Reasons behind the Merger of Sainsbury and Asda

This report discusses the reasons behind the merger of Sainsbury and Asda, the implications of blocking the merger, and the bidding process in a takeover bid.

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
A) Reasons behind the merger of Sainsbury and Asda ...............................................................1
B) Reasons for blocking the merger and its implications............................................................4
C) Bidding process when the company launches bid for another entity with the possible
defences........................................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Mergers and acquisition could be defined as the consolidation of the companies. Mergers
refers to combination of 2 companies for forming a new company while the acquisition is the
process where one company is taken over by other company. It is an important financial aspect
in the corporate world. These events have great impact over the whole economy in case of big
companies. They also have impact over the financial and business operations of the consolidated
company. The present report is based over the merger of Sainsbury and Asda. The report will
cover the understanding about the reasons of merger taking place. It will also be providing the
reasons behind the blocking of the mergers of two companies and the implications of the issue on
the economy. Further the study will also be covering the bidding process when a launch by
company of a bid against other with the possible defences.
MAIN BODY
Mergers & acquisition are the terms used for describing consolidation of the assets or of
entire companies using different types of the financial transactions, it includes, mergers,
consolidation, acquisition, assets purchases and management acquisitions. Merger and
acquisitions are two different terms, where the merger refers to case where the two companies
come together for emerging as a single company and acquisition is the process where the one
company is acquired by other company (Kühnert and König, 2019). These are major aspects in
the corporate financial world. Companies generally go for mergers and acquisition to form a
single company combing two companies for creating more added value in comparison with that
of separated standing of entities. With objective of the wealth maximisation, entities always
evaluate the opportunities through mergers & acquisitions.
A) Reasons behind the merger of Sainsbury and Asda
Sainsbury and Asda are the mega business giants of Britain. Everyone is aware of the
critical phase of the companies during the recent years. Seeing the performance and need both
the companies were on the verge of merging. It is analysed from various news spread and the
facts behind the case. Before the news actually started floating about the merger of the two
companies, many observers were in of unexpected view of the mergers . It was confirmed after
the headlines about the deal of 15 billion was agreed by Sainsbury with parent company of Asda,
Walmart Inc. and stated both the supermarkets will be remaining intact.
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Walmart was to hold around 42% in combined business & will also be receiving cash of
2.975 billion and valuing Asda at 7.3 billion on the cash free, debt free and the pension free
basis. There are some of the reasons that made forced the merger to take place between the two
companies.
Competition
March of Aldi the German retailers and Lidl led to the intensification of which was
already bloody battle on the retail parks and high streets of Britain. Concerns related to the
market share and erosion of the thin line operating margins made the made the consolidation
inevitable. Swoop of billion by Tesco to Booker a recent approved regulatory signed off, also
paved way to an considerable extent to the ambitious deal.
Snug Fit
Both the companies made attempts for diversifying its business from the traditional
bases, Sainsbury and Asda have failed. Former company is having incredibly strong base in
north and latter is still having firms holding white collared shopper around M25. It was
considered as positive in hands in eyes of society, as little overlapping which would be causing
closure of score of shops on cost of hundreds of million pounds and thousand of the jobs
(Haydock and et.al., 2019). Also, at same times, there are also supply chains and the buying
synergies which will be dropping to bottom line and this may also be ploughing the prices to
more lower. Regulators also expected a loo over more benignly over the transactions than it
could be said that Tesco -Asda Alliance, will be creating more swathe of the new local groceries
monopolies.
Amazon
This is the major reason and factor that influenced the decisions and thought of merger
between the two companies. The acquisition of the online retailers of Whole Food put the
American grocers over notice. Amazon was in earnest for the hybrid model that was dominating
both offline and online retails. Sale of Walmart's Asda for 7.3 billion on cash & shares was the 1st
defensive move of Arkansas giant. However the selling spread risks with the UK investors who
are owning 58% in enlarged company (Merger of Sainsbury and Asda, 2018). It lessens exposure
of Walmart to already competitive market by Uber, and where Asda is struggling for competing
with revitalised Tesco & Sainsbury and also the Aldi & Lidl.
Tesco
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It is one of the largest retailer in Britain, rise of the Dr. Frankenstein, that after the
retrenchments were marked by company about the series of profit warnings and accounting
scandals. It is believed by many experts that Tesco is driving back on the track under the
leadership of Dave Lewis however it is also seen that it is not out of woods (Haleem and
Jehangir, 2017). The merger was much easier to take place when company Tesco was out of the
ground, but did no take place may be because of the non existence of drivers of deal and the
possible opportunities.
Internet
It is variation from the theme of Amazon broadened for looking on wider scale the retail
sectors. March of likes for Amazon with online delivery services like Ocado points to an
industry which centralizes around the big distribution hub in golden triangle existing in East
Midlands place where M1 & M6 connects. Having built the property portfolios in 1990's and in
earlier nineties Sainsbury, now realise about they are having surfeit of shops and where the
footfall is not high for making them efficient. Marks and Spencer and Tesco were particularly
exposed to the situation, but Asda and Sainsbury too had the effect.
Other Factors
Apart from these factors there are also other factors that made the competitors companies
to merge. Both the companies were big giants and were suffering losses due to the increased
competition between them. Companies decided to merge as this would bring benefits to both the
companies. When companies merge there are several benefits arising out of it. On merger the
resources of the companies will be combined that will give out company enriched with the
resources. On the other hand on merging the losses suffered may be reduced as the financial
resources and capital will be enough with the emerging company. When companies merge the
market share served by the companies also combine and this is bigger than that served by the
companies individually (Kühnert and König, 2019). This will be dragging more profits to the
company as customer base of both will be accumulated. Merger will cause the company to
ensure that the businesses share their ideas and strategies for collective growth.
They decided to merge for having the financial synergies so that emerged company has
lower cost of capital. This will also be accelerating the performance by using the resources of
both companies for the common goal and also accelerating the growth. The economies of scale
are also drawn towards the benefit of consolidated entity. He decision was also taken for
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increasing their market shares collecting to gain access over a more extended area. They would
be able to deliver the diversification for markets or products with higher growth. There is a
strategic realignment that pushes the good strategies for the overall business. The risks are
diversified and they could more strongly adopt the market changes that are essential for the
business. The other short benefits includes tax considerations. Taxes are lower of the combined
entity as compared with the single standing of the company. Company would be also available
with the resources for making the research and developments of the new innovations of products
and processes (Birkin, Clarke and Clarke, 2017). Market is facing tough competition with each
other and are not able to achieve even the profits from the business and is such environment
mergers helps organisation in reducing the competition and on combined standing they can give
more tough competition. Reduced competition will enable the company to return over the
profitable stage and promote its business. There were multiple reasons driving the merger of
Sainsbury and Asda and this would have improved the financial stability of company.
B) Reasons for blocking the merger and its implications.
After few time of the proposed merger between Asda and Sainsbury the news about the
block of merger was reported. It was reported that the proposed merger of Sainsbury & Asda is
blocked by the competition watchdog of UK over the fear that it will be raising the prices for
customers or consumers. The reports of Competition & Market Authority (CMA) stated that the
merger of companies will be raising prices also at the petrol stations of supermarkets and would
be leading to the longer queues for checkouts. The price rise will be seen due to merger of noth
companies will be reducing the competition and creating monopoly over certain products. The
in-depth investigation about the reasons it was noticed that deal of merger will be reducing the
substantial competition both at the national as well as the international levels for the people who
are shopping at supermarkets (Sainsbury – Asda merger blocked, 2019). It means shoppers
across UK will be affected, and not only the areas where the Asda and Sainsbury stores are
overlapping.
The investigations also found that the merger will be affecting the in-store consumers.
The reports stated that the merger bringing benefits to the companies will be affecting the society
with negative results (Haleem and Jehangir, 2017). Merger of the two companies will be
resulting in high prices of the products, quality of services and products will be declining due to
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this, for example the customer will be available with the reduced options on online shopping.
Further this will also leading the motorists to pay higher attention over more than 125 locations
at places where the Asda and Sainsbury at petrol stations located closely together. For making
the decisions related to prohibiting merger, also other issues were there that restricted the merger.
It includes issues like increased competition from discount stores such as Aldi and Lidl, and how
the expanding or new competitors can affect retail markets including online. The statements of
the company realised that it would be cutting some of the prices (CMA blocks merger, 2018).
Detailed analysis of the merger states that it will be reducing the competition in markets and
instead of price cuts it will be raising the prices.
The merger would have main impact over the employees working these organisations.
Number of management roles at company would have been gone down due to the streamlining
of it business structure. This would be leading hundreds of people to be unemployed this was a
matter of serious concern for the companies. The shopping experience of the customers will be
going down. There are various studies and cases that the companies after the merger are at much
beneficial stage than standing alone and before (Kühnert and König, 2019). Through merger they
raise their market share and have the opportunities for creating monopoly in the market. This
enables them to charge high prices of their products reducing the quality of services delivered to
the consumers. These were the potential reasons and implication behind blocking the merger of
Sainsbury and Asda.
C) Bidding process when the company launches bid for another entity with the possible
defences.
Bidding for takeovers occur when the company is proposing to acquire other company
through the process of bidding. In takeover bidding processes acquirer entity offers cash, stocks
or their mix for bidding the specific prices for purchasing the target companies. The reasons
behind the takeover bids are synergies, tax considerations, diversification from the existing
business. Types of bids are generally offered to the board of director of the target company. The
bidding process is of four types that are hostile, friendly, reverse and backflips.
The bidding occurs when companies, that were otherwise competing, conspire for raising
the prices and lowering the quality of products or services for the purchasers who are wishing to
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acquire the goods or services by a bidding process (Puckrein and et.al., 2016). Both private and
public organisations rely over the bidding process for achieving better value for its money. From
the consolidation lower prices and high quality are desirable as resources being freed or saved
from the products or services.
Activity bringing any change for corporations and is having direct impact over the
company and its stakeholders like customers, directors, suppliers and shareholders is known as
corporate actions. These corporate actions take place on approval of board of directors of
company and also approval of shareholders in some cases. The corporate actions include bidding
for the takeovers. There are numerous reasons behind the acquisition or merger. Acquisition may
take place for instance when the products or services of both companies are in alignments.
Bidding is done to acquire the target entity (Defence Bidding, 2019). The bidding offer is made
to board of directors, who after analysing the possible consequences either accepts or rejects the
deal with the acquirer. After the board of directors it is held for shareholders approval. After the
acquisition deal is passed by shareholders it is investigated by the public authorities for ensuring
that it will be resulting in positive outcomes for both the companies and the society. On
satisfaction that it will not be affecting the consumers they approve the acquisitions.
The defence mechanism in the Merger and Acquisition transactions are the set of
procedures which are employed by target companies for preventing the takeovers. There are
number of defences available to the businesses for preventing the takeovers like pre offer
defences and post offer defences. Pre-offer defences could be termed as pre-emptive strategies.
This is used primarily for making the shares of company unattractive for the potential acquiring
company. It increases the acquisition costs or set restriction in the corporate governance for
limiting the benefits that will be available to potential bidder (González-Garrido and et.al.,
2018). These strategies are taken before the bidding offer is made to target company. On the
other hand post offer mechanism are applied to the organisations when it receives bid for hostile
takeovers. Some of the mechanisms used are green mail defences, crown jewel defences, white
knight defence and pac-man defence. It is difficult for the acquirer companies to bid and acquire
company with defences. However making h deal profitable acquirer can negotiate with the target
company for acquisitions and removing the defences.
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CONCLUSION
The above study shows that merger and acquisition are two important events having
impacts over the society. Companies take the decisions for merger and acquisitions as there are
number of benefits available like synergies, resources sharing, tax consideration and many more.
This helps the emerging company to have greater market share. Companies who were facing
losses on individual standing may generate good profits as it reduces competition, increases
market share. Companies may have defences in bidding for avoiding the acquisitions by another
entity. This makes the acquisition critical for the acquirer company.
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REFERENCES
Books and Journals
Birkin, M., Clarke, G. and Clarke, M., 2017. Retail location planning in an era of multi-channel
growth. Routledge.
González-Garrido and et.al., 2018. Annual Optimized Bidding and Operation Strategy in Energy
and Secondary Reserve Markets for Solar Plants with Storage Systems. IEEE
Transactions on Power Systems. 34(6). pp.5115-5124.
Haleem, F. and Jehangir, M., 2017. Strategic Management Practices by Morrison PLC, UK.
Analysis, Lessons and Implications. Middle East Journal of Business. 55(4182). pp.1-7.
Haydock, J. and et.al., 2019. Recent Developments at the CMA: 2018–2019. Review of
Industrial Organization. 55(4). pp.579-605.
Kühnert, H. and König, E., 2019. Austria∙ REWE/Lekkerland Merger Approved Subject to
Carve-Out of Austrian Business. CoRe. 3(4). pp.392-395.
Kühnert, H. and König, E., 2019. Austria∙ REWE/Lekkerland Merger Approved Subject to
Carve-Out of Austrian Business. CoRe. 3(4). pp.392-395.
Puckrein, G.A. and et.al., 2016. Impact of CMS Competitive Bidding Program on Medicare
beneficiary safety and access to diabetes testing supplies: a retrospective, longitudinal
analysis. Diabetes Care. 39(4). pp.563-571.
Online
Defence Bidding. 2019. [Online]. Available through :
<https://corporatefinanceinstitute.com/resources/knowledge/deals/defense-mechanism/>.
Sainsbury – Asda merger blocked. 2019. [Online]. Available through :
<https://www.theguardian.com/business/2019/apr/25/sainsburys-asda-merger-blocked-
by-competition-watchdog>.
Merger of Sainsbury and Asda. 2018. [Online]. Available through :
<https://www.bbc.com/news/topics/cn54ndxy92yt/sainsburys-asda-merger>.
CMA blocks merger. 2018. [Online]. Available through :
<https://www.gov.uk/government/news/cma-blocks-merger-between-sainsburys-and-
asda>.
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