MAKERERE UNIVERSITY

COLLEGE OF BUSINESS AND MANAGEMENT SCIENCES

SCHOOL OF BUSINESS
YEAR 2 SEMESTER 2 ACADEMIC YEAR 2021/2022
MASTER OF BUSINESS ADMINISTRATION
COURSE CODE: MBS 8209
COURSE NAME: MERGERS AND ACQUISITIONS
Task 1:

Option 1

Choose any corporate restructuring transaction announced recently or

undertaken in the past. Examples include the decision by the management of
Safaricom, Andela, HP, EBay, Motorola, Altria Corporation. Critically evaluate
the financial and strategic aspects of the decision as well as the method of
restructuring announced/adopted.

In any of the choices made, discuss whether this decision was the right one and
whether this decision will create the value envisaged by the management of the
company concerned. In the case of completed restructuring such as that
involving Motorola and Altria Corporation, discuss whether the decision did
indeed create value or whether it was a strategic and financial blunder.
Introduction Categories
❖ Corporate restructuring is the process of reorganizing a ❖ Financial restructuring
company's operations to improve productivity and
❖ Operational restructuring
profitability.
❖ It is a strategy for altering the organizational structure to
help the company reach its strategic objectives and it
includes significant adjustments to an organization.
(Taxmann, 2022)
❖ Serious financial difficulties may require businesses to
alter their operations, and the restructuring strategy is
intended to assist a company get back on track and
become profitable once more. (lrcontentsonal, 2021)
Reasons for restructuring Features
❖ Change in Strategy ❖ Employee reduction

❖ Insufficient Profits ❖ Corporate management changes

❖ Cash-flow needs (lrcontentsonal, 2021) ❖ Selling off underutilized assets

❖ Outsourcing
❖ Operations shifting
❖ Rearranging operations like distribution, sales,
and marketing.
❖ Renegotiating employment agreements to cut
costs
❖ Debt restructuring to reduce interest payments
(Clear, 2021)
Strategies Benefits
❖ Merger ❖ Growth in Market Share
❖ Demerger ❖ Lessening of Competition
❖ Reverse Merger ❖ Large Size
❖ Disinvestment ❖ Economies of scale
❖ Takeover / Acquisition ❖ Tax benefits
❖ Joint Venture ❖ New Technology
❖ Strategic Alliance ❖ Strong brand
❖ Slump sale (Khatabook, 2022) ❖ Diversification (Taxmann, 2022)
CASE STUDY: ABSA GROUP
❖ Founded in 1991, Absa is an amalgamation of various financial service providers including
United Bank (South Africa), the Allied Bank (South Africa), the Volkskas Bank Group and
certain interests of the Sage Group.
❖ 1992 → Absa acquired the entire shareholding of the Bankorp Group (Trustbank, Senbank
and Bankfin)
❖ 1998 → Banks fused into a single brand, adopting Absa as a brand identity
❖ May 2005 → UK’s Barclays purchased 56.4% stake in Absa
❖ 2013 → Barclays UK PLC acquired the entire issued share capital of Barclays Africa Limited
❖ August 02, 2013 → name was changed from “Absa Group Limited” to “Barclays Africa
Group Limited”
Transition of Barclays Bank PLC to ABSA Group
Transition (Cont’d)
Achievements post transition:

❖ Replacement systems (assessed as fit for purpose) to deliver the same functionality on the most appropriate
platform.
❖ Transformational systems which offer new and substantially better features for customers and employees.

By the end of 2017, 52% of services contracted with Barclays had been terminated, with 52% of the Separation
projects completed (including five of the 24 most complex and interdependent projects).

The Board and its Separation Oversight Committee have been regularly updated on all material pieces of work spent
relative to forecast, the status of the overall programme and related assurance reviews.

The expectation was that the financial contributions would neutralize the capital and cash flow impact of separation
investments on the group over time.
Methods of restructuring

❖ CEO Succession
❖ Board changes

Alongside the rebranding, Absa CEO drew up an ambitious

growth strategy to regain market share in retail banking at home
and double the sales contribution from its 10 operations
elsewhere in Africa.

Comprehensive reset of all its core business:

❖ Retail and Business Banking South Africa (RBB South

Africa)
❖ Corporate and Investment Banking (CIB)
❖ Absa Regional Operations (ARO)
❖ Wealth, Investment Management and Insurance (WIMI) Growth Strategy
Growth Strategy
❖ Priority was given to RBB and a comprehensive review completed in June, followed by a new
structure and Executive Committee.
❖ The new leadership conducted further bottom-up reviews, developed new strategies and agreed to
new, ambitious targets for each of the business lines therein. By the end of the year 2018, the board
had presented a comprehensive strategic review and targets to investors, clearly mapping the
intended way to meet future targets.
❖ Since advanced strategic reviews had been done to reset all four core businesses, medium-term
financial targets for the Group were published. The targets were based on the current expectations for
economic growth in South Africa and the Absa Regional Operations countries.
Review of ABSA Group Strategies
❖ RBB SA, (accounts for more than 60% of Absa group income), has largely completed its reorganization and expects to
reap further benefits from its integration with Absa’s wealth and investment management and insurance business.
❖ ABSA board has made a deliberate move to concentrate more on RBB which represents the niche that is Retail
Banking that they think can be captured, grown and consolidated.
❖ At CIB, significant work has been undertaken to form an integrated Pan-African franchise with a single growth
strategy that covers all of the countries where Absa has a presence.
❖ ARO is implementing its new operating model, aligned to the group strategy which devolves accountability and
decision-making closer to the customer interface.
❖ Cost management remains at the forefront of the new adopted business strategy after the structural reset. This is done
with the hope of much more positive and better financial results in the subsequent reporting periods.
❖ Parallel to the reorganization work across business units, Absa continues to make good progress in separating its
operations from Barclays PLC, and in enhancing its digital capability.
Innovation Based Banking
❖ ABSA has shown an ambition to become a scalable and digitally-led bank. The bank set out to become
technology pioneer and be ahead of the tech curve.
❖ Several proof-points where this ambition is brought to life. ABSA’s retail franchise has taken the lead
in providing innovative digital solutions for its customers. E.g.
➢ The launch of Chat Banking in collaboration with WhatsApp and Facebook. ABSA is the first
bank in the world to offer this service.
➢ Launch of Samsung Pay - a first in the South African market, and Africa.
➢ Launch of Timiza which is an android app that allows you to do banking with such convenience.
➢ After launching ChatBanking on WhatsApp, Samsung Pay and Timiza, earlier, Absa
significantly enhanced its Absa app in the first half of the year 2019, resulting in a 20% increase
in the number of app users.
Strategy Delivery and Value Drivers
❖ Oversee management’s delivery of the approved growth strategy into detailed execution plans.
❖ Monitor and assess the business-as-usual execution in the context of significant change and the new
strategy.
❖ Oversee system stability while the Group manages change and transforms the technology landscape,
taking into account both the Separation and the growth strategy.
❖ Oversee and assess how we the business in being transformed in the areas of growth, building a
scalable, digitally-led business, and playing a role in shaping society.
❖ People and culture – Monitor and assess the group’s progress with respect to diversity and the
renewed culture, as an enabler of the new strategy.
❖ Oversee the execution of the Separation programme
ABSA Group Growth Strategy Outlook
❖ Overhaul of the executive management of its corporate and investment banking
❖ Flattening structures and improving customer product offerings
❖ Introduced of four business-generating divisions: transactional banking; client coverage; public
sector and growth-capital solutions; and investment banking
❖ Targeting clients in mining and minerals, agriculture, power and utilities, natural resources and
consumer businesses since it wants to grow more in commercial property finance and structured-
trade finance.
❖ Shares in Absa gained 6.6% in 2019, outpacing the 0.4% advance in the FTSE/JSE Africa Banks
Index which improved from 2018 when Absa slid by 11%, the worst performance in the six-member
South African banking index.
Financial Aspects
ABSA group developed three financial targets which Absa Group Key Financial highlights for the first half
included; of 2019:

❖ To grow revenue faster, on average, than the SA
bank sector from 2019 to 2021, with an
improving trend over time and within
appropriate risk appetite parameters.
❖ To consistently reduce our normalized cost-to-
income ratio to reach the low 50s by 2021.
❖ To achieve a normalized group return on equity
of 18% to 20% by 2021, while maintaining an
unchanged dividend policy.
❖ Headline earnings increased 3% to R8.3 billion
❖ Revenue increased 6% to R39.1 billion
❖ Operating expenses increased 6% to R22.1
billion
❖ Return on equity declined to 16.4% from 17.1%
❖ Dividend increased 3% to R5.05 per share
Financial Aspects (Cont’d)
Financial Aspects (Cont’d)

2021 highlights
Conclusion
❖ The restructuring of Barclays to ABSA resulted into various benefits inclusive of:
➢ Driving digital transformation (Reduces IT infrastructure costs, moves away from expensive
software to open source, accelerates development with in-house IT team, reviews 48,000
documents in three hours as part of rebrand, saves up to R7−8 million on key initiatives)
➢ Open source which opens up opportunities
➢ Improved technical skill set and creativity
➢ Improved efficiency and innovation
Task 2: Identify and discuss a recent case of a hostile bid
and the tactics the bidder had employed.
Introduction
❖ A merger refers to when two or more businesses decide to pool their resources under a
single company
❖ Acquisition refers to the exercise of effective control by a firm over the assets or
management of another company, without physically integrating their operations.
(González-Torres et al., 2020)
❖ A hostile bid can be defined as a takeover strategy in which the buyer approaches the
target's shareholders directly and makes an offer to buy their shares, skipping the target's
board and management. (DePamphilis, 2010).
Hostile bid tactics Pre-offer tactics

❖ A bear hug ❖ Shark Repellents

❖ Tender Offer ❖ Dual Class recapitalization

❖ Long-form merger ❖ Reincorporation

❖ Proxy Fight ❖ Golden parachutes

❖ Toe hold stock position ❖ Crown jewels

❖ Convert into Friendly, ❖ The people pill

Negotiated Merger ❖ Poison pill

❖ Staggered board / Limits on Removal
of Directors
Post-offer tactics
❖ Greenmail
❖ Standstill agreement
❖ White Knight
❖ Leveraged recapitalization
❖ Corporate restructuring
Case study: Kraft’s takeover of Cadbury (2009 – 2011)
❖ Kraft was established in 1767 by two entrepreneurs (Bayldon and Berry) introduced as
“candied fruit peel” in York, England
❖ It is a food and beverage US company about a century old that started off as a door-to-
door cheese business but expanded into other confectionary items through many
takeovers previously such as Ritz Crackers, and Nabisco (Oreos), and Phenix Cheese
Corporation (Philadelphia Cheese) to achieve success (Smith 2009).
❖ It is second in terms of sales and popularity in the confectionery industry with annual
revenues of $42 billion, operating in more than 150 countries (Kraft 2008). (UKEssays,
2018).
Case study: Kraft’s takeover of Cadbury (2009 – 2011)
❖ Cadbury was established in 1824 by John Cadbury as a shop in Birmingham that sells
cocoa and drinking chocolate.
❖ It metamorphosed into different stages of growth to become the leading company in the
production and selling of chocolate and sugar confectionery products
❖ It later expanded by starting a line of beverages after a merger with Indian Schweppes
changing the company name to Cadbury Schweppes (Chinn 1998)
❖ Cadbury is a producer and seller of chocolate and sugar confectionery products in over
60 countries with its headquarters in the UK and listed on the London and New York
stock exchanges.
Aim of the takeover
❖ Kraft was attracted to Cadbury due to its strong performance during the economic crisis.
(Anwar, 2019).
❖ Cadbury is the market leader in UK and Ireland’s confectionary where Kraft has low
market share (UKEssays, 2018)
❖ Cadbury’s strong standing in the Indian (Schweppes) and North American Markets was
cleverly identified by Kraft who wanted to tap it and exploit it under its own name now to
add to its success story. (UKEssays, 2018)
❖ Kraft management believes that the combination of the two companies is both a strategic
as well a complimentary fit, boasting a portfolio of over 40 confectionary brands each
having the ability to yield annual sales of over $100 million.
Aim of the takeover (Cont’d)
❖ $625 million annual pretax cost savings on annual company costs of research and
development, advertising, branding, and procurement.
❖ Significant level of revenue synergy ($50 billion annually) that would subsequently
result in higher earnings per share.
❖ Kraft’s growth prospects would brighten through access to new brands, particularly in
the confectionary department along with new distribution channels for the existing
products which are outside the US.
 Details of the takeover
Hostile bid launch Second bid Takeover

● Hostile bid launched in ● Offer → $17 billion (300 ● $19.5billion hostile

2009 pence in cash and 0.2589
● Initial offering → $16.3 Kraft shares per Cadbury
billion (740 pence per shares)
share) ● November 9 closing price
● Offer rejected reflected the bid valuation
of Cadbury at 710p; Lower
than the share price of 761p
● Offer rejected
takeover of Cadbury (840p
per share) after 4 months of
continuous resistance
● 500 pence in cash per share;
remaining amount paid to
Cadbury shareholders in the
form of Kraft shares

The shareholders had the power to decide the mix of amount they wanted in cash
and shares. The final offer presented was estimated at a multiple of 13 times
Cadbury’s earnings in 2009 (UKEssays, 2018)
Details of the takeover (Cont’d)
❖ The high bid price overruled the threat of Hershey’s or Unilever offering a price for the
same strategy (take over).
❖ The only rival left was Nestle which too was reduced significantly when Cadbury’s
Director signed the agreement that if Cadbury were to change its mind about the
takeover, it would pay a handsome penalty for it.
❖ Management assurance that under the new agreement the previous contractual rights of
the employees would remain the same as before. (UKEssays, 2018)
Challenges faced Tactics used by Kraft
❖ Resistance from the Cadbury ❖ Persistent bidding
shareholders; other confectionery ❖ Allowing the Shareholders of
companies preferred (Nestlé, Ferrero Cadbury to decide the payment Mix
and Hershey) ❖ Attractive and Competitive offer
❖ Opposition from the British ❖ Cadbury employee buy-in
Government regarding takeovers of
British companies by foreign giants as
it nearly always leads to job losses.
Advantages of the takeover Disadvantages of the takeover

Kraft:
❖ High debt
❖ Number 1 dealer in confectionery ❖ Reduced shareholder perceived
❖ Annual sales of over $100 million wealth (pizza production plant worth
❖ $625 million annual pretax cost savings $3.7 billion was sold)
❖ Growth through access to new brands ❖ Employee layoffs (estimated 9000+)

Cadbury:

❖ Extensive global distribution network

Revenue Pre and Post take over
Conclusion
Today, hostile takeovers are rare due to stronger antitakeover laws adopted by many states.
New federal laws require more notice and fuller disclosures in proxy solicitations. However,
hostile takeovers are not gone. The same management hubris that we saw in the past may
launch future takeovers. Investors looking for extraordinary returns will continue to fund
hostile takeovers. Finally, the global economy will witness cycles of growth and decline that
will create new opportunities for hostile takeovers domestically and abroad. The global
economy will create corporate losers and winners, opening doors to opportunists.
(DePamphilis, 2015)