The motives for takeover and mergers, and how these
link with corporate strategy
Takeovers are when a company hope to
achieve growth for them through buying out another company which can become
rather hostile, however mergers are when businesses join forces to hopefully
achieve better profitably for both parties. The main reason for a company to be
involved in a takeover can be to help the company to achieve revenue and growth
by acquiring brands in strong market sectors.
One motive for companies being involved
in takeovers and mergers are so they are able to access new geographical markets.
This could be in an area which the company may not particularly be experienced
in therefore enabling the companies to combine their expertise, leading them to
have a competitive advantage and helping them to increase their market share. This
could especially be the case if the company wants to increase their risk of
survival. The decision of Kraft Foods to launch a hostile bid for Cadbury on
Monday November 9th is an example of this. Cadbury is the world’s
second-largest sweet maker and adds strong business in rich countries such as
Britain and Australia as well as faster-growing developing countries like
India, Brazil and Mexico, whereas Kraft is a low growth company that has little
presence in Britain. Therefore, this could also link into Kraft wanting to
acquire new products in a different market segment through takeover as it is a
quick route to expansion of the product portfolio, which is product development
in Ansoff’s Matrix i.e. stars and cash cows. The immediate benefits of doing
this are the companies will be able to reduce their costs and possibly have more
effective economies of scale, helping them to achieve their prime motive of
increasing their profits, profitability and shareholder value. However, this
could depend on whether the takeover ends up destroying more value than it is
able to create, as Kraft have little expertise in the area they are hoping to
specialise in, for example chewing gum. This could also result in a public
backlash as they may be unhappy with any changes that Kraft decides to make
differing to Cadbury, resulting in a loss of revenue and a possible damage of
reputation.
Another motive behind takeovers and
mergers is economies of scale benefiting the business through reducing the
company’s unit costs. Kraft made a statement that they will spin off its Oreo,
Cadbury, Milka, Trident and LU brands to create a global snacks business with
annual revenue of about $32bn and split its global business into two separate
entities. Therefore Kraft should be able to acquire larger economies of
specialisation which helps the company to focus on different strategic
priorities and operational focus. Kraft’s takeover should be able to save the
company revenue due to the internal growth they will be experiencing, as they
will have the expertise of Cadbury’s former employees especially in the chewing
gum area which is something Kraft are particularly focused on. Also, the
machines which Kraft now has allow the company to make their “tasty treats” at
an extremely low price which mean allowing lower pricing, greater market share
leading to higher revenue. Fixed costs and low-ball pricing schemes do tend to
dominate the low-quality snack food industry, therefore leading to economies of
scale.
In conclusion, most likely to be
affected is Kraft’s brand image due to the British public feeling as though
America are again taking over a British company to make it their own. This
therefore could result in creating the domino effect of loss of revenue leading
to lower profit for the company, meaning they will not achieve their prime
motive of increasing their profits, profitability and shareholder value.
