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CHAPTER 10
STRATEGIC IMPLICATIONS
OF ACQUISITIONS
Learning Outcomes
Relevant definitions:
– A takeover is the acquisition by an entity of a
controlling interest in the voting share capital of
another entity, usually by the purchase of a
majority of the voting shares.
[CIMA Official Terminology]
– A reverse takeover is when a smaller entity takes
over a larger one, so that the predator entity has
to increase its equity by over 100% to complete
the takeover.
Relevant definitions:
– A merger is a business combination that results in
the creation of a new reporting entity formed from
the combining parties, in which the shareholders
of the combining entities come together in a
partnership for the mutual sharing of the risks and
benefits of the combined entity, ....
[CIMA Official Terminology]
– Synergy is the positive incremental net gain
associated with the combination of the entities
through a merger or acquisition (i.e. 1 + 1 = 3).
Strategic Implications of Acquisitions 4
1 Mergers and Takeovers
Horizontal integration:
– Results when 2 entities in the same line of business
combine (i.e. Barclays & ABSA, RAU & TWR, Adidas
& Reebok, SABMiller & AB Inbev).
– List some of the entities currently involved in merger
talks.
Vertical integration:
– Results from the acquisition of one entity by another
which is at a different level in the supply chain (i.e.
attempt by Sasol and Engen to merge was disallowed
by Competition Commission).
Strategic Implications of Acquisitions 5
1 Mergers and Takeovers
Concentric diversification:
– Occurs when an entity seeks to add new products
that have technological and/or marketing
synergies with the existing product line.
Conglomerate diversification:
– Consists of making entirely new products for new
classes of customers.
Big Data
– Big data is data that requires a lot of computer
power to analyse;
– And is too large and complex to analyse using
traditional database management tools;
– If you can analyse the data on your personal
computer then it is not regarded as big data;
– Companies may want to gain access to another
company’s big data and this may therefore be a
reason to merge.
Strategic Implications of Acquisitions 9
1 Mergers and Takeovers
Types of synergy:
– Revenue synergies;
– Cost synergies;
– Management synergies; and
– Financial synergies.
Revenue synergies
– Exist when the acquisition will result in higher
revenues, higher return on equity or a longer
period of growth for the acquiring company.
Cost synergies
– Result from economies of scale;
– As scale increases, marginal cost falls and this will
be manifested in greater operating margins for the
combined entity.
Management synergies
– Result from sharing competencies / technology.
Financial synergies
– Include sources such as diversification and tax
benefits.
Strategic Implications of Acquisitions 13
1 Mergers and Takeovers
Taxation issues:
– Some countries allow tax losses of a target
company to be offset against profits of the parent
company, however, some countries disallow this.
– Local taxes such as withholding taxes on interest,
dividends and royalties need to be taken into
account – the impact is reduced if a double
taxation agreement (DTA) is in place.
– Companies can exploit different tax rules and tax
rates by merging with an overseas company and
re-incorporating in a low tax regime (tax inversion).
Strategic Implications of Acquisitions 15
2 Conduct of a Takeover