During recessionary times, firms will normally hold back from investments, especially as demand falls. With most major economies worldwide showing the early stages of a recovery and confidence levels among businesses and consumers increasing, large firms are beginning to review their growth options for the next few years.
Growth strategies available for firms include external growth through mergers and acquisitions. In the US, merger and acquisition activity in the oil-and-gas industry has reached the highest first-quarter deal volume in more than a decade, according to consulting firm PwC US. For the three months ended March 31 2014, oil-and-gas companies launched 43 deals with values greater than $50 million, accounting for $19.8 billion in activity. That compares to 41 deals in the first quarter of 2013.
In the UK, AstraZeneca a British-Swedish multinational pharmaceutical conglomerate is currently subject to a takeover offer from the US pharmaceutical giant Pfizer. If the deal were to go through it would be the biggest takeover of a UK company by a foreign firm. AstraZeneca employs more than 51,000 staff worldwide, with 6,700 in the UK. Pfizer – whose drugs include Viagra – has a global workforce of more than 70,000, with 2,500 in the UK. The takeover bid values AstraZenica at over $100 billion. Under Pfizer’s plan, the combined company would be incorporated in the UK with shares listed in New York and management in Britain and the US. The arrangement would mean Pfizer would not pay US tax on its non-US earnings. Pfizer said the tax structure would protect AstraZeneca’s revenues from the 38% rate of corporation tax in the US. UK corporation tax is much lower at 21% and will fall to 20% next year.
The first two bids from Pfizer were rejected. Pfizer could raise its offer to try to entice AstraZeneca into negotiations, begin a hostile bid or walk away if AstraZeneca refuses to talk. A hostile takeover is when the acquisition of one company (called the target company) by another (called the acquirer) is achieved by going directly to the company’s shareholders or fighting to replace management in order to get the acquisition approved. The key characteristic of a hostile takeover is that the target company’s management does not want the deal to go through and defends against unwanted hostile takeovers by taking measures such as selling off key assets or finding another firm ( a ‘White Knight’) with which to merge as equals. An example of a hostile takeover was Kraft’s takeover of Cadbury in 2009.
Under UK law, New York-based Pfizer has a month to decide whether to bid for AstraZeneca or to pull out. Alternatively, AstraZeneca may seek a merger of equals with Amgen Inc. (AMGN) or AbbVie Inc. (ABBV), both of which have cancer programs, as a defence strategy, or the U.K. drugmaker may find itself the subject of further unwanted approaches from the likes of Sanofi, which would be attracted also to AstraZeneca’s diabetes assets.
There are a number of significant advantages to a merger or acquisition, including economies of scale and marketing synergies. However, according to Investopedia.com, an estimated 66% of mergers and acquisitions are not successful. Investopedia has an excellent tutorial on the subject of mergers and acquisitions and you may wish to look back at a recent post on this topic on this blog.
The topic of mergers and acquisitions is included in the existing Business and Management syllabus and its importance is boosted in the new programme for first teaching in September 2014. It also offers significant opportunities for an internal assessment and extended essay. A case study of a takeover can also provide a case study for strategic analysis.
Select a recent takeover or merger
1. Produce an 800 to 1000 word report including the following elements:
- a background to the firms involved
- the advantages and disadvantages of takeovers or mergers in theory
- an analysis and evaluation of the potential reasons for the merger or acquisition
Submit the report to your teacher for assessment.
2. Prepare a research title for either an internal assessment or extended essay and a supporting research proposal.