1. Write the action minutes.

Unit 13

Takeovers and mergers

Business brief

'Magnetic's board rejected TT's bid as "derisory, unsolicited, unwelcome and totally inadequate".' This is a familiar refrain from the board of a company that is the target of a hostile bid, one that it does not want, for example because it thinks that the bidder is undervaluing its shares: offering less for the shares than the target thinks they are worth in terms of its future profitability. A bid that a target company welcomes, on the other hand, may be described as friendly.

Bidders often already have a minority stake or interest in the target company: they already own some shares. The bid is to gain a majority stake so that they own more shares than any other shareholder and enough shares to be able to decide how it is run.

A company that often takes over or acquires others is said to be acquisitive. The companies it buys are acquisitions. It may be referred to, especially by journalists, as a predator, and the companies it buys, or would like to buy, as its prey.

When a company buys others over a period of time, a group, conglomerate or combine forms, containing a parent company with a number of subsidiaries and perhaps with many different types of business activity. A group like this is diversified. Related companies in a group can have synergy, sharing production and other costs, and benefiting from cross-marketing of each other's products. Synergy is sometimes expressed as the idea that two plus two equals five, the notion that companies offer more shareholder value together than they would separately.

But the current trend is for groups to sell off, spin off or dispose of their non-core assets and activities, in a process of divestment and restructuring, allowing them to focus on their core activities, the ones they are best at doing and make the most profit from. Compare an old-style conglomerate like GECin the UK, with a wide variety of sometimes unrelated activities, and a group like Pearson, which has decided to concentrate on media, in broadcasting, publishing and now Internet ventures.

Companies may work together in a particular area by forming an alliance or joint venture, perhaps forming a new company in which they both have a stake. Two companies working together like this may later decide to go for a merger, combining as equals. But as the main Course Book unit points out, mergers (like takeovers) are fraught with difficulty and for a variety of reasons often fail, even where the merger involves two companies in the same country. One of the companies will always behave as the dominant partner.

Take the scenario where one company's base is used as the headquarters for the merged company. The other company's office closes, and many managers in both companies lose their jobs. Those remaining feel beleaguered and under threat of losing theirs later. They may dislike the way the managers from the other company work. In cross-border mergers, these difficulties are compounded by cross-cultural misunderstandings and tensions. Problems such as these explain why merged companies so often fail to live up to the promise of the day of the press conference when the two CEOs vaunted the merger's merits.