Inaccordance with Dhar(2013), mergers and acquisitions are an integral part of thecontemporary corporate finance world. Acquisition and mergers involvethe act of combining, selling and purchasing of organizations to formlarger and stronger entities from the former constituentorganizations or companies. This has been a strategy that has beenthere since the early days of globalization, but this practice gainedprominences in the 19thcentury. Mergers have been considered by economists as essentialactivities of corporate expansion and restructuring that contributebillions of dollars to the global economy. As at June 2015, thenumber of mergers and acquisitions Asia from the period between March2014 and June 2015 amounted to approximately ninety-six point onebillion US dollars (Statista2016).In the United States, there were over twelve thousand eight hundredand eighteen mergers and acquisitions that were valued close to onebillion dollars in the year 2016. These statics show how muchorganizations have focused and opted for Mergers as a way ofexpanding their business scope. From a legal view, a merger can bedefined as the act of two or more companies or organizationscombining. Nonetheless one of the organizations ceases to existlegally, and the combined companies or organization continues toexist under the name of the surviving firm. In other instances, thecombining companies can also have a new name for the combined companydepending on the agreement of the merger. On the other hand,acquisition refers to the act of one company entirely purchasing theother company where the employees and infrastructure of the companyare acquired by the purchasing company. When the acquisition happens,the acquired company goes to the disposal of the purchasing companytherefore whether the names or structures change is decided by thepurchasing company. Mergers and acquisitions are undertaken byorganizations to achieve given financial or strategic financialobjectives dependent on the company goals and abilities. While thatis true, not all mergers happen to be successful. Other mergers donot produce any economic benefits to the regarding the shareholdervalue. This paper will discuss the acquisition of Imperial ChemicalsIndustries plc. (ICI) by AkzoNobel N.V
AkzoNobelN.V is a company of Dutch origin that has grown over the past decadeto a multinational organization. The company is in the Chemicalcompanies industry and manufactures decorative paintings, Specialtychemicals and performance coatings. The headquarters of AkzoNobel arelocated in Amsterdam, and the company’s presence spurs to overeighty countries. As off 2016, the company had employed approximatelyforty-five thousand people with the sales hitting an all-time of overfourteen billion in the year two thousand and five.
ImperialChemical Industries (ICI) was a company of British origin that dealtwith chemicals. According to research, ICI was the largestmanufacturer of chemicals in the British market. ICI was formed whenfour British chemical companies merged in the year 1926. The companywas headquartered in Millbank in London. In the 70’s, ICI hadexpanded into some parts of Europe and parts of America. Notably, thecompany dealt with fragrances, polymers, flavorings and electronicmaterials. The organization continued to grow even on the 80’sgaining financial muscle with time Dhar (2013). Nonetheless, in theyear 1993, the reducing customer base of the organization’sproducts, in addition to competition from other companies, ICIstarted experiencing diminished returns, and in 2007, AkzoNobel N.Vannounced that it intended to acquire ICI. The acquisition took placeJanuary 2, 2008 (Dhar, 2013).
Inthe year 2007, AkzoNobel sold off its pharmaceutical businessOrganon. It, therefore, ceased to produce medicines as part of itsbusiness. That was done to help the company to focus on its coatingssector which at that time were considered to be the core business ofthe company. According to the chief executive officer of the companythen Hans Wijers, ICI was considered an attractive target for severalreasons. One of the reasons was the increased share value of ICI. Inthe period between 1950- 2000 ICI had experienced an upwardtrajectory in the share value of the organization. Anotherconsideration was the return on investment ratio. Since the companywas already functional, it was a brand that already had loyalconsumers. Therefore, by investing in such, the investors would besure that their investment would not only bring profits but were alsosure the duration of recouping the capital would have been shortercompared to investing in a new company. Acquisition of ICI wouldalso reduce completion for the paints and lead to the formation ofone the largest coating and specialty Chemical Company in the worldas at that time. That was because, by the date of acquisition, Akzowas one the largest company dealing with coatings. ICI, on the otherhand, was performing exquisitely in the decorative market industry.Apart from the financial benefits, Akzo also gained strategicbenefits by acquiring ICI (Dhar, 2013).
Theacquisition of ICI raised antitrust in the paint industry. The newcompany was a viewed as a greater competition compared to before whenthe organizations existed differently. That could have beenattributed to the fact that a combination of both companies meantmore financial more and a stronger strategic advantage on their side.As at the time of acquisition, it was indubitable that it was thestrongest company in all aspects compared to the competitors on aglobal platform.
IfI were thedecisionmajor of the acquirer, I would convince the shared holders that theproposed acquisition was a good deal in various ways. One of thereasons the deal was good was the fact that the shares of ICI wasstill high. Unlike for a new company where the people have to beconvinced to purchase the shares, ICI had already been to the marketso it was a tried and tested product the shareholders would have beeninvesting in. Also, the acquisition of ICI would lead to increasedshare value of AkzoNobel. That is because many financial analystswould have advised their clients to purchase the shares of AkzoNobelas it would be one of the biggest paint companies in the world.Therefore, the sales would increase with the acquisition thus thedividends. The demand for the shares of AkzoNobel would increase theprice of the shares and the shareholder’s value by extension.
Also,the tangible benefits that came with the acquisition would ease thework needed to recoup the investor’s money. That is because ICI hadphysical presence in several countries already, that means that iswas producing paint and other chemicals already. Therefore, byacquiring ICI the company would continue to make the paint productswithout the necessary need of purchasing or incurring the cost ofbuilding premises and buying of machinery. ICI organizational culturewas also close to AkzoNobel’sorganization culture. Therefore, the two organizations would have aneffective merger with little or no frictions.
Atthetimeof the acquisition, the company had estimated the synergies to be at€280mn.From a financial perspective, the deal was viewed and expected toincrease the revenue of the company as well as the shareholder valuethrough increased dividends and increased share price forshareholders who would have wished to sell their shares after theacquisition. Also, the rate of return was expected to increase andsurpass the WACC that was at 8 % as at the time of acquisition. Akzoproceeded to pay 670p for the individual shares of ICI. The deal wasfinalized later on Jan 2 in 2008 with the investors having to partwith over eight billion Euros. From the financial analysis of thecompany two years after the acquisition, the company managed to havesome sixty percent larger turnover than its nearest competitor. Theexecutive and integration risk was mitigated by the policies thatwere adopted by Akzo in the acquisition. That explains why thesynergy target of 2009 was already ninety percent achieved by 2008.The share price also increased by over thirty percent thus the sharevalue.
Mergersand acquisitions are an integral part of the contemporary corporatefinance world. Acquisition and mergers involve the act of combining,selling and purchasing of organizations to form larger and strongerentities from the former constituent organizations or companies.Markedly, as at June 2015, the number of mergers and acquisitionsAsia from the period between March 2014 and June 2015 amounted toapproximately ninety six point one billion US dollars. AkzoNobelN.V is a company of Dutch origin that has grown over the past decadeto a multinational organization. The company is in the Chemicalcompanies industry and manufactures decorative paintings, Specialtychemicals and performance coatings. On the other hand, ImperialChemical Industries (ICI) was a company of British origin that dealtwith chemicals as research posits ICI was the largest manufacture ofchemicals in the British market. According to the chief executiveofficer of the company then Hans Wijers, ICI was consideredattractive targets for several reasons. One of the reasons was theincreased share value of ICI. In the period between 1950- 2000 ICIhad experienced an upward trajectory in the share value of theorganization. Secondly, the return on investment ratio made financialsense. Since the company was already functional, it was a brand thatalready had loyal consumers. Therefore, by investing in such, theinvestors would be sure that their investment would not only bringprofits but were also sure the duration of recouping the capitalwould have been shorter compared to investing in a new company. In myview, the acquisition was successful and was worthwhile to theinvestors.
Dhar,S. (2013, September 16). ‘Two case studies in mergers andacquisitions: Why some succeed while others fail?’ RetrievedDecember 20, 2016, from Dhar Dhar,http://www.dhardhar.com/2013/09/two-case-studies-in-mergers-and-acquisitions-why-some-succeed-while-others-fail
Statista(2016). Number of M&A deals in the U.S. By deal value 2016 |statistic. Retrieved December 20, 2016, fromhttps://www.statista.com/statistics/245977/number-of-munda-deals-in-the-united-states/