5. The impact on and reaction of stakeholders to takeover and mergers

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. Any type of takeover will effect stakeholders, stakeholders can be internal (shareholders, employees, managers) or external (suppliers, customers, the community and rivals). Whether they are internal or external they will have various opinions and feelings about a takeover. The extent as to which they are effected by the takeover will be different, for example employees might fear for their jobs, however customers will only be concerned about the quality of the products after the change of control.

A takeover or merger will have a direct impact on all employees in the sense that they might be made redundant, or even if they are kept working for the company they may face different working conditions.  An example of a takeover where employees were highly affected was Kraft’s takeover of Cadbury. Cadbury employed around 45,000 people in 60 countries including 5,600 members of staff at eight sites in the UK and Ireland. Before the takeover was completed Kraft agreed to keep open an underperforming factory in Somerdale, however once they had completed the purchase they immediately shut the factory, making all 400 employees redundant. This unexpected change of decision by Kraft left all other employees at the other factories fear that they may also lose their jobs.  In the next few months Kraft announced that it was to axe another 200 jobs in other factories through voluntary redundancy or redeployment. This meant that employees didn’t know if they had a future in the company, therefore their performance could have been affected in a negative way, by employees felt less motivated, taking more days off and having lower productivity. However this changed and employees started to feel less worried about losing their jobs when Kraft announced that they planned to spend £50m on the development of new products therefore creating 54 new jobs in the innovation labs. Employees started to feel that they jobs were safe due to the fact that Kraft was now taking on more workers instead of making more job cuts. However any workers that were made redundant gained large amounts of money of redundancy pay, this is due to that fact that Kraft was forced to pay each worker on their performance for the whole time they was working for Cadbury and not just the few months after Kraft took over. This means that they were given far more reasonable redundancy terms.

Shareholders are other types of stakeholders that can be affected by a takeover or merger. In the Kraft and Cadbury takeover the shareholders were not happy, Legal & General one of Cadbury’s biggest shareholders said they felt that the shares were worth more than what they was being sold for and that Kraft’s offer were underestimating the long term value of the company if the offers they gave.  Before the deal was made Felicity Loudon a distant family member of the Cadbury founders urge shareholders to reject Kraft’s 850p a share offer, the offer being made up off an offer for 840p for the share and a final dividend of 10p a share. This was due to her feeling that Kraft would not honour the way that Cadbury was previously being run and that is wouldn’t respect its British history.  However Cadburys chairman announced a recommendation that all shareholders accept the offer due to him thinking it was a fair price and that they are unlikely to gain a higher offer in the near future.  The offer that Kraft has was accepted with was an improved offer from the previously offered of 770p for each share, the previous offer was rejected straight away and described as derisory by Cadbury’s chairman.  However Cadbury shareholder should be happy by the dividend they received in 2009, the final dividend paid to them at the end of 2009 of 12.3p, added to the dividends received during the year meant that they had received a total dividend of 18p for the whole year, this was 10% more than they received the year before.

The government are external stakeholders who are affected by takeovers or mergers when it involves large companies.  Both Kraft and Cadbury’s are large companies therefore largely involving the government. Kraft has its biggest presence in North America, unlike Cadbury which is mainly in Europe. Therefore if Kraft was to choose to move Cadbury’s out of the UK, it would mean that the 5,600 people that are employed in 8 factories around England and Ireland would be made redundant.  Such a large amount of people being made redundant is a worry for the government because it means that the unemployment rate will be increased and more people will apply for unemployment benefits from the government, therefore taking money which could have been used by the government elsewhere. In addition to this Cadburys and its factories are currently generating a lot of tax for the government and without that tax the government will have less money to fund various projects such as funding schools and paying benefits out to people.  However Cadburys currently has 8 factories around the UK that are fully equipped and functioning in making Cadbury’s products, even though the workers are fairly low skilled and could be found elsewhere in the world, it would be an unnecessary cost for Kraft to move the factories in another country.

                In conclusion takeovers will affect a lot of people from within or outside of the actual businesses, however some people such as shareholders and employees will be more affected than others. In the Kraft/ Cadbury take over the different stakeholders mostly all had a negative feeling towards the takeover. Employees are worried about the potential loss of employment; shareholders of both companies are worried about receiving less money than if the companies were to stay separate, the government worried about national unemployment rates and customers worried about how the quality of the product would be affected.  After the takeover Kraft had to decide which of the stakeholders they wanted please the most, shareholders and employees both have high interest in the takeover, however shareholders have more power. Kraft decided that the shareholders were to be prioritised and they made more than 400 employees redundant in order for the Kraft shareholders to receive higher dividends and in order to pay back some of the debt that Kraft acquired whilst buying Cadbury’s. This means that the shareholders of Kraft are happy and they will be pleased with the outcome of the takeover. But on the other hand, this therefore means that all other employees will now be worried for their jobs and the government are now suffering due to Kraft’s decisions.

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%.

Cadburys and kraft
http://www.bbc.co.uk/news/uk-england-16047813 - going to axe 200 jobs

http://www.bbc.co.uk/news/uk-england-birmingham-17208144

http://www.bbc.co.uk/news/uk-england-birmingham-16067571- redundencys

http://www.bbc.co.uk/news/uk-england-birmingham-14946665 - creates new jobs

http://news.bbc.co.uk/1/hi/england/west_midlands/8493577.stm -owner of cadbury's said hes sad that the company has sold for less than he thinks it is worth.

http://www.mirror.co.uk/news/uk-news/krafts-cadbury-takeover-marks-the-end-195970- borrowing money to buy it, so they may axe jobs to try and save money.

http://www.mirror.co.uk/news/uk-news/krafts-cadbury-takeover-marks-the-end-195970- super rich guy because of the takeover, and the fact he will lose his job.

look on the gardian