Mergers & acquisitions , Corporate Finance

Mergers & Acquisitions now is playing crucial role in modern corporate finance world.

For any prospects, there is only one reason for a firm making an offer to M&A another firm, which is creating value. The ultimate purpose/motivation of any M&A is to benefit from synergy for both acquiring firm and target firm.

Revenue Enhancement

  • Market gains: Sainsbury is one of the biggest groceries in the UK retail market (others are, Tesco, Morrison, and Asda). Referring to this case, our stores across the US and in other 15 countries worldwide, particularly in Central America and Asia, and the first advantage of M&A Sainsbury is to benefit from revenue growth. The global market share will be increased by participating into UK market/European market. The distribution network will be greatly improved.
  • Strategic benefits: Sainsbury offers over 30000 different quality products, and also has joint ventures like banks and online services, this could benefit from ou
  • Market monopoly power: this may/may not happen in this case, but acquirer will definitely benefit from reduced competition level. Firm can be benefited from manipulating price level in order to gain higher profit.

Cost reduction:

  • Economy of scale: one of the advantages of horizontal M&A is that firms can benefit from large economy of scale. Similar business will be able share same production lines or suppliers, in order to increase the level of production, the average fixed costs will drop automatically. Also
  • Increase in efficiency: By restructuring two firms, some inefficient departments or segmentations can be eliminated; departments which have same functions can be consolidated. Those actions could directly lead to increase in efficiency.
  • Complementary resources: M&A would help to improve usage of existing resources.

Financial synergies:

  • Usually large firms would be easier to raise capital issuing more debt.
  • Increasing debt capacity this also could lead to changing in debt-to-equity ratio, this brings tax advantage to firms. Because higher debt-to-equity ratio will result in higher interest payments, this action can lead to final reduction in taxations.
  • Lower cost of capital raising. The cost of issuing securities is subject to economies of scale.
  • In addition, in this particular case, acquirer may also be benefited from currency aspect.

Applying to facing situations of our firm, firstly we will benefit from reduced level of competition after successful M&A. this will solve the difficulties of increasing competition of main market. Meanwhile, strong revenue growth forecast as the bar chart shown below, UK has the highest potential of future market growth; this will help boost our current declining profit margin. For the purpose of reorganising and altering business portfolio of products, it is sensible decision for board that decide to invest in UK market.

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In addition, for Sainsbury, it has also become the largest Fair-trade retailer in the world in February 2010. This will particularly help to improve the public image problem we are facing at moment. Also Sainsbury has relatively good record of corporate governance and corporate social responsibility.

This shows that employees being treated as fair condition. Moreover, Sainsbury applied them to commit in reducing the impact on the environment and aim to be leader in the UK for environmental innovation. This will help bring the corporate public image green.

Posted Date: 2/19/2013 6:43:20 AM | Location : United States







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