The market for food in the UK is highly competitive. From dining in style to a simple take-away, one of the key words when it comes to dining seems to be choice. Competitive prices and high quality are on offer, which is largely due to the sheer number of restaurants available to consumers. However, consolidation seems to be on the menu.
Nando’s is a well known restaurant and a popular eating destination on UK and Irish high streets, with more than 230 restaurants. This chicken restaurant group has made a £30 million bid for Clapham House, the company behind the Gourmet Burger Kitchen chain with 53 branches. Clapham’s shareholders were advised to accept the deal and on the 17th September 2010, it is reported that a deal was reached with Nando’s Group Holdings and its private equity owner Capricorn Ventures International. The 74 pence per share deal was met with disappointment by some analysts, who felt that the company was under-valued, despite failed attempts by Clapham House’s Board to persuade Capricorn to raise the offer price or find an alternative bidder.
The restaurant industry has suffered from the recession and especially by the weak economic recovery, so perhaps lower valuations are to be expected. Nando’s said:
‘As macroeconomic weakness has persisted in the UK, the trading environment for restaurant businesses in the UK has been difficult. This is evidenced by Clapham House’s vaolatile weekly trading performance.’
Nando’s intend to invest significantly in Clapham Houses’ businesses to reinvigorate their previous competitor. This may be essential, given the expectation that conditions in the UK will remain fragile, with consumer confidence staying low, as well as a somewhat untimely rise in VAT in January next year, which is almost certain to have an adverse effect on the restaurant business.
This take-over deal is not the first in the restaurant industry and nor is it likely to be the last, as the UK economy remains in a vulnerable state. The following articles look at this and over takeovers.
Nando’s to buy Gourmet Burger Kitchen for £30m BBC News (17/9/10)
UK restaurants serve up £50m in takeover deals Management Today, Emma Haslett (17/9/10)
Nando’s swallows Gourmet Burger Daily Mirror News, Clinton Manning (18/9/10)
GBK team plots next move after Nandos deal Telegraph, Jonathan Sibun (18/9/10)
Nando’s to buy Real Greek chain for £30m Independent, Alistair Dawber (18/9/10)
Mithcells & Butlers and Nando’s to feast on rival restaurant chains Mail Online, Ben Laurance (17/9/10)
GBK owner Clapham agrees to Nando’s offer Reuters (17/9/10)
Questions
- What type of takeover is Nando’s purchase of Clapham House?
- Why has the weak macroeconomic environment adversely affected the restaurant industry? What might be the impact of next January’s rise in VAT?
- Will Nando’s takeover (or indeed any other takeover in the restaurant industry) allow the company to prosper from the weak economic climate?
- In which type of market structure would you place the restaurant industry in the UK? Explain the characteristics of the market structure you choose and why you have placed the restaurant industry in it.
- How was the finance for the deal raised by Nando’s Holdings Group? What other sources of finance are available to firms for this purpose? What are the (a) advantages and (b) disadvantages of each?
- What other takeovers have occurred recently in the restaurant industry? What types of takeovers are they?
August is usually a quiet month for mergers and acquisitions. But not this August! As the linked Independent article below states:
Korea National Oil Corporation’s £1.87bn hostile bid for Dana Petroleum yesterday was just the latest in a surge of activity taking merger and acquisition (M&A) levels to a nine-month high.
Despite edgy economic data from the US, global deal-making has already topped $197bn (£127bn) so far this month, and is on course to beat the August record of $260bn set in 2006, according to Thomson Reuters. This week’s $89.8bn total is the highest weekly total since early November.
During the global recession of 2008/9, M&A activity slumped. In 2007, global M&As were worth $4162bn. In 2009 they were worth only $2059bn. Not only were companies cautious of acquiring other companies in a period of great economic uncertainty, but finance for deals was hard to obtain. Now, with many companies having cut costs and having much healthier balance sheets, they are in a position to bid for other companies. And banks too are much more able and willing to provide the finance to support takeovers.
So does this signify a continuing surge in M&A activity? Or are the August figures likely to be a ‘blip’, with fears of a double-dip recession dampening any renewed takeover fever? The articles below look at the recent cases and at the factors influencing current M&A activity.
Articles
Stock markets catch deal fever as M&A booms again Independent, Sarah Arnott (21/8/10)
BHP, Intel, RSA shatter usual August M&A lull Reuters, Quentin Webb (20/8/10)
Global M&A volume could be highest in August International Business Times, Surojit Chatterjee (21/8/10)
Mergers and acquisitions mania disrupts bankers’ summer breaks Guardian, Elena Moya (21/8/10)
Merger mania predicted as cash-rich firms stalk takeover targets Observer, Richard Wachman (22/8/10)
M&A Signal Higher Stock Prices Ahead Minyanville, Terry Woo (20/8/10)
From slowest to busiest TodayOnline (21/8/10)
Data and Reports
International
The era of globalized M&A: Winds of change Thomson Retuers and J.P.Morgan (June 2009)
Preliminary M&A Financial Press Release 2Q10 Thomson Reuters (25/6/10)
World Investment Report 2010: Annex Tables United Nations Conference on Trade and Development (UNCTAD) (see tables 9–16)
UK data
Mergers and Acquisitions involving UK companies Office for National Statistics
Mergers & Acquisitions data Office for National Statistics
Mergers and acquisitions involving UK companies: 1st Quarter 2010 Office for National Statistics (2/6/10)
Mergers and Acquisitions Tables Office for National Statistics
Questions
- Identify the reasons why firms want to take over other firms.
- Why does M&A activity tend to increase during a period of economic boom and decline during a recession?
- What is likely to happen to M&A activity over the coming months?
- Exmamine two recent mergers or acquistions and explain why the acquiring company was keen to take over the other company, or why the two companies were keen to merge. Were there any economies of scale to be gained? Would the merger increase the acquiring company’s market power?
Russia is now ranked alongside Zimbabwe on the worldwide corruption index, despite the fact that the Russian authorities have been doing their best to tackle it. The Russian bribery ‘industry’ is worth some $300 billion per year and those who can be bought include several government officials.
The Russian economy is in much need of foreign investment, but the growing world of bribery is deterring international businesses from investing in Russia. Not only will they face the costs of building and running the business, but they are also likely to face substantial costs in trying to get the paperwork through, as IKEA found. Having said that they would never resort to bribery, IKEA had to pay $4 million for investment in local infrastructure and donate a further $1 million for local government projects just to get the 300+ permits they needed to begin construction. This then led to further bribes and a number of lawsuits. For some companies, the delays caused by not paying a bribe may actually cost more than the bribe itself.
The following webcast and articles look at the case of IKEA and the push by foreign businesses to avoid the clutches of Russian bribery.
Webcast
Russian bribes culture hits international business BBC News (14/5/10)
Articles
Foreign firms pledge not to give bribes in Russia BBC News (21/4/10)
IKEA masters rules of Russian business The Moscow Times (14/5/10)
Russians are spending twice as much on bribes Prime Time Russia (13/5/10)
Data Source
Corruption Perceptions Index 2009 Transparency International 2009
Questions
- Why is Russia in need of significant foreign investment? How would it help the economy?
- Can we classify IKEA (or any other company that uses bribery) as a risk-lover? Explain your answer.
- If a foreign firm wants to invest in Russia, which type of expansion do you think would be the easiest and the least open to bribery?
- IKEA began building without the necessary permits, but then ‘the bureaucrats took advantage of the situation’. Was IKEA operating under conditions of risk or uncertainty?
- In the article ‘IKEA masters rules of business’, Lennart Dahlgren said: “If we had waited to receive them all, we would have lost years”. What economic concept is being referred to?
- To what extent is government intervention and international co-operation needed to tackle corruption in Russia?
Whilst a new version of Windows may make the headlines, it’s not Windows that is the main source of profit for Microsoft: it’s Office, with it’s suite of appplications – Word for word processing, Excel for spreadsheets, PowerPoint for presentations, Access for databases, FrontPage for web pages and Outlook for e-mail. But Office is under threat from two sources.
First, despite that fact that Microsoft’s share of the office applications market has remained fairly constant at around 94%, it is facing increased competition from free alternatives, such as Google docs and Google Apps, and OpenOffice from Oracle (see also).
Second, the demands of users are changing. With the growing use of social networking and file sharing, and with a more mobile and dispersed workforce, Microsoft Office needs to adapt to this new environment.
With the launch of Office 2010, these issues are being addressed. The following articles examine what Microsoft has done and whether it is a good business model
Microsoft Office 2010 takes aim at Google Docs BBC News (11/5/10)
Office 2010: banking on Apps Sydney Morning Herald, David Flynn (11/5/10)
Microsoft’s two-pronged strategy for Office 2010 BBC News, Tim Weber (12/5/10)
Revamped Microsoft Office Will Be Free on the Web New York Times, Ashlee Vance (11/5/10)
Microsoft Predicts Fastest-Ever Adoption of New Office Software Bloomberg Businessweek, Dina Bass (12/5/10)
Questions
- Discuss the business logic of giving away products free.
- Discuss the likely success of Microsoft’s response to the changing market conditions for office applications software.
- Explain what is meant by ‘cloud computing’. What opportunities does this provide to Microsoft and what are the threats?
- What is meant by ‘network economies’? How do these benefit Microsoft? How is Sharepoint relevant here?
- Are network economies likely to increase or decrease for Microsoft in the future?
Two of America’s airlines have agreed to merge to form the world’s largest carrier. The deal between United and Continental Airlines is worth £2.1 billion and the management of the two companies hope that the new airline, to be called United Airlines, will bring cost savings of some £800 million per year. Last year, the two companies lost a total of £900 million. It is also hoped to increase revenues by providing more routes and more effective competition against rivals, such as Delta Air Lines.
But just how significant will any economies of scale be and to what extent will they involve job losses? Certainly the merger has been greeted with caution by the Air Line Pilots Association and unions such as the International Association of Machinists and Aerospace Workers. Also, will the larger company be able to compete more effectively to the benefit of consumers, or will the increased market power see a rise in fares?
And this is not the only airline merger. In April, British Airways and Iberia of Spain signed a deal to merge, thereby creating one of the world’s biggest airlines. Other mergers are expected as airlines battle to cope with rising costs and lower passenger numbers in the wake of the global recession. So will such mergers benefit passengers, or will it simply result in less choice and higher fares? The following articles look at the issues
Articles
1st priority for new United-Continental combo: Keep customers, workers happy Chicago Tribune, Julie Johnsson (3/5/10)
Debating future of US Airways Philadelphia Business Today, Linda Loyd (4/5/10)
Arpey points out good, bad of United-Continental deal The Dallas Morning News, Terry Maxon (3/5/10)
US airline merger creates world’s biggest carrier Independent, Nick Clark (4/5/10)
We can’t fix fares, says chief of merging US airlines Telegraph, James Quinn (3/5/10)
United and Continental Airlines to merge BBC News (3/5/10)
British Airways and Iberia sign merger agreement BBC News (8/4/10)
Are mergers good for airlines? BBC News, Edwin Lane (4/5/10)
United boss Glenn Tilton on Continental merger BBC News (3/5/10)
United and Continental bosses’ press conference on merger BBC News (3/5/10)
Data
Aviation Data & Statistics Federal Aviation Administration
TransStats RITA, Bureau of Transportation Statistics
Airline and Airport Statistics European Regions Airline Association
Questions
- What type of merger is the one between United and Continental: horizontal, vertical, conglomerate or a mixture?
- What types of economies of scale can be achieved by a merger of airlines?
- For what reasons may a merger of airlines result in higher revenues?
- To what extent will passengers (a) gain and (b) lose from airline mergers? What determines the size of these gains and losses?
- Is the airline industry an oligopoly? To what extent is there collusion between the various airlines?
- What should be the attitude of regulatory authorities across the world to airline mergers?
