Boots Background merger attempts
In 1989 Boots attempted to enter the DIY market, to do this they acquired Ward White which owned 91 stores under the name of payless, however Boots ran in to difficulty when high interest rates reduced demand for DIY products, this is because many British home owners have mortgages and the increase in interest rates means less real disposable income to spend on a luxury item such as DIY products. To combat the recent downturn in the market Boots and WH smiths decided to merger there DIY companies, payless 4th in market with do it all, 3rd in market. This did turn out to be a disaster as two weak firms never made a strong one, customers didn’t now what to expect from a payless/ do it all store and so stopped coming. By 1996 WH smiths pulled leaving boots to record a loss of 6.7 million for the year, with Boots now in full control they turned things around in the Following year and a profit of 2.5million was made; however in comparison B&Q made 167 million profits that year. Boots decided to pull out and write of the 400 million it spent trying to make it a success, learning from the DIY disaster Boots agreed to stick closer to home in areas it has strong reputation and expertise.(1)
Merger of Boots and Alliance UniChem
Boots' efforts to broaden its retail offering over the last ten years - offering dentistry, chiropody and laser eye surgery - have proved largely unsuccessful. The merger between these two companies will create one of Europe's largest drugs, beauty and healthcare groups with sales of more than £13bn. Although Boots offers a variety of services and is an established household name in the UK, Boots has been struggling in the face of stiff competition from supermarket giants Tesco and Asda. Boots has seen its sales fall in recent years as supermarkets have aggressively targeted the toiletries and over-the-counter medicines markets.
The merger with Alliance UniChem would enable the new company to regain market share in these areas and with the expanse of Alliance UniChem into European markets where Boots have failed to impact, a potential whole new market can be captured. Unichem said it had paid close to £18m ($31.2m) for 96% of AP Apteka, Russia's fifth-largest drug wholesaler. Apteka has 20 depots in Russia, employs more than 2,400 people, and supplies 12,000 chemists and 2,000 hospitals. Unichem estimates the Russian wholesale drug market to be worth more than £3bn and is predicting it will keep growing.(2)
As this merger is a horizontal one with the main motives being growth and market power it is likely that the office of fair trading will refer the case to the Competition Commission if market share is found to be above 25%, this is because if one company is seen to have too large of a market share they become too powerful and competition becomes unfair for the other firms and new firms trying to establish themselves in the market, the competition commission needs to establish if the merger is in the publics interest. An example of this is the supermarket chain Morrison’s take over of Safeway, selected stores had to be sold to rival companies to avoid gaining to much market power in different locations.
The merger will eventually lead to annual pre-tax cost savings of about £100m, Boots and Alliance UniChem reported that a merger could result in thousands of jobs losses as the two companies tried to make savings in areas such as administration and distribution, this is where the two companies see a diseconomies of scale occurring if they continued to run two separate administration and distribution departments. The job cuts are not seen as a substantial by the chairman of Boots Sir Nigel Rudd “We see around 1,000 [job losses] emanating from this particular transaction," "not a significant number considering the combined group's 100,000 staff.”(3)
This will not be good news to the employees or consolidation for those that are made redundant and with the likelihood of staff already resistant to change, this could start to complicate the merger and create multiple problems with the employees such as motivation, productivity and loyalty to the company. It’s not only the employees that may think this is not good news customers reaction to the potential job cuts is crucial to the short term success of the business, if the reputation of Boots is damaged then turnover will fall and not be a successful start to the new Alliance/ Boots company.
For the companies' share prices it has been good. Boots jumped more than 7% in early trading, while Alliance UniChem climbed 5%. This gives shareholders an increased confidence for the merger as the quantitative data suggests success; however, the feel-good factor surrounding Boots may be down to expectations of a bidding war for the retailer, rather than optimism that the merger will revolutionise its business.(4)
This merger of these two companies suggests benefits for both the consumer and the shareholders, as decreased cost (suggested 100 million) will give the shareholders better dividends, and should also results in lower prices for the customer, this could be a direct result of lower costs gained by economies of scale from becoming a larger company, or lowering the general market costs because of the increased competition. There are people who see the merger as not a good idea and resources could be better spent, Critics complain that the company has run out of ideas and the merger is a last ditch attempt to revive the business by an increasingly desperate management. Instead of taking on more shops, Boots should be looking at ways of getting the most from their existing floor space, cutting costs and polishing up their brand name, they say.Critics also complain that a merger very rarely delivers on all of its promises, and destroys shareholder value rather than enhancing it.
Bibliography
1. BBC news source, Monday 3rd of October 2005
2. BBC news source, Friday 17th of February 2006
3. BBC news source, Monday 3rd of October 2005
4.BBC news source, Monday 3rd of October 2005
