1.     The motives for takeovers and mergers, and how these link with corporate strategies.

Takeovers and Mergers are common ways for company to expand. A merger is where the companies voluntarily join together to benefit from the possible advantages of working together, however a takeover is when one company will buy another company, this will be done by buying 51% or more of the company shares to gain control, this will usually be to use its expertise and assets in order to benefit their original company.  A company could expand internally through reinvesting their profit into the business by buying new assets or funding new research and development, however this can be slow to do and the company might not want to wait for the retained profits to become available.  The alternative to this is external expansion through takeovers, this is a much quicker way to expand which means that they can benefit straightaway, however it comes with a lot more risk. A company may need to take out loans to be able to raise the money for a takeover, which will mean that they have to take on the risk of being in high levels of debt, with the hope that the takeover will mean high revenue that they will be able to pay the debt off with.

One motive for a takeover is that it will give firms access to new markets.  One example of this is when Kraft took over Cadbury’s in 2010. Kraft made its highest level of sales in countries such as Brazil or Scandinavia selling cheese, and had no knowledge of the European or Indian confectionary markets in which Cadbury’s makes the majority of its revenue, Cadbury’s current annual sales is £240 million in India whereas Kraft makes hardly any sales in India at all. The takeover of Cadbury’s allowed them to have a market base already set up in Europe and India selling confectionary, and they was able to access the market research done by Cadbury’s.  This means that they didn’t have to take on the risk of entering a market that they had no knowledge about. Ansoff believed that entering a new market in which you had no knowledge was risky and might mean that you make large losses in profit, however the takeover allows them to use Cadburys research and minimise the risks.  If Kraft had expanded internally then it would have taken them much longer to gain the knowledge that they gathered from Cadbury’s and would have cost them a large amount of money. However they can now expand and start to sell Kraft’s original cheese products in Europe and India without spending thousands of pounds conducting their own market research. Expanding into other countries will mean that the company will grow, Kraft had aims for that they want to increase their revenue by 5%, and the main way in which they aim to do this is by expanding into other markets. Cadburys have large sales in India and Brazil which are both emerging companies, if Kraft was to use their knowledge about the companies and enter those markets then it provide potential for the future as the market grows, this consequently means that it is more likely that Kraft will meet their increased revenue target.  In addition to this being spread over a large range of countries will mean that you will have high levels of brand awareness and means that you can raise revenue and consequently profits. Profits that are made can go to shareholders or kept in the company to raise the worth of each share. However during the takeover Kraft will need to be sure that they are not making skilled personnel redundant, for example if they might make someone redundant that knows all of the key knowledge about the different markets. If this was to happen then they might have no benefits for entering new markets from the takeover at all, and they would find entering the new markets just as risky as they would have done if they grew internally.  Therefore they must be careful about which workers they make redundant if it becomes vital that some people must lose their jobs.

The second motive for a firm to take over another is that it allows the company to acquire new skills and expertise. Cadbury employs around 45,000 people in 60 countries all of which have valuable skills in confectionary making. Kraft is now able to use these workers to make products for them without searching for workers and training them to do their jobs from scratch. This will save Kraft from spending large amounts of money on recruitment and training costs, the money that is saved will now be able to be spent on further expansion or developing new products. One valuable skill that Kraft will be able to take from Cadburys is the expertise to make chewing gum. Cadbury’s currently had high chewing gum sales in Europe and Latin America, however Kraft has little knowledge about the manufacturing of chewing gum despite owning Trident. This means that Kraft would be able to use Cadbury’s knowledge about chewing gum manufacturing as well as being able to use Cadbury’s workers and factories to make the new products for Trident, sharing the workers and factories will mean that they can save costs and benefit from economies of scale. Throughout the whole of both company’s the takeover could save around £397 ($625) million a year in distribution, marketing and product development costs.  However this all depends on whether or not Kraft will use the knowledge and skills from Cadbury’s to its full potential.  Kraft do not create new products very often and therefore might not use an innovative ideas thought of by Cadbury’s employees. The employees that have the knowledge may also not work for the company after the takeover, this may be due to them not being happy about the takeover and leaving the company, or Kraft may have made them redundant when trying to reduce the amount of workers that are doing the same job.

Another motive for taking over another company is to increase their competitiveness. With both Cadbury’s and Kraft having high market share, the takeover will make them the world's No1 sweets and chocolate giant. This will consequently mean they can be highly competitive and be dominant over other companies. The benefits of being dominant include them being able to be the price leaders and set the price for their products that most other companies will follow. Companies will not challenge the Kraft about prices because they know that the takeover allows Kraft to lower costs and will mean that they would win any price wars. Kraft would most likely set a high price for their products, this is because it allows them to have higher profit margins from what the previously had. The additional profit that they will now gain can be used to reinvest or to pay out in dividends to shareholders.  The main competitor Kraft has is Mars, after taking over the chewing gum company Wrigley in 2008, the American brand was in control of 14% of the global confectionary market, meaning they are in direct competition with Kraft. The Kraft/Cadburys takeover will mean that they will have high brand recognition due to the publicity from the takeover and high sales with a predicted figure of $50 billion combined revenue. However Kraft might not have increased revenue and reduced costs straightaway, it all depends on the amount of time it takes for the companies to integrate and to start working efficiently as one. In the short term the takeover might mean that the company has low profits/dividends  and high costs, this might be due to them trying to pay back the money they used to buy Cadburys and high costs due to things such as redundancy costs and the costs of closing down any factories that are no longer needed.

In conclusion the main motive of a company takeover is the higher levels of profit this is because the revenue for both companies will be joined together, along with costs that can be minimised by the companies using joint resources such as only having one set of directors.  This consequently also means the owners of the original company will now have higher share worth and will be able to be paid more in dividends, which had previously been an aim for Kraft, to increase their earnings per share by 10% after the Cadbury’s takeover.  As well as the main motive there are a lot of other motives such as competitiveness and availability of new markets, which persuade companies to take over another because they wish to benefit from all of the possible profits. I believe the Kraft/Cadbury take over had been a success to some extent because they integrated together successfully and Kraft is now making sales in around 170 countries. However the long term effects of the integration is hard to judge and in the short term, the integration cost them $1.3 billion and reduced the earning per share by 33%, this is the complete opposite of their aims to increase earnings per share by 10%.