Merger mania - what does it all mean?

May 14, 2018

At Dabbl, we want to make buying shares as accessible as we possibly can - for everyone. To help with this, we’re running a series of blog posts covering a wide range of topics which impact the world of business, finance and investing. These snapshots have been carefully crafted to cut through the jargon and highlight some of the most important facts to consider in each subject. 

Merger mania - what does it all mean?

With a phenomenal £66 billion worth of corporate takeovers having been announced in the UK just last week, merger mania is very much on the cards. From CYBG - owners of Clydesdale Bank - bidding for Virgin Money, to the company behind Zoopla and USwitch being sold to a US investment firm, exactly what is a merger, what drives the decision and is it always good for shareholders? 

Mergers come in many different shapes and sizes, which at times might sound more like they’ve been plucked from the playbook of the latest Netflix fantasy drama than the upper echelons of corporate finance. Poison pills, white knights, dawn raids and hostile bids are all part of the lexicon, so let’s try to unpick some of this jargon.

It can be like something out of Game of Thrones

But first, it’s probably important to consider why to companies would merge in the first place - and typically it’s going to be that one party has something the other wants. That could be the next great technology, access to a specific market, or even a pile of spare cash. Also, in some instances the merger may simply be designed to find synergies or cost savings, as two companies operating in the same area could cut out a lot of duplicated overheads. 

Then, what are the intentions behind the bid? Does the target company simply smell a bargain on the table? Is the share price unreasonably low? Can they convince the shareholders that the acquiring firm’s management can do a better job than the incumbent board of directors? 

There’s a rule book, too…

A complicated set of rules sit behind mergers of listed companies in the UK, known as the City Code of Takeovers and Mergers. You can read all about it here but in summary it ensures a fair approach can be taken, providing some assurance to all stakeholders that the inevitable period of uncertainty will be short lived. 

Ultimately a merger - however it comes about - should bring value to the table. In many instances, directors in the target company will lose their jobs, and that could quite possibly be the same for many employees, too. Shareholders in the acquiring company could end up over-paying for the business as the target holds out for the best price, whilst in some instances, key ethical beliefs held by the target company could be compromised. We saw this with the attempted bid by Kraft Heinz for Unilever back in 2017. Had this bid been successful then issues right across the supply chain, ranging from the company’s responsible sourcing of products in Africa to the treatment of its staff in Europe, could have been subject to ‘review’. To say this increases benefit for shareholders gives a distinctly one dimensional view of how we all consider ‘value’.

Make no mistake. Merger’s aren’t universally bad. They can help with investment in a company and in the case of struggling businesses, can help preserve essential services and many jobs. However there are plenty of instances where such predatory action is driven by the ego of the acquiring company, seeking world domination like some Bond supervillain, wedded to the idea that bigger is always better. 

About those buzz words…. 

If a company is being sought because of one aspect - maybe some technology it owns or a cash pile - a poison pill would one possible solution. If the board of directors can do something to make the company a less attractive target - maybe pay out the surplus cash as a special dividend or sell that prized tech to a ‘nicer’ rival, the company is all of a sudden a less attractive target. A white knight is another suitor who may be encouraged by the target firm’s management to place a bid - the future, not least for the directors - might be rather more upbeat if someone else buys them. A dawn raid is when the target company sweeps in and starts buying up as many shares as possible as soon as the market opens. Takeover law mandates that they will have to announce their intentions once a certain percentage holding of the company is achieved and this could cause the share price to soar, so the target company getting in quick can be financially lucrative. We saw this last month when British Airways owner IAG had built an almost 5% stake in Norwegian. Finally, a hostile bid is one that’s hugely unwelcome with the target company. It can lead to drawn out debate as to whether it’s going to be beneficial for shareholders, customer and employees alike - the Melrose bid for GKN earlier this year being a good example. 

We’ve built Dabbl to help you buy shares in the brands and companies you love. Anyone can Dabbl.

For information purposes only, not intended to constitute any financial advice from us. The customer should assess the risk of potential loss carefully and individually before investing any financial products. Dabbl Group Limited is authorised by the FCA under the reference number 767263 as an appointed representative of its Principal firm VIBHS Financial Ltd, which is authorised and regulated by the Financial Conduct Authority under the reference number 613381.