the biggest potential losers are shareholders in bidding companies who were sacrificing profits for future growth. Firm size and financial performance of acquiring firms can be the determinants of poor performance in the post acquisition period. Investors do not hold more favorable expectations for related mergers than for unrelated ones and stockholder value appreciates most for vertical mergers. Post-merger performance of the acquirers is influenced by the pre-merger performance of target companies. When the target is small relative to the acquirer, weighted average profitability gains are less likely to show through in result of the combined firm (Cosh and Hughes, 1994 Pg 7; Higson and Elliot, 1994 pg 14).The merger of relatively larger target companies has showed improved profitability so shareholders of a target companies tend to benefit from acquisition activities based on their cumulative average residuals. It seems long term shareholders do not gain significantly from mergers and acquisitions. The share prices of the acquiring companies experience systematic deterioration during the post-merger periods.Econmic theory generally offers two competiting thoughts about the efficacy of mergers as corporate restructuring strategies.
First, the neo-classical theory or the value maximizing theory assumes merger consequences as the motivation for mergers and views corporate mergers as value enhancing activities in which managers work to achieve shareholders' wealth maximization goal of the firm (Frank and Harriss, 1989 pg 9).Second, in contrast, is managerial theory or non-value maximizing theory, which view mergers as the extension of managers' own potential interest, undertaken for the purpose of increasing their own wealth or prestige by managing a larger post-merger entity(Roll,1986 pg 26).The acquiring firm generally earns positive returns prior to announcements ,but less than the market portfolio in the post-merger period services(Bhagat et al.,1990 pg 3;Pandey,2001 pg 23).The question of whether mergers and acquisitions improve corporate performance is one that has been addressed by many researchers over the last decades(Lin and Switzer,2001 pg 18;Ghosh,2001.pg 11).An acquisition can be financially justified only if it increases the wealth of the acquiring company shareholders. Similarly a merger can be financially justified only if the wealth of the shareholders of both companies increases. Takeover is the only means for replacing ineffective management and better utilizing corporate resources. The Department of Justice, in presenting evidence to the congress (March 1986) concluded, "The existence of a vigorous and competitive market for corporate control helps to discipline managers more effectively to severe stockholders' interest better". This reasoning suggests that the threat of a takeover may stimulate more efficient management. Thus, competition among management teams to control corporate resources may motivate better management overall. A company may be acquired either by the purchase of its assets or its common stock. The acquirer evaluates many facts of a target company may purchase all or a portion of the assets of another company and pay them in cash or with its own stock. Frequently, the buyer acquires only the assets of the other company and does not assume its liabilities. If all the assets are purchased, the selling company is but a corporate shell. After the sale, its assets are composed entirely of cash or the stock of the buying company. Takeovers serve as gains to target firms, bidding firms and smaller firms and it also provides competition for Top-level management jobs. It also provides external control. It is also rapid, relatively free of risks; provide access to investment opportunities not otherwise available.
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The Bell Journal of Economics note that the probability of a raid pie (Q, q) is a non increasing function of q.Hence, the tradeoff for the manager is between choosing a high profit action with an associated low chance of being raided and choosing an action which provides high managerial utility but which is likely to lead to a successful takeover bid. Justification or motives for acquisitions are generally considered to be economic financial or managerial in origin.
The Economic justifications for takeovers is that shareholders wealth will be increased by the transaction as the two companies are worth more combined than as separate companies. This can be shown algebraically as:
PVx+Y > (PVx+PVy)
Here, PV represents present value and X andY are the two companies involved. Economic gains may be generated for a number of reasons as follows but one of them is SYNERGY. Synergy occurs when the assets and/or operations of two companies complement eachother, so that their combined output is more than the sum of their separate outputs once merged. By acquiring a company which can supply this service it may be able to reduce its costs. Synergy is the magical force that allows for enhanced cost efficiencies of the new business, which can take in the form of revenue enhancement and cost savings. The form of synergy is enlisted below:
Staff Reductions: To some extent merger reduces labor.
Economic of scales: Whether it is purchasing small stationery or acquiring a brand, Economics of scale can be achieved any way. Economies of scale help to reduce cost of production.
Acquiring new technology: Synergies might occur by acquiring new technology.
Improved market reaches and market share: Often companies tend to penetrate in new areas to acquire a local company and synergy can be achieved by the benefits of the marketing and distribution of local company.
Not necessarily every merger will result in Synergy. First of all there has to be a cultural fit between the two merging organization and then only synergy can be achieved. The Financial justification is the financial benefits they bring to the shareholders of the companies involved. These are now considered in turn:
Financial Synergy: Financial Synergy is said to occur if a company's cost of capital decreases as a direct result of an acquisition. One way in which financial synergy can occur is through a conglomerate takeover where the lack of correlation between the cash flows of the different companies will reduce cash flow votality.Managers may therefore justify a conglomerate takeover by claiming it reduces the risk faced by shareholders.
Target Under evaluation: The justification for an acquisition suggests that some companies may be bargain buys, in the sense that their shares are undervalued by the market. The implication here is that capital markets are not efficient since the idea of companies being undervalued for more than a short period is not consistent with pricing efficiency.
Tax Considerations: It may be beneficial for a tax-exhausted company to takeover a company i.e. not exhausted so it can bring forward the realization of tax-allowable benefits. This may apply to companies with insufficient profits against which to set off capital allowances and interest.
Increasing Earnings per Share: If a bidding company has higher price/earnings than its target company it can increase its share earnings proportionally more than it has to increase its share capital if the takeover is financed by a share-share issue. Its EPS has been boosted through acquisition. This boosting can be beneficial to the company as EPS is seen as a key ratio by market analysts and an increase in EPS can potentially lead to a share price rise.
The second motive for acquisitions is managerial motives. Takeovers can also arise because of the agency problem that exists between shareholders and managers whereby managers are more concerned with satisfying their own objectives than with increasing the wealth of shareholders. Since managers are likely to increase their own wealth at the expense of the shareholders, Takeovers made on these grounds have no shareholder wealth justification.
DATA COLLECTION AND ANALYSIS
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This chapter set the basis for conclusion in the next chapter which is the last chapter. Britvic Plc will be use as a case study and data collection.
Britvic Plc is a company in the United Kingdom based on Soft Drinks and it is called Britvic Soft Drinks Ltd.It was formed in 1987 and is the second largest soft drinks in the UK, after coca-cola Enterprise Ltd.Britvic name was found after the production of bottled fruit juice. In 1986 it was named Britvic Soft Drinks after Britvic merged with Canada Dry Rawlings.In may 2007, Britvic acquired an Irish company C&C, which produces Magners Cider.C&C was the second largest company in Ireland. The deal was worth EUR249million and britvic predicts the cost of integrating the businesses will be EUR20-25million over the next three years. All of Britvic major brands received marketing support in 2008.At the end of 2007 its Net sales was EUR716.3m and Net profit was EUR80.0m.At the end of year 2008,the company reported a gross profit of EURO500.4m. While its revenue rose 29% to EURO926.5m for the period.Britvic has 20 brands in its portfolio of which three are water brands, which have 5% brand share of take-home sales of bottled water. In 2008, Britvic had the highest advertising expenditure in the bottled water market-EURO4.23m.Of this promotions for Fruit Shoot H2o accounted for 53 %( or E2.26m) of the spend.
As at the end of 2007, they have
Total Branded Revenue of E716.3m and it increased to E926.5m in 2008
Operating Profit of E80.0m and it increased to E96.7m in 2008
Full Year Dividend of 11.0p and increased to 12.6p in 2008
Earnings per Share of 20.4p and increased to 24.8p in 2008
Free Cash Flow of E65.3m and E66.2m in 2008
Revenue of E692.5m and E725.8m in 2008
EBIT of E76.2m and E82.0m in 2008
By 2011 they will have synergies worth of E21m and 50% increase on previously announced synergies and they also delivered E5m in 2008.So we can see now that the acquisition of C&C Company has increased the share price of Britvic Plc and the shareholders will gain in the increase and it will justify wealth for the shareholders.
This chapter gives a final summary of the data analysis presented in chapter four and draws conclusion from the findings. With what I have done so far in chapter three, I have come to a conclusion that Mergers and Acquisitions actually improve the share price of companies and therefore justifying shareholders wealth maximization. From what I have learnt from Britvic Plc is that they identify the sources of the firm's current and future competitive strengths. In my case study it is known that synergy is occurred and wants to be improved more in the next three years. Even with their loss in 2007 which was a sum of E11.6million their share price still increased and it favored their shareholders.
After synergy is done, then the valuation of the target company is to be done and then other strategies are to be evaluated. And assuming while developing the case study the organization are operating below the optimum level, holds in case of real corporate world.. This result indicates that mergers cause improvement in the profitability of the acquirers. Another argument is that merger increases assets productivity by eliminating facilities that are unused, i.e. operating synergy is created.Mergers,it is claimed could create financial synergy. The summary of market share price of britvic Plc as at 27/11/09 is 381.50. As at 2009,the market is dominated by three companies which are Danone, Highland Spring and Nestle while Britvic has recently entered the market with drench.
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Sources of Data Collection:
Britvic Plc Annual Report 2007/2008
Euromonitor International from GMID.