(1) The Motives for Takeovers and Mergers and How
These Link with Corporate
Strategy
Behind every merger and takeover,
there are motives and reasons to it. Initially, a Business has two methods to
growth, either internally (organic) growth or external growth; Takeovers and
Mergers are two main ways for external growth. Moreover, the factors that
influence a business owner or corporation to make a decision whether to growth
by takeovers and mergers is Corporate Objectives, different companies have
different objectives hence the corporate strategy which is a medium to long
term or course of action required to achieve the business’s corporate
objectives. Two common objectives for big firms are profit motive and
shareholder.
A merger or takeover allows a business
to access in a new geographical market. According to the Ansoff Matrix,
accessing new market are market development and Diversification, one big
advantage of new markets is to spread risk and gain more revenue from another
market. One factor to look at is the market conditions, a rapid growth market
would attract business to emerge.(Expand)
Emerge to a developing geographical area, for example BRICS, Brazil,
Russia, India, China and South Africa were among the fastest growing emerging
markets, it has an estimated average growth of 25% of GDP. Take the Kraft
takeover of Cadbury as example, Kraft intended to start making Tang powdered
beverage and chocolate in a developing country, the strategy is to use
Cadbury’s strength in those regions, Cadbury already has the opportunity to its
expands its global operations, new market with new product of which are limited
in particular region, such as Cadbury India was attempting to increase the
inclining market for chocolate with innovation. Statically, Cadbury India is
said to be growing at Compounded Annual Growth Rate (CAGR) of 20% and due to this,
Kraft will also make good market in India for their products. As the result Kraft now gets about 1/4 of it’s
almost $50 billion USD in sales from emerging markets because of takeover Cadbury.
The takeovers showed a huge benefit for Kraft to expand in a growing market,
get a foothold in the emerging market, broaden the access to a fast-growing
market and enjoy the huge benefit of the market growth in these growing
markets. Hence by using takeovers to get in a new geographical market would decrease
the barriers to entry, opportunity cost applied which would possible save the
company time and money to research and try to reduce the barrier there would
been. However, according to Ansoff’s Matrix, although market development has a
high reward, it has a high risk as well, two companies might have different
ways of operation and marketing, by integrating therefore it might change the
marketing strategy to the new markets, it depends on do they share the same
knowledge to the new market, and how they coordinate with the knowledge they
have got and also depends on the time to adjust to the new geographical market.
Another benefit would be achieving
rapid growth, in above mentioned, a company can growth in either internally or
externally; with external growth would be more rapid, since the company would
merger or takeover another company with all their assets, it instantly growth
by a large volume, hence to achieve the objectives of the company. The further
impact of growth rapidly is being more competitive hence gaining market share
and power, by many ways, take Kraft and Cadbury as an example, The main motives
behind the takeover by Kraft was to become the largest confectionary company in
the world which would result in a turnover of around 50 billion USD per year,
before the takeovers, Kraft were the second largest confectionary company in
the world following the competitor Nestle; After Cadbury accepted the
takeovers, Kraft Foods Incorporation forming the world’s biggest food and dairy
product company (Confectionary Company) defeating his competitor Nestle. Primarily,
Kraft would achieve the its company strategy of growth and gaining market
share, since it became the market leader, becoming an monopoly/oligopoly in the
market allow the firm to set the price of their products which others price
takers would fellow . Moreover, this horizontal takeover involves the
acquisition of the same stage in the supply chain, which could benefit from
cost reduction of Economies of Scales with lower costs leads to high profit
margin. However, although takeovers and mergers could achieve a rapid growth
instantly gaining economies of scale, being too big also has diseconomies of
scales, in Kraft being the largest company in the market, communication might
be harder, coordination would become harder, also depends on how Kraft use the
Cadbury to cut cost by Economies of Scale.
In Conclusion, a mergers and motives
have a lot of different reasons, and not 100% satisfactory and not 100%
advantage, weighting up the risk and reward is essential in order to make a
successful mergers and takeovers. Overall these motives above have contributed
to increase Profits, profitability and shareholder value. It can be measure by satisfying
the shareholders, which they have highest interest and biggest influence to the
company. Takeovers and Mergers these external instantly growth in a short term would
have difficulties such as clash of culture, in return in long term would help
future growth and maximize the ability to generate profit. The success depends
on the company culture to adjust and coordinate. For Kraft and Cadbury takeover
the strategy is being the largest confectionary company in the world resulting
to make almost 50billionUSD in 2010 after the takeover, having over 28%
increase over the year in revenue. These large amount of revenue allows Kraft
to growth bigger stay competitive and
more important is satisfy the shareholders eventually leads to them keep
investing or invest more to gain more capital, achieving Kraft Corporate Objective, to be sustainable.
