size-of-business evaluating-external-business-growth

The impact of a merger or takeover on stakeholders

• When two businesses combine, different stakeholder groups can be affected

• These impacts often depend on how the merger or takeover is managed and the reason behind it (e.g., to grow, enter a new market or reduce costs)

• Stakeholders may support or resist the change depending on how it affects their own interests

Possible impacts on stakeholders

1. Employees

• Mergers may create job opportunities if the business grows

  • Employees might also have access to better training and resources

• However, businesses often try to cut costs after a merger or takeover

  • This may lead to job losses (especially in duplicated roles), uncertainty and lower morale

• E.g., When Amazon took over Whole Foods, some staff benefitted from higher wages, but others were worried about job security due to automation

2. Owners

• Shareholders of the business being taken over may receive a high offer for their shares

  • The combined company may become more profitable in the long term

• However, if the takeover fails or performance drops, the share price might fall, affecting owners’ wealth

• E.g., Facebook’s takeover of Instagram increased its market value significantly, benefiting shareholders

3. Suppliers

• A larger business might place bigger orders, giving suppliers more business

• However, the new company may demand lower prices or switch to new suppliers to reduce costs

• E.g., After Tesco’s merger with Booker (a wholesaler), some small suppliers feared they would lose contracts due to pressure to cut prices

4. Customers

• Customers may benefit from lower prices, more product choice and improved services if the business becomes more efficient

• However, less competition might lead to higher prices or fewer choices over time

• E.g., after Disney acquired 21st Century Fox, some customers enjoyed new content, but others worried about fewer streaming choices

5. Competitors

• A merger or takeover can create a much stronger rival, making it harder for smaller businesses to compete

• However, if the new business faces problems after merging, it may open opportunities for others

• E.g., following the merger of Vodafone and Idea in India, smaller telecom companies found it harder to compete on price and network size

Why a merger or takeover may or may not achieve objectives

• Mergers and takeovers can look attractive, but business leaders must also plan for culture clashes, higher debt and the real possibility that regulators will refuse the merger

Hard-to-blend cultures and systems

• When two very different organisational cultures join together, employees may clash over ways of working and IT systems may be incompatible

• Managers can spend months fixing problems instead of improving products

• Expected cost savings and new ideas can stall, leading to poorer performance and lower staff morale

  • E.g. Kraft Foods and Heinz‘s merger in 2015 led to significant cost-cutting which left some brands under-funded and less able to compete

Heavier debt burden

• Mergers are often paid for with borrowed money

• High interest payments use cash that could alternatively fund research, marketing or new factories

• If profits fall, the enlarged business may be forced to cut dividends, sell assets or issue new shares

  • E.g. Dell borrowed $48 billion in 2016 to finance its purchase of rival EMC, which affected cash flow for years and was a key reason Dell had to raise finance by selling shares on the stock market in 2018

Regulation

• Competition watchdogs can delay a merger for years, demand that parts of the business be sold off, or block the deal entirely if they think it will hurt consumers

• Companies can spend years and millions of pounds on planning a merger that is never approved

The importance of joint ventures and strategic alliances

Joint ventures

• A joint venture is when two businesses join together to share their knowledge, resources and skills to form a separate business entity for a limited period of time

  • E.g., The mobile network EE is a joint venture formed by the French mobile network, Orange and the German mobile network, T-Mobile

Problems with joint ventures

• Conflicting objectives

  • If the parent companies want different things, everyday decisions slow down and the joint venture can lose focus

    • E.g. In 2024 ITV sold its 50% stake in Britbox to the BBC, saying the service would be simpler to run under one owner after the partners’ strategies began to diverge

• Too small to compete

  • A joint venture that stays small may not have the money, stores or marketing power needed to stand up to larger rivals, so it struggles to grow

    • E.g. In 2016, Sainsburys and Dansk Supermarked‘s joint venture Netto ended because nationwide expansion would have required more investment than they were prepared to spend

• Limited control for a minority partner

  • A parent that owns only a small share may have little say in its strategy

    • E.g., Tesco ended its minority stake in its Chinese grocery joint venture in 2020, drawing a line under years of weak performance

Strategic alliances

• Strategic alliance agreements are similar to joint ventures

  • Businesses collaborate for a period of time to achieve a specified goal

  • They agree to work together for their mutual benefit

  • Resources are often shared

Comparison of joint ventures and strategic alliances