Introduction
Boots-Alliance Unichem merger deal had been reported as early as October 2005 with the purpose of reviving the sales drought Boots was experiencing for recent years (BBC News 2005). The merger was also intended to minimize pre-tax cost savings of about £100M primarily due to downsizing (e.g. employees). As early as the £7B deal initiated by Boots was leaked into the market, shares of both companies strongly rose. Boots shares gained 4% or 24.5 pence to close at 633 pence while Alliance Unichem gained 1% or 8.5 pence to close at 875 pence. Boots and Alliance Unichem operate in pharmaceutical and health-related retailing industry but the former is only UK-based while the latter has a more global approach with stores in at least five countries including UK (BBC News 2005).
Pre-Merger
As shown in table 1, the share price of boots continued to rise from the merger deal announcement up just before the actual merger date which happened in 31 July 2006. It is possible for share prices to act this way because, as part of total return to shareholders, share prices reflect the future expectations of the majority of the holders and also the market (IIMC 2006). And the merger of two giant companies is a near creation of an industry monopoly which can provide infinite advantages for its owners. For example, having an expectation of monopoly makes the merged company price-maker in the product market due to substantial economies of scale being achieved. As a result, potential total return to shareholders, that is both capital gains from increase in share price and dividend pay-outs, will inevitably increase due to the fact that profits will surely be above industry standards.
However, looking at the performance of the original Boots Group before merger, year-ended 2006 profit before tax of £348.9M is relatively lower to year-end 2005 profit before tax of £427.6M (Wikipedia 2006). In the pre-merger deal, dividend pay-outs have little concern because Boots was implementing constant dividend growth despite underperformance (Alliance Boots 2005). So, the question is that why its share price continued to soar? The discussion above cleared the issue of why the merger resulted in positive outlook from investors. The rationale is that, even if Boots is underperforming in 2006 relative to its performance in 2005, the value of shares reflects not this situation but forward and beyond it (e.g. perception of monopoly stance of the merged firm).
Table 1: Share Price Chart of Boots Group Plc in the Pre-Merger (LSE 2006)
Post-Merger
Table 2 shows that the merged-firm’s share price continue to appreciate from August 1, 2006 to December 8, 2006 and it is unlikely that it will go below the 777 pence closing in the last day of the per-merger deal. Perhaps, this is the indication of the relentless positive expectations now that the merger has been completed. Also, in its interim results ended 30 September 2006, the merged firm had announced how shareholder expectations are met (Alliance Boots 2006). Revenues, trading and underlying profit, earnings and earnings per share are all up to comparative figures. With this, it is eminent that the intention of Boots had been somehow successful as far as interim result is concerned.
Table 2: Share Price of Alliance Boots as a New Firm (Alliance Boots 2006)
While issues concerning Boots are settled, issues concerning shareholders are yet to be apparent. According to post-merger documents, Alliance Unichem became a wholly owned subsidiary of Boots (Alliance Boots 2006). As a result, the shares of Alliance Unichem were cancelled and holders of such shares will be compensated by 1.332 of New Boots Share (NBS). Ownership of the merged firm will be held 49.8% for Alliance Unichem shareholders and 50.2% for Boots shareholders. In this order, the New Boots Shares will be issued as fully paid either to Boots or Unichem shareholders and will be entitled for dividends and other distributions on or after the post-merger. On the other hand, Unichem shareholders which have prior interest with regards to their holding (e.g. dividends before the post-merger) will also be paid to allow adjustments as the New Boots Shares will be dispensed (Alliance Boots 2006).
To illustrate the implications of this settlement on share value and dividend payouts, there is a need to outline impacts of the merger regarding these components (Outline 1999). For Alliance Unichem shareholders, their share exchange ratio is 1:1.332 which means that if a Unichem shareholder has 100 shares, he will receive 133 NBS. Days before the actual merger date, Unichem share price was 1,068 pence or £10.68. However, with the current NBS price of £7.915, which means that there is a decrease in share price at £2.765 relative to the historic data of pre-merger. Gains will be £261.195 (33 shares x £7.915) and losses will be £276.50 (100 x £2.765) which gives the Unichem shareholder a net loss of £15.305 (£261.195 – £276.50) per 100 shareholdings.
In terms of dividend payments, Unichem shareholders were entitled in the October 2006 dividend of 13.25 pence per share (Alliance Boots 2006). This is a near figure compared to the last issuance of dividends of the firm for 2005 performance amounting to 13.6 pence per share before March 2006 announced closure. In effect, Unichem shareholders are better-off than Boots shareholders because even if their company had closed they have received dividends. In the contrary, the supposedly constant dividend growth situated by Boots did not apply and Boots shareholders will not receive dividends until the end of March 2007. This indicates that Unichem shareholders are compensated in their capital gain loss which is apparent in the computation above. In addition, this dividend bias is also evidence that Unichem is the good performing company and Boots continued to be in underperforming stance.
Holders of Boots shares will have a 1:1 exchange with NBS. This means that one Boots certificate will be replaced and handed with also one NBS. As observed, shareholdings remain the same as Boots retain the ownership of the merged-company. Further, the share price of Boots on the last day of the pre-merger deal was £7.77 which means that it is coinciding with the NBS current share price of £7.915. In effect, Boots shareholders will have a gain of £0.145 per share. This is what the merger brought to Boots shareholders which are the increase in capital gains due to the good performance of Unichem. Also, the near figures indicated how the acquirer retained not only the ownership but the overall impression of the market. Dividend payments will not be affected because the level of shares being held by Boots shareholders remains the same. In addition, it is announced that there will be no interim dividend payments until March 2007.
Conclusions and Future Implications
Merger-related performance changes display high degree of variability (Pilloff 1996 pp.294+) especially when share value and dividend payments will be the basis of performance. This is because performance is measured not on the actual firm operations rather on expectations of the merger. However, if sales of Boots will be viewed (see table 3) it will be noticed that earning performance did not change much for the better. Looking on before tax figure is more appropriate because a firm can implement tax relief. In this view, there is a need to use other performance measures such as market value added which is a better indicator of value creation (IIMC 2006).
Table 3: Boots Performance before Actual Merger (Wikipedia 2006)
Year ended
Revenue (£m)
Profit before tax (£m)
Net profit (£m)
31 March 2006 *
5,027.4
348.9
303.4
31 March 2005
5,469.1
427.6
302.4
31 March 2004
5,325.0
579.9
411.5
31 March 2003
5,325.2
494.9
301.6
31 March 2002
5,328.3
595.8
404.3
31 March 2001
5,220.9
492.2
333.2
31 March 2000
5,187.0
561.7
399.0
In the contrary, there are some advantages of having a continued rise in share prices. One is that it can lower the cost of borrowing as well issuance of new equities while maintaining the confidence of customers and employees (Coyne & Witter 2002 pp. 29+). In addition, it is apparent that the intrinsic value of shares cannot be calculated by net present value (NPV) of the firm unless in the long-term value of the shares. As a result, management of a company cannot decide new strategies for the firm and its prospect becomes stagnant. In the short run, however, the management can rely on market expectations particularly during merger decision-making. With Boots having this in mind, it instantly lowered the cost of its capital by having an increase in its share price. More importantly, it is able to overturn falling performance due to synergy with Unichem in a free-flowing and less problematic decision analysis which saved its operations from further decline.
In to the future of Alliance Boots, share prices will continue to rise as long as the synergy and monopolistic advantages are achieved. More consistently, the merged firm should continuously exceed market expectations (IIMC 2006) because it is the only way that it can sustain rising share prices and having low cost of capital. Dividend payouts will also rely on this capability. On the other hand, if the constant dividend growth model of Boots will be implemented, it can ease the merged firm effort to exceed market expectations. This is because shareholders are assured of dividends even in a loosing year which is of course unlikely for a near-to-monopoly entity. In this case, the position of shareholders in the newly merged firm will be profitable in the short, medium and long-run basis.
Recommendations
Mergers and acquisitions seldom results to added value expected can be suspected from over expectation of the acquirer. News Corporation expected to finally have its legacy after Direct TV acquisition (Hill et al 2004). However, with the post-merger outcome wherein the acquirer only have at most 30% stake in the latter (Direct TV website), the added value may not be suffice to call the acquisition successful. As a matter of fact, there was no acquisition but merely portfolio investment. In effect, there was a lack of accurate evaluation of the target response and necessary adjustments in the earlier pronouncement of acquisition goals to react to it. Thus, expected value is overvalued and is likely to be assessed as failure unless there emerge untoward developments like stock market bubble in the post-merger/ acquisition. Freezing this hypothesis, the primary factor would also be found within human specific characteristics since it is only the part of an organization that derives motivation for optimal performance.
There are different reasons for merger and acquisitions and examples can illustrate these. HP acquired Compaq to not overly rely on its well-known businesses of printers and computer accessories but to intensely compete on the PC industry; consequently, the merged firm overtook IBM in terms of market and revenues (Hitt et al pp. 216 & 221). On the other hand, Merck & Company was trailed by its competitors replacing the former in the number 1 spot in pharmaceutical industry as it resisted acquiring a successful firm and minimizing the cost and time spent on internal drug research and development (p. 220). Lastly, the Australian-based News Corporation, the owner of Twentieth Century Fox and other international media firms, acknowledged its offered acquisition to satellite pay television leader in the US market, Direct TV, would make its ultimate objective of being the world’s largest media company (Hill et al 2004).
Such citations have different causes and implications. HP wanted to increase market power and reshape its competitive scope, Merck & Company is bounded to significantly spend and wait for new-product development, and News Corporation aspired to overcome entry barriers, reduce risk of developing new products and increase diversification (Hitt et al pp. 216-221). On the other extreme, not all acquisitions are successful particularly in delivering the expected added value for the merged firm (pp. 222-228). The acquirer may have conducted inadequate evaluation of target leading to too much diversification or large extraordinary debt. The merged firm also may have integration difficulties that result to inability to achieve synergy, being large without substance and managers overly focused in acquisition disregarding managerial functions for sustainable growth.
In 1989, HP acquired Apollo workstation business. HP had succeeded to integrate the compensation, engineering and marketing aspects of the merged firm (Legare 1998). However, the last aspect they have intricacy to deal with is the different work philosophies of each firm employee. HP environment foster cooperation while Apollo allows competition between teams. Another, the former is customer-focused while the latter is technology-focused. This example is basically a submission that intangible resources are unique to a firm and is difficult to imitate unlike tangible assets. As a result, the pre-merger goals of HP and Apollo of increased market power and generate cash flow respectively is not easily attained. In this case, the human-side dictated the major post-acquisition problem. And since organizational culture is the social energy that drives or fails to drive a (merged) firm towards its goal (Hitt et al p. 28), resolving the behavioral conflict was also the major focus of the new firm.
The expectation not only on added value per se but also considering the period in which they can be obtained and integrated by people is a function of three merger effects: namely, looking over one’s shoulder, win-loss game and feeling of isolation (Deal & Kennedy 2000 p. 121). They are demoralizing effect of post-merger downsizing, inconvenience and adaptation of/to the new firm. Ultimately, as what happened in HP-Apollo case, the integration of physical, financial and technological resources were completed faster than organizational resources and culture. This is because culture grows over time. And since humans are the foundation of capabilities (Hitt et al p. 6), core competencies cannot be simply obtained from resources. They are also subjected to behavioral adjustments of integration.
In a different case, there are acquisitions that did not submerge the culture of the acquired into the acquirer. AT&T let McCraw Communications preserve its entrepreneurial, philanthropic and casual culture (Deal & Kennedy p. 127). Similarly, IBM did the same when it acquired Lotus. The former let the latter to price their unit products and even mimic some of Lotus work style like attending meeting in non-formal clothes. The preservation of cultural identities is crucial particularly when the acquired firm has business that is new or unfamiliar with the acquirer. This idea gives the acquirer bigger bargaining power to retain its philosophies and business strategies. Otherwise, the advantages of the acquired firm skills and knowledge cannot be exploited by the acquirer.
Bibliography
Journals
Hitt, M, Hoskisson, R & Ireland 2003, Strategic Management: Competitiveness and Globalization, 5th Edition, South Western; Thomson Learning, Singapore.
Coyne, K & Witter, J 2002, “What Makes Your Stock Price Go Up and Down: Identifying and Understanding Important Individual Investors Can Help Corporate Executives Predict the Direction of Share Prices”, The McKinsey Quarterly, pp. 29+.
Pilloff, S 1996, “Performance Changes and Shareholder Wealth Creation Associated with Mergers of Publicly Traded Banking Institutions”, Journal of Money, Credit & Banking, vol. 28, no. 3, pp. 294+.
Electronic Sources
BBC 2005, viewed January 19 2008, <news.bbc.co.uk>
Life Style Extra (LSE) 2006, viewed January 19 2008, <www.lse.co.uk>
Outline 1999, viewed January 19 2008, <www.telus.com>
IIMC 2006, viewed January 19 2008, <www.iimcal.ac.in>
Alliance Boots 2006, viewed January 19 2008, <www.ir.allianceboots.com>
Wikipedia 2006, viewed January 19 2008, <www.wikipedia.org>
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