Morrison's and Safeway Acquisition

Another negative aspect of the proposed merger in terms of public interest was food poverty. The Competition Commission needs to take into consideration the shoppers who do not have access to a car, the availability for a diverse range of products in walking distance is very important. Low income consumers are likely to shop around instead of purchasing everything from the same supermarket, in order to keep in a tight budget.  

Research has shown that low income consumers cannot afford to buy all their groceries from one of the major supermarkets. The Competition Commission has taken into consideration the impact on low income consumers without cars if more local shops are unable to compete as a result of any of the mergers under consideration.

The Morrisons takeover of Safeway's has proven to be not in the public interest, therefore the Competition Commission has allowed the takeover to proceed but with set conditions, with which Morrisons has to comply if it wishes to continue with the merger. The Competition Commission has a choice to either let the takeover proceed with conditions or can dismiss the proposal altogether, as it did with Asda, Tesco and Sainsbury's.

The conditions put by the Competition Commission are detailed on the Office of Fair Trading's website and in Appendix One. The Competition Commission recommended that divestments would remedy or prevent the negative effects that would result from the proposed acquisition by Morrisons of Safeway. The Competition Commission recommended that Morrisons should divest one-stop grocery stores in 48 localities which it identified and five smaller grocery stores identified by the Competition Commission where adverse effects would result from the merger. The Competition Commission also set out the broad principles of a framework for the divestment of one-stop grocery stores. No recommendation was made however as to how the divestment of the five smaller grocery stores should proceed.

The Competition Commission recommended that Morrisons dispose of some of its stores particularly in local areas where, issues such as food poverty, supplier bargaining power and consumer choice would arise.

Morrisons despite being a profit making business has a duty to the public, and anything acquisition going against public interest is not likely to be permitted by the Competition Commission. A sole purpose of merger/takeovers is shareholder wealth maximisation, however, if a takeover is not in public interest, then even if takeover appears to be successful in the short term, in the long term it is will not be because if the company’s profits slowly start to decline, shareholder wealth will decline.

The Competition Commission could have prohibited the acquisition as it did with Tesco, Sainsbury’s and Asda, but it felt that Morrisons taking over Safeway would have had a lesser effect on the competition in the supermarket industry. However, the Competition Commission felt that letting it proceed would effect the competition in the UK supermarket industry that is why it put conditions on the acquisition before letting it proceed.    

To define whether or not we can say the takeover was a successful one we first need to define some success criteria.

There are two main groups of people that will be affected by takeovers, these are managers and shareholders, and although they can have conflicting interests as Sudarsanam states “The interests of these groups do not always coincide.  One group can win at the expense of the others.  For example, a takeover can lead to high shareholder returns, but loss of managerial jobs”

Amongst others there are two main methods to assessing success, these include Shareholder wealth maximisation and benchmarking,

Using performance forecasts of the two firms prior to the merger and as Sudarsanam 2003 States “…use the forecast performances of the merging firms on a stand-alone basis, and then synthesise a measure of forecast performance for the two firms together…”

This approach is very useful in situations where there are changes in market conditions, and different competitor reactions in the market to the merger.  This approach depends very heavily on the quality and reliability of the forecasts

Using an external firm as a benchmark, Sudarsanam calls this “…a firm that is identical to the acquiring firm except that it has not made an acquisition…” 

The performance of this firm is then assessed, and a comparison is then made against the firm that has recently merged

Looking at Appendix 2, Market Share table you can see that Morrison’s is currently in 4th place and pre Safeway takeover they were in 5th place, so although there is a increase in their market share Safeway is no longer there and thus they have not quite had the increase in market share they were after.

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%, whilst Morrison’s had an increase of 7.1% from 2004 to 2005, suggesting that the increase in sales would most likely of occurred anyway due to the economy supply and demands.

During the period from 2004 to 2005 Morrison’s operating costs and labour costs increased as then ran two admin, IT and distribution centres. However, they have estimated their post merger synergies to be received in the year ending Jan 2008 as £215million.

We cannot take into account the profit before tax because between 2004 and 2005 Morrison’s decreased from £319.9m to £297.1m mainly due to increased labour and operating costs as mentioned earlier. This is a decrease of 7%, whilst during the same period Tesco had an increase of 18.8%. However, in 2002 pre takeover Morrison’s profit before tax was £243m, so after the takeover and selling off stated stores they have only increased by 18%.

Using the Capital Asset Pricing Model (CAPM), the closer the beta is to 0, the safer and less risky the business is. Supermarkets often have betas of less than 1 because they are considered as safe businesses due to the fact that the majority of their sales are for necessity items.

From the CAPM table in Appendix 2, you can see that Tesco is the safest, then Sainsbury and then Morrison’s, although Morrison’s is considerably higher than the other two in their industry. This shows that Morrison’s is a riskier business to invest in and the return they have to offer should be higher to match the risk versus reward theory.

Looking at the Earnings Per Share (EPS) for each of the 3 companies in the table in Appendix 2, you can see that whilst both Morrison’s and Sainsbury undertook takeovers between 2003 and 2004, their EPS from 04-05 has decreased. EPS shows the amount of profit earned by the company for each ordinary share.

The market leader has continued to increase its EPS, this shows that only Tesco has increased its profit for each shareholder. However, you have to take into account the increased costs that both Morrison’s and Sainsbury will incur due to running two admin, HR, IT and distribution centres whilst they complete the merging.

So you could say that just a slight decrease in their EPS during this period is to be expected and therefore depending on what next year brings, they might well have had successful takeovers. Sainsbury’s EPS for next year is estimated at 13.47 according to the analysts at Yahoo finance, according to the same analysts Morrison’s EPS for next year is estimated at 7.02.

This increase for Sainsbury would suggest they will be increasing their profits and becoming successful after their merger in increasing their market share too. According to the Financial Times this would be true because they are set to push Asda out of second position with market share.

Whilst Morrison’s still remains at 4th position with decreasing returns on their income and having to pay out higher dividends due to the higher risk status they currently have.

On the whole the merger between Morrison’s and Safeway cannot be described as a successful one because all of the figures from pre merger compared to post merger do not support the shareholder wealth maximisation theory that should underpin any merger/takeover.

Stakeholders are described by Johnson and Scholes as "those individuals or groups who depend on the organisation to fulfil their own goals and on whom, in turn, the organisation depends" appendix 3.1 identifies the main stakeholder groups.  Sudarsanam identifies that in different countries there are differing levels of emphasis on each stakeholder group, in continental countries the emphasis is on the board of directors, where as Dutch law takes the route that "The balance of power should not unduly favour the shareholders.  It must also take into account the interests of other stakeholders such as employees."  It is difficult to define success based upon the conflicting needs of shareholders where the aim maximise wealth, management; remunerations and power, employees and job security and customers.  

Empirical research helps us to establish whether mergers and takeovers will have a benefit to society and from that we can conclude which stakeholders will benefit from this strategic action, this has been discussed further in section 3.  From an economic perspective, the acquisition of Safeway has created synergy.  When the assets of two companies come together they compliment each other, so in turn, when combined the output of these assets is greater, this was anticipated to be a saving of £250 million pre takeover.  Due to this saving, Morrisons could either reinvest to the consumer which could result in lower prices being offered or pay higher dividends to the shareholder.

On an operating level Morrisons will have achieved economies of scale this may be in such areas as production, marketing or distribution, due to the size when merged they will have more power to negotiate lower prices with the suppliers which in turn can be passed onto the consumer in terms of offering lowering prices.  Economies of scope may be gained through rationalisation of management departments, these results in a lower cost per unit of service and often eliminates levels of inefficient management.  This is a major benefit to the shareholder as where poor management exists there is a high degree of negative exposure from the press, which can lead to reductions in the share price, and often open to a takeover.

After the acquisition in 2004 Safeway's management will benefit from having increased power through running a larger, busier store.  Morrison's found that they had an increase in customers of 23%, furthermore "stores now converted to Morrisons (from Safeway) saw like-for-like sales for the period post conversion increase by 13.7%" in consideration of the two factors above the predators management at Morrisons, will feel empowered.  This will especially be felt by Bob Scott who will take over the role of Sir Ken Morison and may lead to job security in the future if he can prove that he continue the success of Morrison

A further advantage to the acquisition is to that of the managers, they are looking at increasing their remuneration they receive after the takeover, and figures taken form FAME highlight this. The directors alone in sore an increase in remuneration from £2 million in 2003 to post acquisition 2004 of £4 million, and 2005 although it had decreased to £3 million this was in increase from pre-merger figures of £2 million.

Financial institutions gain in monetary terms from assisting during the acquisition process; they obtain their fees advising the companies on bid values, defence tactics and arrangement of finance for mergers and acquisitions.

In October 2004, seven months after the acquisition Morrisons sold 114 smaller Safeway stores to Sommerfield, this could have lead to benefits in the local community as Sommerfield will have more market power, and they may be able to offer lower prices in store benefiting the consumer.  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) 

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.E 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.

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