A takeover can be either friendly or hostile according to the circumstances. A friendly takeover is when the company welcomes it and therefore recommends shareholders accept the bid. Otherwise it can be hostile, meaning the predator company is not welcome, and shareholders are advised not to accept the bid.
A real life example of a takeover is that of the supermarket chain Somerfield.
Somerfield has received a £1bn ($1.8bn) takeover approach from Icelandic venture capital group Baugur. Baugur, which already owns a 5% stake in the group, is Iceland's biggest retail owner and has been extending its presence on the UK High Street. In December it agreed to buy Big Food Group, owners of the Iceland chain.
Under the bid proposal, Somerfield's current management would continue to run the Bristol-based firm. The company, which runs the Kwik-Save chain, said it was considering the proposed offer. Fierce competition has seen UK food retailers come under increasing competition pressure in recent years, with Sainsbury's losing market share to both Tesco and Asda. Somerfield, which operates 700 Somerfield stores about 500 Kwik Save sites, has also faced pressure from price-cutting by the two market leaders. It recently revealed a decline in like-for-like sales and warned of challenging trading conditions. In 2003, the company rejected a takeover approach from retail entrepreneurs John Lovering and Bob Mackenzie. If Baugur is successful with its bid, it will become the fifth biggest food retailer in the UK with a share of about 7.6%, behind Morrison, which bought Safeway in 2003. Somerfield has a pension fund deficit of nearly £79m and the funding of the scheme will need to be addressed before any offer is finalised. Baugur counts Karen Millen, Oasis and London toy store Hamleys among its non-food interests.
There are many advantages that a takeover brings, to both the target company and the predator. For the target company the new, larger business is likely to be more powerful, have a larger market share, and achieve higher sales revenue and profits, this also advantageous for the predator. The predator if successful will have a greater market share, the chance to achieve economies of scale and they will also have more chance in surviving in the increasingly competitive market. Ultimately the underlying motive for most mergers and takeovers is to achieve synergy. This is often called the “2+2=5 Effect”, since the end result will hopefully be more than what the two firms put in to the venture.
For Sommerfield the main advantages of accepting the takeover bid would be an increased market share. Currently Sommerfield has lost business, amid price-cutting to retail giants Asda and Tesco. If the business merged with Bauger it would stand more chance of competing against these two companies. It will also still manage the company, and will still have a part in what happens within the firm. For Bauger the main advantage is that they will become the fifth biggest retailer in the UK, which will increase their market power and enable them to diversificate their products even more, without as much risk. They will also be able to compete more effectively with other large retailers.
They are disadvantages of a takeover, again for both predator and the target business. The Target business may become complacent and inefficient and find that it suffers from diseconomies of scale and / or falling profits. There is also the problem of poor implementation, when senior management fails to take account of the different cultures of the companies involved. This takes time, which unfortunately management does not have straight after a takeover, and therefore the cultures do not merge quickly enough to take advantage of the opportunities. For the predator a takeover can be very expensive. Such as the professional fees of merchant banks, public relations consultants etc. There is also the risk of capital loss from purchase and release of the target company shares, although capital gain is still possible. The main disadvantage for both target firm and predator is that competitors will not waste time for a merged company to improve its performance; simply announcing the takeover will alert competitors to the acquiring companies strategy.
For Sommerfield there are many disadvantages to Bauger’s takeover bid. Most importantly they will lose control of the business, but there are also other negative factors to consider. A major problem is that Sommerfield, a PLC, can experience as it grows, is the divorce of ownership and control. This refers to the fact that the owners of a PLC (shareholders) are usually interested in maximising the company’s profits and, therefore, their own dividend payments. However, the control of Sommerfield is to be in the hands of the original management and the Directors. They too want the company to be profitable, but would also like some of the company’s resources and money to be invested into new products and new markets. This, clearly, reduces the short-term profits of the company and, therefore, also reduces the dividend payments to shareholders. The main disadvantage for Bauger is the expense of the takeover. The firm has offered a bid of £1bn to Sommerfield, and have no guarantee that this investment will pay off.
In conclusion taking all stakeholders into account I think takeovers are not the best method of growth for a business. Firstly other than losing control of your company, the process can be against consumers’ interests and therefore it may be involved in investigations by the Department of Trade and Industry, as well as the Mergers Commission. There is also the fact that Take-overs can be very expensive. Heavy legal and administrative costs are often incurred. Also the amount of money required to take over another company is sometimes unknown. Take-overs can kill off competition within the industry and this can eventually lead to higher prices for the consumer. It can also lead to the disappearance of company brand names, e.g. names like C&A, Burtons and Leeds Building Society have all disappeared from our high streets. In Sommerfield's case however I feel they would benefit from the takeover. In recent months their sales have fallen, the revamp of their stores not making any real impact on sales. Alone I do not think Sommerfield’s can compete effectively with retail giants Asda and Tesco, and cannot cope with the ever-growing challenging trade conditions. Overall I think takeovers generally are not the best method of growth for a business. Even recently we have seen many of them fail, the predator not taking into account unexpected costs that are hard to control, and staff resentment. Some companies do actually benefit from takeovers but only in certain circumstances and this is not evident enough to give a certain outcome for the others. Many takeovers fail and will continue to do so successful or unsuccessful as businesses battle to control the unexpected business environment of today.
