INSIGHTS

This Valentine’s Day, it’s not just the last minute, petrol station flower purchases and fully booked restaurants causing relationship stress for a number of executives and boards out there. There’s a chance they may also be feeling pressure as their companies’ eye unions of their own. Indeed, merger and acquisition activity across the world has been heightened in recent years.

We’ve certainly had our fair share of corporate activity on the NZX in recent times. Just last year saw the purchase of Vodafone NZ by Infratil and Brookfield. Restaurant Brands and TradeMe also caught the eye of foreign suitors, while Kathmandu moved to purchase iconic surf brand Rip Curl. Meanwhile, late in the year we saw Abano Healthcare announce a tie-up of its own, and after some to-ing and fro-ing, Metlifecare received a takeover offer.

While heightened merger and acquisition activity can often signal the the market is near a peak, with low interest rates, buoyant markets, and many industries being disrupted, there’s no reason to expect a slowdown in merger and acquisition activity any time soon.

Value of global merger and acquisition activity 1999 - 2019

Why do companies get together?

It can be very intensive and time consuming to buy or merge with another business. There’s hundreds of boxes to tick, shareholders to get on side, and sometimes governments to convince. It can also serve as a distraction for management which means existing businesses may not get the attention they need. So why do companies do it?

Scale and efficiency.
Acquiring a business or merging two businesses can provide all-important scale benefits. This enables the new firm to benefit from its larger size to lower costs and better compete in the marketplace. Efficiencies can also be achieved by consolidating costs and utilising the new firms larger buying power. This is a common rationale behind so-called mega-mergers, for example, that of Kraft and Heinz.

Growth. 
For a company targeting growth in a certain area, sometimes it’s quicker and easier to buy an existing company with an established footprint than to start from scratch. The high profile acquisition of Whole Foods by Amazon is a good example. Instead of slogging to build out is fledgling grocery business, Amazon acquired Whole Foods providing it with an immediate presence in that market.

Diversification.
Acquiring a business in a different area can provide important risk mitigation. This means a slowdown in one business can be absorbed by better performance in other businesses. Kathmandu’s purchase of Rip Curl is a good example of this. Rip Curl’s summer selling season is complementary to Kathmandu’s winter focus, reducing the overall company’s seasonality.

Opportunity for business improvement.
A company with good assets that is not being managed as well as it could be can present an opportunity for buyers. This often manifests itself in an investment firm taking a public company private and shaking things up.