Are acquisitions good or bad news for shareholders?

Julie Palmer

Regional Managing Partner

7 minutes to read

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Are acquisitions good or bad news for shareholders?

Updated: 8th January 2020

Acquisitions: The Opportunities and The Risks

On the face of it, acquisitions make good business sense. An acquisition of an established company allows for a pooling of resources, a reduction in costs, access to a new customer base, and improvements to overall operational efficiency.

Indeed, harnessing the power of an established company has proven to be an important means of growth for many companies leading to rapid expansion and an increase in market share and/or the removal of barriers to entry to new markets or territories.

Opportunity abounds

For a company looking to dominate their market, acquiring a rival is an effective way of increasing market share while simultaneously reducing competition.

For those looking to diversify, acquiring a company in a different, but perhaps complimentary field, represents a less risky proposition than entering a new market blindly where achieving market penetration can be a lengthy and costly process with no guarantee of success.

With both parties keen to ensure a good deal with favourable anticipated shareholder returns, acquisitions can be fraught with difficulties. Here we look at how these transactions affect both buyer and seller.

What does an acquisition mean for the acquired company?

It goes without saying that the main motivation behind entertaining an acquisition approach from a rival is the prospect of generating a healthy return for shareholders.

A premium to cover goodwill often results in the company being sold for an amount significantly above its day close market value, something which is clearly appealing to shareholders.

In regards to the company’s future prospects, it is likely that the acquiring company, keen to ensure the acquisition is successful, will assist when it comes to allocating additional resources such as staff and an increase in marketing spend and activities. This could propel the company forward much faster than it would have been able to do on its own over the same time period.

What does this type of deal mean for the acquisitive company?

For the acquisitive company the potential benefits are numerous. Acquiring a direct rival means an increase in market share, an expanded customer base, a greater presence and coverage on the high street and/or online, as well as reduced competition.

Purchasing a company operating within a different field is often a time efficient and less risky way of entering a new market or growing market share. It allows the acquiring company to instantly expand their reach and move into a new market bolstered by the advantages that come with a company already established in that particular marketplace.

These include having a known brand and trusted reputation, as well as knowledgeable and experienced employees who not only know the market but also know how to be successful within it.

Depending on the industry, these key employees are also likely to have valuable contacts, something which is highly prized in certain industries such as professional services where referrals are a big source of lead and work generation.

However, acquiring an existing company may also mean inheriting aspects of the business which are not quite as desirable whether this is outstanding debt, non-performing retail locations, overstaffing issues, or an overly complex organisational and operating structure.

As every acquisition is different, the level of value added to the acquiring company is questionable and varies wildly. While some transactions translate into an almost immediate boost to shareholder value, some acquisitions, particularly those which are hostile in nature, lead to costs escalating far above initial projections. This means it may take much longer for shareholders to see increased value than originally expected.

Even after the transaction has completed, there are still hurdles to tackle if the acquisition is to become a success. The loss of staff or customers who may not be happy with the change of ownership is always a risk, something which was present during Kraft’s acquisition of Cadbury in 2009.

"For a company looking to dominate their market, acquiring a rival is an effective way of increasing market share while simultaneously reducing competition."

A difference of opinion

The hostile takeover of chocolate producer Cadbury by food giant Kraft was greeted with a huge amount of backlash from board members and loyal customers alike who were less than supportive of the merger.

Although resistance from shareholders relented, Kraft still had to contend with widespread disapproval from customers. As a much-loved British institution, many people were disappointed that the company was soon going to be in the hands of the US conglomerate.

Despite original plans to cease production at their Somerdale location, Kraft vowed to keep activity at the plant running following growing customer criticism. However, Kraft later reneged on this promise and closed the factory shortly after the takeover was complete with production moving to Poland.

Although Kraft eventually got their way, this proves that unforeseen events can have a detrimental impact on forecasted figures. In this example, a planned move of the factory in order to cut costs may have needed to be abandoned in order to keep consumers on board. This unanticipated cost would undoubtedly dampened profit projections and therefore shareholder returns. What may have seemed like a sure-fire way of reducing outgoings prior to the acquisition could, in reality, end up being a PR nightmare.

Culture clash

When smoothie and fruit juice company Innocent was taken over by Coca Cola, many thought this went against the values the British start-up brand stood for. For a company that prioritised health and wellness and had cultivated an image based on using sustainably sourced products along with a commitment to donating 10% of its profits to charity, the link with Coca Cola seemed a jarring fit.

Following the takeover, however, not much reportedly changed when it came to how Innocent operated. Despite owning over 90% of Innocent, Coca Cola have kept themselves at arm’s length when it comes to the day-to-day running of the business. Innocent is still headed up by its original founder, its UK headquarters are powered by green electricity, and the company continues to donate a slice of its profits to its charitable arm the Innocent Foundation. This has helped Innocent retain its perception in the public eye as a wholesome company despite being majority owned by the global soft drinks giant.

In both of these examples of initial resistance, the figures speak for themselves, with sales at both Cadbury and Innocent continuing in an upward trajectory post-acquisition.

Cadbury remains the country’s top choice for branded chocolate and has maintained its position as Britain’s biggest brand according to The Grocer. Meanwhile Innocent can boast of annual sales in excess of £350m up from the £210m which was being generated at the time of the acquisition.

We’re (not) in the money: When a purchase goes wrong

While the acquisition strategies of Kraft and Coca Cola have reaped rewards for shareholders, not all acquisition attempts are as successful.

Sainsbury’s chief executive, Mike Coupe, was famously caught singing “We’re in the Money” following an interview about the supermarket’s proposed takeover of rival Asda in 2018. This vocal demonstration proved to be premature as the £7bn deal was eventually blocked by the competition watchdog who decided the merger would be detrimental to consumers and would lead to decreased quality and choice coupled with increased prices.

It was estimated that the deal would have generated in excess of £500m in additional profits for Sainsbury’s; instead a bill of more than £30m in legal and professional fees followed and Sainsbury’s shares plummeted dangerously close to levels not seen since 1989.

Post-acquisition: Integration is key

Even in instances when a deal does make it to completion, it is not always smooth sailing. The integration process can be more difficult than expected with culture clashes and ingrained loyalties preventing an easy meshing of the two companies.

In order to be successful a strategic acquisition needs to be well-orchestrated from the start with an awareness that sealing the deal is only the first step. Consideration needs to be given to post-merger integration to allow for the best chance of success.

Employees need to be assimilated into the new set up and may require retraining. If the integration process is lacking at this point you run the risk of a ‘them vs us’ mentality prevailing for some time afterwards. Keeping current owners on board and engaged can help with this merging process which is so often central to a successful acquisition.