Blog 6- Are M&A’s the Best Way to spend your Pocket Money?

Big companies can find themselves with large amounts of cash sat on their balance sheets. Especially post- financial crisis, when companies were keeping as much money as possible on their balance sheets as a safety net in the uncertain times. But this money cannot stay sat there forever, it needs to go somewhere, so where is the best place to put this excess cash? Are mergers and acquisitions in the interest of the shareholder and do they maximise/ generate shareholder wealth?

One person that doesn’t think M&A’s are in the best interest of his company is Warren Buffett. He prefers to plough Berkshire Hathaway’s cash back into its own shares, rather than ‘over-priced M&A’s’. Berkshire Hathaway rarely participates in M&A’s, its last one being in 2016, as Warren Buffett thinks that attractive deals are hard to come by. I can see that this must be working for the company, as putting the money back into their own shares is doing well; they have added billions to their equity positions in banks and other financial companies.

Studies have shown that after an M&A (over the next 2-5 years) shareholder wealth is not increased. The acquirer’s shareholders wealth is usually reduced following an acquisition, showing an obvious reason why Warren Buffett is not too keen on participating in such activity. I agree with the reasons he chooses not partake in many M&A’s and waits for the right time and right deal, while reinvesting his spare cash back into his own business. If a deal is not going to generate shareholder wealth it is likely to not be worth doing.

Some companies do agree with M&A’s, for this companies that do choose to acquire other companies, there can be some problems. A big problem for an acquirer are regulatory bodies. Regulatory bodies are essentially there to make sure that nothing unfair is happening. If one big company is acquiring another big company, this could take over too much of the market share; this can make it unfair for competitors, suppliers and consumers. Regulatory bodies have the power to stop an M&A happening if they think people are not being treated equally, if there is evidence of insider dealing, managers are not acting in the best interest of the shareholders and various other things. The main thing regulators do is a public reprimand, which is usually more than enough to stop the company going through with the M&A.

One M&A that is going on at the moment and is under speculation from regulators is Sainsbury’s acquisition of Asda. If the acquisition were to go head the supermarket would become a new UK market leader, ahead of Tesco, the problem is with them being the biggest UK supermarket retailer they will surely have a large amount of power over suppliers and in turn prices, affecting the consumers. I think this acquisition will turn into an unfair advantage for the supermarket: with a very large piece of the market share they will have a lot more negotiating power with suppliers and, with suppliers not having as many competitors to turn to, they might have to succumb to these demands and meet the prices they are requesting. Furthermore, if Sainsbury’s decide to raise prices at all, other competitors may do the same, if they see that they can. This could lead to a rise in all round prices that will be a nightmare for customers.

The Competitions and Markets Authority (CMA) is currently reviewing the Sainsbury’s/ Asda case to determine whether they think this will be a fair deal. From discussing this case in the lecture, my personal thoughts would be that the CMA turn down this deal; it will create a competitive advantage that is too unfair. On the other hand, for Sainsbury’s, if this deal is approved, this would be great for them. I think the acquisition would generate wealth for J Sainsbury and the shareholders- I think this would be a good way to spend Sainsbury’s pocket money.

An M&A can either be friendly or hostile: friendly being that both parties have a mutual agreement and that there is a share of power between the two companies; hostile being that the target company is not happy about being acquired. A tender offer is usually involved in a hostile takeover, this is an offer made directly to the shareholders, bypassing the management of the target company. This can mean the acquirer can obtain enough shares of the company to attain a controlling interest. Obviously a friendly takeover is the ideal situation, but this is not always possible. An example of this is the biggest UK hostile bid in a decade- Melrose’s takeover of GKN.

Melrose only managed their takeover with the support of 52.4% of GKN investors, this is only just above the 50% +1 share threshold that they needed. The takeover battle went on for 80 days, with some of the company’s shareholders waiting right up until the last minute to accept Melrose’s bid. Was this acquisition a good use of Melrose’s cash? In the first half after the GKN takeover, Melrose swung to a loss, however, they did not think this was anything to do with their new acquisition. The shares were up more than 5% at one point. It does seem that Melrose made the right decision in terms of their shareholders: they declared a dividend of 1.55p a share, this was an 11% increase on last year’s a share price, an advantage for the shareholders of Melrose.

On reflection, I think it is hard to form a hard and fast opinion to answer my own question, as to if M&A’s are the best use of spare cash. It definitely depends on the situation. I feel my opinion is quite similar to that of Warren Buffet; to keep putting money back into your own business- or to invest in projects- rather than investing in high risk M&A’s and rather, waiting for the right M&A at the right time to spend money on.