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Morrison's and Safeway Acquisition

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Introduction

NAME: Mariya Badani, Jenny Salmon and Michelle Grant COURSE: BA (HONS) Financial Services MODULE: Takeovers, Mergers and Corporate Restructuring MODULE LEADERS: Tony Head ASSIGNMENT TITLE: Morrison's and Safeway Acquisition ASSIGNMENT DEADLINE: 10 March 2006 WORDCOUNT ASSIGNMENT: 3,107 Morrison's and Safeway Acquisition Sudarsanam1 describes the Competition Commission as an independent advisory body headed by a full-time chairperson, and includes a number of part-time commissioners made up of business people, lawyers, economists, accountants and other specialists. The first task of the Competition Commission upon a referral is to establish whether the merger situation qualifies for investigation. It has to then decide whether a takeover is in the public interest or not, the Competition Commission has a set of criteria they use to determine this; maintenance of effective competition in the UK, promotion of consumer interests, promotion of cost reduction, new techniques and products, and new competitors, balanced UK distribution of industry/employment and promotion of UK companies' international competitiveness. Sudarsanam2 identified the criteria that needs to be taken into consideration before a proposed merger/takeover can proceed; competition in the UK, efficiency of the merging firms, employment and regional distribution of industry, international competitiveness of UK firms, national strategic interest, the viability of the merging firms as a result of the method of financing, the scope for turning around the acquired firm. Even though a criterion is identified by the Office of Fair Trading it is not always referred to the Competition Commission. Prior to the takeover, the Office of Fair Trading produced a report which detailed reasons why the takeover of Safeway is likely to work against public interest, Appendix one shows some of the reasons that the Competition Commission identified.3 The takeover of Safeway invited bids from Asda, Sainsbury's and Tesco. The Competition Commission identified these proposals as not being in the interest of the public. The Competition Commission felt as if the proposed takeover would lessen competition, because the number of large supermarkets would reduce, competition has proven to be in the interest of the public because it leads to lower prices, reduced competition reduces the bargaining position of customers. ...read more.

Middle

In 2002 pre Safeway takeover the supermarket sector was in oligopoly because there was 5 main providers taking 90% of the market, in 2004 the market came out of oligopoly status as it went to being 5 providers taking 75% of the market. Now after the Safeway takeover the market is back in an oligopoly status again as there are now 4 providers taking 75% of the market share. This effectively means Morrison's are no better off as they still operate in an oligopoly market. Oligopoly theory highlights a number of characteristics; non-price competition is strong, high levels of branding and brand loyalty; prices tend to be stable, high degree of interdependence between the main rivals; high of barriers to entry; strong emphasis on advertising; economies of scale; a possible price leader whose actions are followed by rivals and the potential for collusion. Firms who dominate the industry in this way tend to benefit from considerable economies of scale and can thus expect to achieve reduced costs and increased profit. When benchmarking us can look at other companies in the same sector and see how they have responded over the same time period as Morrison's, using the market leader Tesco as a benchmark if Tesco increases in their wealth then the companies with lesser market share should also increase but not necessarily by as much. Between 2004 and 2005 Morrison's had a 13.8% increase in their pence per ordinary share dividend as it rose from 3.25p to 3.70p, at the same time the market leader Tesco had a 10.5% increase rising from 6.84p to 7.56p. This would suggest that an increase was apparent for the industry anyway and for Morrison's to have increased more than the market leader would suggest some form of successful wealth from the acquisition. Looking at Tesco again their sales increased by 9.8%13, whilst Morrison's had an increase of 7.1%14 from 2004 to 2005, suggesting that the increase in sales would most likely of occurred anyway due to the economy supply and demands. ...read more.

Conclusion

This will not affect sales at Morrisons because as described the Competitions Commission there are three different markets "one stop (major replenishment of supplies); secondary, (topping up of customary purchases); convenience (emergency or convenience shopping)28 If we look at acquisitions from the view of the finance perspective, shareholder wealth should be maximised, the merger must increase the wealth of both Morrisons and Safeway shareholders, although this is a very limited view as it does not take into account other stakeholders. In consideration of the previous point we can look at R.O.C.E29 as this encompasses other stakeholder groups such as the government and debtors to the company. Although from appendix 3.6 we can see on an absolute level that Morrisons share price is performing below that of Tesco but in relative terms if we compare dividend yield for 2004-2005 their was a 13.8% increase Morrisons compared to that of Tesco whose results for 2004-2005 showed an increase of only 10.5%. Showing that against the market leader they have managed to increase their dividend yield by 3.3%, thus increasing the wealth of shareholders. 1 Sudarsanam, pg 416 2 Sudarsanam, pg 415 3 Appendix One 4 Office of Fair Trading 5 Office of Fair Trading 6 Paul W Dobson, "Retailer Buyer Power in European markets: Lessons from Grocery Supply", Loughborough University Business School 7 Hitchman, Christie, Harrison, Lang, "Inconvenience Food", Demos, 2002 8 www.oft.gov.uk 9 Appendix One 10 Sudarsanam, Creating Value form Mergers and Acquisitions, 2003, FT Prentice Hall. 11 Sudarsanam, Creating Value form Mergers and Acquisitions, 2003, FT Prentice Hall. 12 Sudarsanam, Creating Value form Mergers and Acquisitions, 2003, FT Prentice Hall. 13 Tesco Plc Annual Report and Accounts 2004 & 2005 14 Morrison's Group Annual Report and Accounts 2004 & 2005 15 Morrison's Group Annual Report and Accounts 2005 16 http://uk.finance.yahoo.com/q/pr?s=SBRY.L 17 http://uk.finance.yahoo.com/q?s=MRW.L 18 http://news.ft.com/cms/s/440dbe0c-af12-11da-b04a-0000779e2340.html 19 Johnson and Scholes p206 20 Peter Verloop, Acquisitions monthly, 1991, p 208 21 See appendix 3.2 22 Competitions Commission 23 See Appendix 3.3 24 http://www.morrisons.co.uk/InterimReport2005.pdf 25 http://www.morrisons.co.uk/InterimReport2005.pdf 26 See Appendix 3.4 27 Mintel Report 28 www.competition-commission.org.uk 29 See Appendix 3.5 ?? ?? ?? ?? ...read more.

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