Study notes

Takeovers

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

A takeover (or acquisition) involves one business acquiring control of another business

Takeovers (or acquisitions as they are otherwise known) are the most common form of external growth, particularly by larger businesses.

Reasons for Undertaking Takeovers

There are many reasons why a firm may decide to undertake a takeover as part of its strategy, including to:

  • Increase market share
  • Acquire new skills
  • Access economies of scale
  • Secure better distribution
  • Acquire intangible assets (brands, patents, trade marks)
  • Spread risks by diversifying
  • Overcome barriers to entry to target markets
  • Defend itself against a takeover threat
  • Enter new segments of an existing market
  • Eliminate competition

Why Might Takeovers Be Preferred to Organic Growth?

Possible strategic reasons why takeovers might be the best option for a business include:

  • Existing products are in the later stages of their life cycles, making it hard to grow organically
  • The business (in particularly its management) lacks expertise or resources to develop organically
  • Speed of growth is a high priority
  • Competitors enjoy significant advantages that are hard to overcome other than acquiring them!

The Risks and Drawbacks of Takeovers

It is important to recognise that takeovers are the highest risk method of growth.

Many studies on the performance of takeovers have been completed over the years and they consistently show that a large percentage of takeovers destroy value for the shareholders of the acquiring firm (in other words - most takeovers fail).

The common drawbacks of takeovers include:

  • High cost involved - with the takeover price often proving too high
  • Problems of valuation (see the price too high, above)
  • Upset customers and suppliers, usually as a result of the disruption involved
  • Problems of integration (change management), including resistance from employees
  • Incompatibility of management styles, structures and culture
  • Questionable motives

Why Takeovers Fail

Among the main reasons why so many takeovers fail are:

  • Price paid for takeover was too high (over-estimate of synergies)
  • Lack of decisive change management in the early stages
  • The takeover was mishandled
  • Cultural incompatibility between the two businesses
  • Poor communication, particularly with management, employees and other stakeholders of the acquired business
  • Loss of key personnel & customers post acquisition
  • Competitors take the opportunity to gain market share whilst the takeover target is being integrated

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