Mergers and acquisitions (M&A) are a key tool in reshaping industries around the world. Global activity has picked up this year and is set to hit a new record. The UK has remained a hub for M&A and takeover activity, with the value of deals hitting its highest ever level in the first half of 2018.
Investors can find themselves on one of two sides of the M&A coin: either holding a stake in a target company that another wishes to buy, or owning shares in the bidding company seeking to buy another. The potential impact of M&A and the opportunities on offer differ depending on how the coin lands.
There are many reasons that M&A activity occurs, but the questions often remains the same. If a company receives a bid, its shareholders and board must decide if the offer on the table is worth sacrificing any long-term gains that could be delivered as an independent business (an easier decision if the firm is experiencing tough times). For investors that find their business out shopping, they have to consider how any deal would impact the company’s finances and outlook, essentially weighing up if the purchase helps or hinders their investment.
Why do takeovers and M&A happen?
Growth often lies at the heart of M&A. Expanding the business organically is still the main method used to grow, but acquiring another a business (essentially the same as a takeover) can accelerate its efforts. This could be because the target offers a product or service that would enhance its portfolio, or operates in geographical locations that the other firm wants to break into.
But M&A is not all about expanding, it is equally about surviving. When an industry as a whole hits a rough patch, companies often look to merge with a peer to benefit from economies of scale, taking out the competition through cost and revenue synergies. This is a theme for both mature sectors that are seeing limited growth and stagnate profitability, and emerging industries that sees the swathe of fragmented, smaller players in the market merge to begin forming larger and market-leading businesses.
M&A: takeover examples
Below is an example of some high-profile mergers and acquisitions that were completed for different reasons.
Synergies: John Wood Group buys Amec Foster Wheeler as downturn bites
As oil prices sat at new lows at the start of 2016, the downturn started to spill over from the oil giants to those providing crucial engineering and other work. Oilfield services group John Wood Group bought smaller peer Amec Foster Wheeler for £2.2 billion, to weather the downturn and prepare for the cyclical upswing in crude prices.
Amec Foster Wheeler was already undergoing a turnaround programme when the bid was made, having seen losses more than double in 2016 with dividends suspended and its debt pile build to worrying levels that threatened the launch of a £500 million rights issue. For Wood Group, it was aiming to combine its services to cut costs and jobs, while acquiring its peer’s stronger position in US shale, in the knowledge that it was a key area to move into before oil prices started to pick up again.
If companies are looking for cost synergies then it is because profitability has been squeezed. In this case it was an industry-wide theme more commonly known as consolidation. For example, General Electric (GE) merged its oil and gas business with Baker Hughes, forming the second biggest player in the market to take on leader Schlumberger. Halliburton did have the same idea but was unsuccessful in its attempts to strike a deal with Baker Hughes.
Diversification: Shell buys energy supplier First Utility
Oil giant Shell made a major and unexpected move when it purchased First Utility, a firm supplying power to over 800,000 UK homes. Shell had raised its exposure to natural gas (often used to produce electricity) over oil when it purchased rival BG Group, and now it has moved down the supply chain.
The UK energy supply industry has undergone significant change with the ‘Big Six’ suppliers that monopolised an area disrupted by over 50 new small and independent rivals that have been encouraged to enter the market to fire up competition.
This has seen the incumbents, like Centrica-owned British Gas and SSE, consistently lose customers to new entrants over recent years, open up opportunity for Shell to buy a growing business and enter the market at a much lower price. It also forms part of Shell’s strategy to gain exposure to electric vehicles, having bought charging companies such as NewMotion.
Growth: Comcast buys Sky to enter Europe
After a two-year long bidding war over the UK pay-TV and broadband provider, Comcast finally won the battle for Sky with a £31 billion offer that was well above the one put on the table by rival 21st Century Fox.
The price Comcast paid (£17.28 per share) signalled that the US cable provider, which also owns the likes of NBC Universal and Universal Pictures, was willing to pay over the odds for Sky as the UK firm had traded at just £7.50 per share before it became the centre of a takeover battle.
This is because Sky offers Comcast a foothold in Europe, where it lacks a presence. Sky had 23 million subscribers spanning the UK, Germany, Italy, Austria and Ireland, where pay-TV penetration is much lower than Comcast’s core US market. The takeover of Sky was in response to its home market being stagnate and the rising competition from streaming services like Netflix and Amazon.
Supply-chain pricing power: Tesco buys Booker Group in vertical merger
Tesco is the leading supermarket in the UK and its £3.7 billion acquisition of Booker Group saw the company gain more control over the supply chain. Booker is a food wholesaler supplying small convenience stores and the likes of the catering industry. Tesco was keen to add its network of smaller store brands, like Londis and Budgens, to its portfolio as customers continue to shun larger warehouse-like stores, but it also gave it control over one of the country’s biggest suppliers.
This has given Tesco increased purchasing power and control over the market, selling not only to the public but to competitors and peers.
Mergers and acquisitions: UK regulatory bodies?
There are numerous regulatory and other bodies that could impact how an M&A deal is completed, including whether it is allowed to be completed at all. Mergers of a certain size and stature attract the attention of numerous authorities which are tasked with overseeing the deals: some to protect competition in the market, some to protect shareholder interests, and those concerned with national interests.
The key bodies that are often involved in the UK M&A process are:
- The Panel on Takeovers and Mergers: the regulating body of takeovers of companies that are subject to the City Code (see below), responsible for overseeing M&A activity in the UK
- Financial Conduct Authority (FCA): the regulating body of financial services in the UK
- Prudential Regulation Authority: less often, the body responsible for the prudential regulation of banks and insurers could also be involved
- Competition and Markets Authority: the body responsible for investigating mergers that could give rise to competition concerns
- Ministerial departments: some high-profile mergers can go beyond regulators and straight to ministers that take charge as a matter of national interest. When 21st Century Fox tabled a bid for Sky in 2016 it had to be cleared at a ministerial level over concerns of too much concentration of control within the media industry.
- European Commission (EC): despite Brexit, and until the UK formally leaves the European Union (EU), the EC has exclusive jurisdiction over proposed M&A within the region