Motives for a takeover

Takeovers and mergers are a way of growing externally, this can be done through reaching an agreement between the management and shareholders of two businesses or when one business controls the stakes in another company by purchasing 50% or more of their share capital. The alternative to this is organic growth, this is through increasing outputs and sales and then reinvesting to buy new outlets or to fund research and development. However, this method takes longer for a business to grow.

One possible motive for a takeover is to gain access new geographical markets that the company had not reached, this may be due to survival from recession or already saturated domestic markets. For example, Kraft took over Cadbury which already has an established presence in many markets such as the UK but most importantly one of the BRIC countries – emerging markets such as India. Cadbury set up in India over 60 years ago and become the country’s largest confectioner, as a result of fast growth in this country, India represented 40% of sales where Cadbury gained the majority of its revenue. As well as this, India’s resilient market has a growth of 20% with profits growing at 30%. After the takeover, Kraft gained access to more markets which Cadbury already had a foot in thus being able to reach more customers and develop a bigger chance of sales leading to increased revenues and profits without taking the risk of entering completely new markets where neither firm had knowledge of. Additionally, as the market is growing, the company can spread the risk amongst current markets if they are becoming more saturated. However this depends on whether the hostile takeover that Kraft carried out has damaged their reputation within the emerging markets. During the takeover, Kraft received heavy amounts of negative press concerning their hostile takeover as they were accused of taking away Britain’s Heritage. In addition to this, there were rumours of closing down factories despite making public pledges, this could ruin their credibility and reputation therefore could potentially damage sales within the new markets.

Another possible motive for a takeover could be to acquire new products or services. For example, before the takeover, Cadbury’s had 26% of the chewing gum market whereas competitor Mars, owned 35%. Cadbury’s popular gum brands such as Stride or Trident can allow the little expertise that Kraft have in the chewing gum market to expand and evolve therefore the combination of Kraft and Cadbury’s can allow the market to result in a proportion similar to Mars/Wrigleys. As expertise from Cadbury will already be present, Kraft will be able to save costs of recruitment and training thus being able to spend more capital on research and development or recouping integration costs.  The success of this depends on whether expertise from both Kraft and Cadbury’s is sufficient and innovative enough. As well as this, it relies on both firms working together to produce gum products that tailor to the markets wants and needs, therefore Kraft have to be vigilant when making redundancies.

A final possible motive for a takeover is to increase their market share thus reducing competition. If Kraft were to gain the most market share, they would become the market leader therefore they can increase their competitiveness by charging premium prices and benefit from economies of scale. Further benefit allows the company to compete more closely and so Kraft/Cadburys have a chance of holding the position of market leader. This dominant position will allow the firm to be more competitive as they have the potential of being price leaders thus setting the boundaries. As the firm can take advantage of economies of scale, this can enable them to lower costs, especially with the bonus of charging higher prices, this can results in wider profit margins. Furthermore, being market leader means there are barriers to entry for new entrants. After the purchase of Cadbury, Kraft increased their market share to 14.8% of the global candy and gum market. Competitor’s Mars follows closely behind with 14.% whilst Nestle has 7.8%, this evidence shows that Kraft was successful in gaining market share by taking over Cadbury.

In conclusion, the main motive behind takeovers and mergers is to access high levels of profits by combining the revenues of both companies. Although in the short term there will be high integrations costs around £430million, in the long term the combined profits from both companies will be large. This will benefit both the company and shareholder value as shareholders will be able to receive high returns for their investment in the form of dividends once all the costs are paid.