Potential Merger Between Ladbrokes and Coral

Introduction

In today's fast-paced business environment, mergers have become a common strategic initiative for organisations (Volberda et al., 2011). Mergers are projected to be based on shareholders' proposition or creating value for them, however, it is argued that the decision is initiated by the management (Wolfgang, 2008). The motive may be different for firms in different situations. For some organisations it may be to survive in the industry by combining with a more established player in the industry (McCarthy and Weitzel, 2013), while for others it may be a strategy to compete better by achieving higher growth (Johnson et al., 2014).

A recent merger proposition between bookmaking giants Ladbrokes and Coral became the limelight of the public attention (Kleinman, 2015), whereby the various reasons for the merger were highlighted, followed by two-sided opinions about them. On one hand, media updates depict the potential of greater market power (Farrell, 2015), higher financial benefits (Hall, 2015), faster online growth (GalaCoral, 2015), increased international presence (Schram, 2015) and strong position in the regulatory environment (Maidment, 2015); while on the other, analysts criticize the decision by pinpointing the probability of store closures and job losses (Wood, 2015), loss in share price and dividend yield (Head, 2015), unfit skills set for online growth (Nimmo, 2015) and uncertainty about decision confirmation (Martin, 2015b). With such mixed viewpoints, Ladbrokes Coral must take appropriate steps to ensure the success of the combined entity both in the short run and long run.

Reasons for the Merger

Greater Market Power

The most important reason behind the merger intention between Ladbrokes and Coral seems to be their aspiration to gain the market leadership position, i.e. they want to create a new entity which would be the largest bookmaker in the UK (Farrell, 2015). The new entity would have a total of 4000 shops (Rojas, 2015) surpassing the current market leader William Hill, which has only 2400 (Aglionby, 2015). Volberda et al. (2011) identify this as the principal reason underpinning most merger cases, whereby the merging organisations strive to achieve greater market power by ensuring that they will have an opportunity to sell more goods or services than their competitors. Bridge and Craven (2015), however, provide a critical review of this strategy saying that it will be a move with an aim to achieve dominance merely in terms of higher number of shops, and further mention that with the two companies merged together, they will have lots of duplicated shops within the same vicinity, which might not be very useful.

Another critique about this strategy was that a single company would not be allowed by the CMA regulations to have that many shops, hence the excess shops will be allocated to smaller competitors like PaddyPower and Betfred; that again makes the purpose of this merger in vain (Kleinman, 2015). As a counter-argument to this, the management of Ladbrokes and Coral stated that even if they lose 1000 stores, they would still have 700 more stores than William Hill, hence it would be beneficial for them (Bridge and Craven, 2015). Wood (2015) argues that as the regulatory authorities enforce to close down excess shops, it would also result in many job cuts and that Ladbrokes Coral management should have considered these consequences while discussing the merger proposal.

Higher Financial Benefits

According to Hall (2015), the combined entity would be valued at £2.3bn, earning about net revenues worth £2.1bn and delivering cost synergies worth £65m per year. However, critics argue that a mere announcement of the merger has resulted in a 9% decline in Ladbrokes' share price, which is alarming (FinancialTimes, 2015). Hence the situation at the time of actual merger may be worse. An analyst Greg Johnson considers this to be a smart strategic initiative as the combined entity's revenues and profitability will be higher, which would result in greater marketing budget, thus helping the bookmaking giant be equivalent to the current leader William Hill (Martin, 2015a). Head (2015), on the other hand, views this as a disadvantage mainly for Ladbrokes, because at the time of announcing the merger, it underwent a reduction in the 2015 annual dividend by 66%. With only 2.3% yield of the shares, Ladbrokes' investor confidence may further drop as well. The CEO of Ladbrokes offers a counter-argument saying that although this strategy has shown some dividend and revenue losses currently, it would be useful for the business development in the next 900 years (ProQuest, 2015). The combined retail business of Ladbrokes Coral is viewed as a cash engine of the company, which is why they consider this merger as a win-win situation for both organisations (Maidment, 2015). An opportunity for business growth has been identified related to the joint procurement and reduction of central overhead costs which would enhance the company's efficiency, making it financially strong to bear the tax increases (GalaCoral, 2015).

Faster Online Growth

With the major growth opportunities in the industry being online gaming and digital sportsbetting, the combined entity has a higher potential to enhance its online growth (GalaCoral, 2015) by attracting sports fans and younger gamblers through its tablet and mobile applications (Maidment, 2015). It will also set the drivers to enhance customer experience and increase loyalty though effective multi-channel offers (GalaCoral, 2015). Since both the companies use similar technology platforms and have partnered with outside parties such a Playtech and Scientific Games, it will be easier for integration of the systems and would not cause any disruption to their existing customers (GalaCoral, 2015). Investment banker Jefferies, however considers Coral to be an imperfect fit to merge with Ladbrokes, as another analyst determined that the success of Coral's online business is only dependent upon its casino games; hence it lacks the competence to help Ladbrokes enhance its online growth (Nimmo, 2015).

Increased International Presence

Another reason for the merger is the opportunity to have greater international presence (Schram, 2015). After closing this deal, the combined entity would be able to operate in Italy, Australia, Spain and Belgium, and would have the potential to expand further with lesser limitations (GalaCoral, 2015). As a result of this, international revenues would account for more than 10% stake in the company's total revenues (Kleinman, 2015). The management of Ladbrokes and Coral also believes that they are very complementary businesses, which would enable them to compete better in the UK and internationally (Schram, 2015). Although there might be potential benefits of going international, Martin (2015b) argues that the uncertainty of whether the merger will take place or not, may cast serious doubts on the strategy of Ladbrokes and it may then hinder its plans to grow in other countries later on.

Strength to Operate in the Regulatory Environment

Maidment (2015) believes one of the reasons behind betting firms' mergers is their strategy to be strong enough as an entity to be able to bear higher British tax bills and regulations in the industry. Some analysts view this as a strategy which is not well-planned, because Ladbrokes planned to take over Coral in 1998 with the same intention of better online growth, but the imposed regulations by the government to cease the takeover proposal and notices from the trade and industry secretary about the consequences of hurting the competition, made it discard the proposal (Martin, 2015b). Hence similar hindrances may occur this time around as well if the minute details have not been given enough consideration.

Recommendations for Success

Digital Strategy

Jim Mullens, CEO of Ladbrokes admitted in front of the public about the disappointment from poor digital strategy by Ladbrokes, which made them suffer (ProQuest, 2015). In the digital market, Gala Coral accounts for a strong share of about 8% in the UK, while Ladbrokes lags behind with only 6% (Maidment, 2015). Hence in case of the new entity, the innovative ideas and successful technology from Coral may also be used in order to devise a successful strategy for digital marketing. The Coral Group possesses the leading multi-channel technology (Playtech, 2014), which if combined with that of Ladbrokes, would increase their expertise to such an extent that they will be able to upsurge their multi-channel revenue and customers.

Separate Investment Entities

Since the declining share price and dividend yield may have an adverse impact on customer confidence, the combined company should still keep the shares of existing shareholders to the entities they prefer, meanwhile transitioning the best case practices in both the entities before the merger takes place. This would help in avoiding any future issues in standardization of processes as has been the case in some merger failure cases (Papathanassis, 2012). Another advantage of this strategic move would be foundation of a recreational scale and improvement in the customers' experience (Schram, 2015), whereby they would feel more valued. It would also upkeep the shareholders' confidence as they would have discretionary power to hold the shares desired by them based on the experiences of customers.

Ensuring High Employee Morale

According to media sources, the merger is planned to come into effect legally as a takeover of Coral by Ladbrokes (Farrell, 2015), however, there might be problems arising as a result of this issue at the time of implementation of plans, because research suggests that takeover cases normally prove to worsen the situation for employees in the acquired organisation (Risberg, King and Meglio, 2015). Although there is satisfactory representation from both organisations in the executives' list (GalaCoral, 2015), the real cultural problems may occur down the hierarchy. Ladbrokes Coral would, therefore, need to take care that the impression of the 'acquired firm' is not considered in its literal sense, taking example from the successful merger case of Yawata Steel and Fuji Steel to form Nippon Steel, where the employee morale was kept up throughout (Waverman, Comanor and Goto, 2005: 66). The management must, therefore, develop policies according to which the employees of neither organisation are discriminated against to create a healthy work environment.

Appointment of Trustworthy and Reliable Executive Members

There is a probability that the CEO of HBOS, Andy Hornby would occupy a senior position in the executive board of Ladbrokes Coral (Duncan, 2015). Hornby was accused of pushing the bank into massive failure when it was finally rescued after being taken over by Lloyds bank in 2008 (Inman, 2015). Ladbrokes Coral seems to be waiting for the legal inquiry being published about the HBOS case and that Hornby would be taken on the board if not found guilty. One of the executives in the company suggested that he could be given another chance as he is a good retailer and was probably not well-suited for the banking career (Farrell, 2015). However, critics argue that the bank failed as a result of the reckless lending practices during Hornby's leadership (Aldrick, 2012). Although not being appointed for the main executives' list (Duncan, 2015), it is still not fit for Ladbrokes Coral to have Hornby on their panel as it is going to be a huge risk for the company and might hinder its way to achieve its goals successfully. Even if Hornby was not directly responsible to create the culture of high pressure sales, he was still responsible to not cease it when it came to his notice. Therefore, having experienced personnel with clear and honest work history would be best suited for the executive positions to be filled in for the newly merged company.

Conclusion

The competitive betting industry poses some amazing opportunities for Ladbrokes Coral, however, the combined entity may be faced with certain threats as well. Therefore, the management must evaluate the benefits of the merger proposition against the criticisms by the analysts to take the necessary actions to ensure the smooth running of the organisation. It may capitalise on Coral's remarkable technology to develop its digital marketing strategy and secure stakeholders' confidence by keeping the share ownership of the two entities separate. Additionally, it can formulate discrimination-free policies to ensure high morale of the employees in both entities, both before and after the merger, and appoint trustworthy and reliable members for its executive board to lead to a successful future.

References

Aglionby, J. (2015). Ladbrokes and Coral Confirm Merger. The Financial Times. 24th July. [Online] http://www.ft.com/cms/s/0/6a054918-31cb-11e5-8873-775ba7c2ea3d.html#axzz3olHGUo00

Aldrick, P. (2012). Book Cites Andy Hornby for HBOS Failure. The Telegraph. 9th September. [Online] Available at: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9531748/Book-cites-Andy-Hornby-for-HBOS-failure.html

Bridge, S., and Craven, N. (2015). Merger of Top Bookmakers Ladbrokes and Coral would lead to Huge Local Duplication of Shops all Owned by Same Firm. This is Money. 28th June. [Online] Available at: http://www.thisismoney.co.uk/money/news/article-3141674/Merger-bookmakers-Ladbrokes-Coral-lead-huge-local-duplication-shops-owned-firm.html

Duncan, H. (2015). Disgraced Former HBOS Bank Boss Andy Hornby to Land Top Job at Newly-Merged Gambling Giant Ladbrokes Coral. The Daily Mail. 24th July. [Online] Available at: http://www.thisismoney.co.uk/money/markets/article-3172417/Disgraced-former-bank-boss-Andy-Hornby-handed-job-newly-merged-gambling-giant-Ladbrokes-Coral.html

Farrell, S. (2015). Ladbrokes and Coral in Talks to Create UK's Biggest Bookmaker. The Guardian. 23rd June. [Online] Available at: http://www.theguardian.com/business/2015/jun/23/ladbrokes-and-coral-in-talks-to-create-biggest-bookmaker

FinancialTimes (2015). Ladbrokes profits slump 44% after Shop Closures. [Online] Available at: http://www.ft.com/fastft/373691/ladbrokes-half-year-profits

GalaCoral (2015). Joint Announcement Regarding Proposed Recommended Merger. [Online] Available at: http://www.galacoral.co.uk/~/media/Files/G/Gala-Coral/reports-and-presentations/quarterly-report/pr-24072015.pdf

Hall, J. (2015). Ladbrokes Share Price Falls after Confirming £2.3bn Merger with Gala Coral. CityA.M. 24th July. [Online] Available at: http://www.cityam.com/220890/ladbrokes-confirms-23bn-merger-gala-coral

Head, R. (2015). Why Playtech PLC is the Jackpot Winner from the Ladbrokes PLC-Gala Coral Merger. The Motley Fool. 24th July. [Online] Available at: https://www.fool.co.uk/investing/2015/07/24/why-playtech-plc-is-the-jackpot-winner-from-the-ladbrokes-plc-gala-coral-merger

Inman, P. (2015). Former HBOS Boss Andy Hornby to take Charge of Public Company. The Guardian. 23rd July. [Online] Available at: http://www.theguardian.com/business/2015/jul/23/former-hbos-boss-andy-hornby-to-take-charge-of-public-company

Johnson, G., Whittington, R., Scholes, K., Angwin, D., and Regner, P. (2014). Exploring Strategy: Text and Cases. Harlow: Pearson Education Limited.

Kleinman, M. (2015). Ladbrokes and Coral Agree £2.3bn Merger. Sky News. 24th July. [Online] Available at: http://news.sky.com/story/1524609/ladbrokes-and-coral-agree-2-3bn-merger

Maidment, N. (2015). Ladbrokes and Gala Coral Team up for Online Betting Push. Reuters. 24th July. [Online] Available at: http://uk.reuters.com/article/2015/07/24/us-gala-coral-m-a-ladbrokes-idUKKCN0PY0JL20150724

Martin, B. (2015a). Déjà vu for Ladbrokes Investors as Bookie Gambles on Mega-Merger. The Telegraph. 27th June. [Online] Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/leisure/11703159/Deja-vu-for-Ladbrokes-investors-as-bookie-gambles-on-mega-merger.html

Martin, B. (2015b). Ladbrokes Merger Months in the Making. The Telegraph. 23rd June. [Online] Available at: http://www.telegraph.co.uk/news/predictions/leisure/11694843/Ladbrokes-merger-months-in-the-making.html

McCarthy, K.J., and Weitzel, U. (2013). Merger Motives - Merger Motives and the Realization of Gains. In: McCarthy, K.J., and Dolfsma, W. (ed.). Understanding Mergers and Acquisitions in the 21st Century, pp. 109-147. London: Palgrave Macmillan.

Nimmo, J. (2015). Market Report: Ladbrokes Stumbles as City Doubts Success of its Coral Deal. EveningStandard. 13th August. [Online] Available at: http://www.standard.co.uk/business/market-report-ladbrokes-stumbles-as-city-doubts-success-of-its-coral-deal-a2488616.html

Papathanassis, A. (2012). Post-Merger Integration and the Management of Information and Communication Systems: An Analytical Framework and its Application in Tourism. Germany: Springer Science & Business Media.

Playtech (2014). Playtech's Multi-Channel Solution Revolutionises the Betting Shop Experience. [Online] Available at: http://www.playtech.com/news/latest_news_and_prs/playtech_s_multi-channel_solution_revolutionises_the_betting_shop_experience

ProQuest (2015). Ladbrokes Business Review, Proposed Recommended Merger with Coral Group and Proposed Placing Call - Final. Fair Disclosure Wire. [Online] Available at: http://goo.gl/Px3LXl

Risberg, A., King, D.R., and Meglio, O. (2015). The Routledge Companion to Mergers and Acquisitions. New York: Routledge.

Rojas, J.F. (2015). Betting Giants Ladbrokes and Coral Merge to Create UK's Biggest Bookmaker - But will it Close Stores and Axe Jobs? Mirror Online. 24th July. [Online] Available at: http://www.mirror.co.uk/news/business/betting-giants-ladbrokes-coral-merge-6128993

Schram, B. (2015). Ladbrokes and Gala Coral Agree on £2.3bn Merger to Create Bookmaking Giant. International Business Times. 24th July. [Online] Available at: http://www.ibtimes.co.uk/ladbrokes-gala-coral-agree-2-3bn-merger-create-bookmaking-giant-1512379

Volberda, H.W., Morgan, R.E., Reinmoeller, P., Hitt, M.A., Ireland, R.D., and Hoskisson, R.E. (2011). Strategic Management: Competitiveness and Globalization. Hampshire: Cengage Learning EMEA.

Waverman, L., Comanor, W.S., and Goto, A. (2005). Competition Policy in the Global Economy: Modalities for Cooperation. London: Routledge.

Wolfgang, K. (2008). Synergies, Shareholder Value and Exchange Ratios in "Value-Creating" Mergers: Why Shareholders Should Doubt Management's Pre-Merger Promises. Managerial Finance, Vol. 34, No. 4, pp. 252-261.

Wood, G. (2015). Coral and Ladbrokes Merger Result of Adapt-or-Die Phase of Digital Age. The Guardian. 23rd June. [Online] Available at: http://www.theguardian.com/sport/blog/2015/jun/23/coral-ladbrokes-merger-result-of-digital-age