Why do firms engage in mergers? Describe a recent merger between two firms and identify the reasons for the merger.
24th February 2005
Why do firms engage in mergers?
Describe a recent merger between two firms and identify the reasons for the merger.
In the business world, mergers play a vital role in both helping certain markets remain free, help prevent single firms taking over in a monopolistic manner and allowing struggling companies to find a second chance to succeed. There are mergers happening in and around us day by day and although a majority of the public are unaware of the significance of these manoeuvres, the business world can be greatly affected by such actions. The most famous and possibly the best documented merger in recent United Kingdom History was that of Lloyds Bank and TSB Bank in 1995 to create one of the largest forces in domestic banking with the two super banks along with the acquisition of Cheltenham & Gloucester in the same business year. There are several reasons why firms or businesses merge and several different methods of merging. In the following piece of writing, I will explain why and how mergers take place and the effect of mergers upon the Welsh Rugby Union.
Whenever a merger takes place, the merger must comply with the strict regulations of the Competition Commission, an independent board who regulate all mergers to ensure fair trade and acquisitions. Established in 1948, the Monopolies and Mergers Commission (MMC) was the UK body responsible for investigating matters which come under the 1980 Competition Act and related legislation. The MMC has no powers to initiate investigation and therefore no choice as to which inquiries it undertakes. The name has now changed along with various aspects of its role. The MMC is now known as the Competition Commission. The commission would act in a situation such as the attempted takeover of Manchester United PLC by American tycoon Malcolm Glazier. In that situation, the Commission would look at such angles such as competition, stakeholders interest and merger regulations before allowing such a move.
There are several main forms of mergers for different companies who require different outcomes from the merger:
* The first type of merger is a Takeover, when one company buys a controlling interest in a second against the wishes of that company's directors.
* Secondly there is a straight merger, when the two firms agree to form a new company, Such as Lloyds TSB Plc.
* Another form is a Vertical Merger, where two firms at different stages of production join together to expand and compete against larger firms, such as Wal-Mart's acquisition of Asda to compete against larger domestic firms such as J Sainsbury's and Tesco.
* The final "style" of ...
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* The first type of merger is a Takeover, when one company buys a controlling interest in a second against the wishes of that company's directors.
* Secondly there is a straight merger, when the two firms agree to form a new company, Such as Lloyds TSB Plc.
* Another form is a Vertical Merger, where two firms at different stages of production join together to expand and compete against larger firms, such as Wal-Mart's acquisition of Asda to compete against larger domestic firms such as J Sainsbury's and Tesco.
* The final "style" of merger is Horizontal Integration, where two companies merge in the same industry and at the same stage of production.
Although the forms in which a merger is completed are limited, the reasons for the takeover and numerous and lucrative and some of these are listed below:
* Gains from greater economies of scale - this would apply in cases where a Horizontal Integration style of merger took place and the company could benefit from "buying in bulk" and mass distribution.
* Reductions in managerial staff and administration - a reduction in CEO's, Managers and directors as the merger would bring the headquarters of operations and business to within one area eliminating the need for excess staff.
* Smooth out seasonal sales trends- for example should a company enjoy large profits in a particular season and struggle in another, the firm could merge with a company that would allow the company to maintain sales figures and profit margins throughout the year.
* Gain access to new distributors - if a large distributor would place minimum orders on distributing goods then the merged companies increased size, budget and workforce would allow the larger distributors to accept new orders and even help create a greater economy of scale for the merged companies.
* Enhance coverage of sales force - an increased workforce would allow the merged companies to reach new levels of customers and clients through geographical expansion.
* Gain new technology - possibly one of the beneficial reasons behind a merger would be the availability of better, more efficient and possibly expensive technology which would help the companies expansion plans and possibly expand beyond expected capabilities.
Now that I have examined why and how companies merge together, I will now give and example of a merger that has taken place in recent years and one that is of large interest to myself.
In Wales, until October 2003, there were four divisions of professional rugby teams each competing in respective divisions. The teams were all either towns or cities such as Cardiff, Swansea and Llanelli. However, the interest in Welsh rugby dropped due to limited success in all areas. From the period of 1987-2003, the Welsh Rugby Union (WRU) had planned radical changes to promote the game of rugby and "stop the rot" that was occurring in the business side of the game. The Merger was planned for the following reasons:
* There was a drop in interest in the game of rugby due to lack of success and in international home matches, an average of 73% attendance was reached, lower than Italy, Scotland, England & France.
* Merchandising sales had fallen with replica shirt sales down 37% from 1999-2001 and needed to improve to help boost the economy.
* The merger was seen as an ideal way to make use of greater economies of scale.
* Improve quality of welsh completion in European competition for greater grants from the International Rugby Board (IRB).
After the game of rugby turned professional in 1996, a majority of the welsh clubs began to struggle financially and three of the top seven sides were forced into administration. To counteract these problems, the WRU suggested that the local teams should be allowed to merge with each other for the prosperity of the game. The merged teams would then compete with 4 regional sides from Ireland (Munster, Leinster, Connacht and Ulster), 3 sides from Scotland (Edinburgh, Glasgow and The Borders) in a 12 team league between the regions. At the time of the merger, there was uproar at the decision to abolish the history of the teams who would be forced to join forces with local rivals. Despite the strong opposition against the mergers, the WRU went ahead and the teams were created. The merger that I have decided to concentrate on is the merger between Neath and Swansea.
Before the mergers, Neath were in administration with deep financial problems not being able to pay the players due to the lack of local support, lack of income from merchandising and limited success in the Welsh league. Swansea however were surviving but not making a clear profit due to high levels of rent for the St.Helens Stadium, Swansea which remains a landmark in the region. The merger was a clear case of Horizontal Integration as both sides were in the same position if not the same financial situation. If the Neath & Swansea Ospreys were to make a profit as a PLC, they would need financial structuring and increased initial spending to attract the fans and the money from gate receipts and merchandising. The Table below shows the attendance figures and highest attendance for Neath RFC and Swansea RFC for the years 2001/02-2002/03 (before the regionalisation):
Team
Year 2001-2002
Year 2002-03
Neath average
3'254
3'827
Neath record
5'790
6'000
Swansea average
2'300
2'750
Swansea record
4'600
4'000
As the figures show, the attendances were struggling and several of the owners of the regional sides stood together and argued the case for the mergers. Leighton Samuel, former Owner of the Celtic Warriors said:
"..the merger signifies the intention of both the WRU and the owners of all regional sides to improve both the success and support of both the domestic and international squads.."
Soon after the mergers took place, there was a radical change in both the support for the new structure and in the financial aspect of both domestic and international welsh rugby corporations. In the first season after the mergers had been completed, the crowds had been drawn back to the stands and clubs had began to make back profits. The estimated £7million debts owed to creditors by Neath RFC had been abolished after a successful season on and off the field as part of the Neath Swansea Ospreys. The merger was apparently a complete success and below and some facts which reflect this:
* Merchandising for domestic replica shirts had increased by up to 22%, according to Sport Sales Glamorgan's figures.
* The average attendance for Neath Swansea Ospreys increased from 3'034 in 2001-03 to 4'634 in 2003-04 and is now 6'400 for the 2004/05 season.
* On top of this, Welsh regional sides have benefited from qualifying for the quarter final stages of the European Heineken Cup, which offers prize money of over £1'000'000 to the winner.
* The increased quality in rugby set-up and profits have allowed more money to be spent on youth development to help the game progress in coming years.
* The Welsh national team has moved from being a poor outfit to a side who are on track to win their first six-nations for more than 20 years, a feat that would not have been possible without the mergers between the domestic rugby clubs in Wales.
Although the rugby has benefited greatly, the community and spirit in Welsh pubs and bars has sky-rocketed due to the success of the National team. Dave Williams, owner of the New House Inn, Cardiff, Wales commented that:
"the supernormal profits that have come about during the last few weeks can only be down to how well the team is performing, every game day the fans are here in there tons and we are taking more in that we would do on New Years Eve."
This is conclusive proof of the success of the mergers in Wales and the effect on both the local economy and national pride. This concludes my look at the mergers and their success upon the welsh rugby set-up
Bibliography
www.businessweek.com
www.rugby365.com
www.swansearfc.com
www.wru.com
www.competition-commission.org.uk
Alistair Jongman
ID: 237756