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This report shall outline the various procedures, financial and non-financial implications associated with mergers and acquisitions between two corporate organisations. In order to further encourage a suitable discussion on the merger and acquisition prospects, the selected companies for this report shall be British American Tobacco Plc as well as Reynolds American Plc. In this report, discussion on the bid tactics and bid defences shall also be discussed in brief with the help of rationale, strategies and prospective targets. This report shall additionally emphasise on discussing regulatory concerns involved in mergers and acquisitions, restructuring and divestment as well as Post merger integration plan concerned in the merger and acquisition processes for both the corporate organisations.
The British American Tobacco Plc (BAT) is considered to be a significant player in the retail and fast-moving consumer goods (FMCG) segment, primarily based in the United Kingdom. The primary business concern for BAT is mostly concerned with high quality production of tobacco products and selling them at reasonable prices to the normal public. Foundation of the company can be traced back to the year 1902, in which priority was offered on maximising sales and revenue as well as reducing severe health impacts by producing tobacco products (bat.com, 2022). The current operational headquarters of BAT are situated in London, United Kingdom, while the company is currently being headed by Mr. Jack Bowles. In this report, the British American Tobacco Plc (BAT) shall be considered as the bidding company.
Reynolds American Inc (RA) is also considered to be a significant player in the FMCG segment, mostly based in the United States. In the year 2020, the British American Tobacco Plc acquired the entire stakes of Reynolds American Plc, to further establish a b brand value in the consumer goods industry concerned in both the United Kingdom as well as the United States. The primary objective of RA is to highly value its corporate values and ethos, which comprises harbouring suitable working conditions for employees as well as complying with long run sustainability (reynoldsamerican.com, 2022). The organisation is being currently headed by Mr. Guy Meldrum and in this report, RA shall be considered as the target company.
Bid tactics and bid defences are considered to be a vital part of the merger and acquisition procedure involving both the bidding as well as the target company. The rationale associated with employing bid tactics in a merger and acquisition process can be further categorised as following strategies.
Friendly takeover is considered to be the primary bid tactic, which is usually exercised by the bidding company for taking over and acquiring the target company. As explained and illustrated by Thym (2020), the major characteristics of a friendly takeover usually consist of healthy negotiations between both the bidding as well as the target companies. Hence, the rationale could be further justified by British American Tobacco Plc paying a purchase consideration of $ 49 billion to Reynolds Plc for completing the acquisition process. Simultaneously the mutual obligation and friendly takeover between these two companies had expected to yield high profitability, which could be measured in terms of 8 out of 10 cigarettes sold (theguardian.com, 2017).
The second important aspect of the bid tactics, generally employed by the bidding company, consists of leveraged capitalisation. The leveraged capitalisation can be further considered as a major financial restructuring, where the bidding company modulates their core equity structure in lieu of raising a higher debt security concerning both the companies. The rationale of employing leveraged capitalisation can be further justified by identifying changes in dividend structure for British American Tobacco Plc where a 30% dividend rate is expected due to deleveraging (seekingalpha.com, 2022).
Figure 1: Capital Structure of British American Tobacco Plc
(Source: seekingalpha.com, 2022)
The third aspect of the bid tactics, which are also generally employed by a bidding company, attributes to the implementation of golden parachutes. The implementation of golden parachutes mostly consists of reforming the financial outlook by considering dividend pay-outs to investors of the target company. As expressed by Choi et al. (2020), the implementation of golden parachutes also protects the integrity of the target company as the bidding company has an obligation to compensate the target company during the course of financial uncertainty.
The rationale of bid tactics can be further complemented by employing a suitable discussion on the bid defences. The major rationale, strategies and characteristics of bid defences are further classified as follows.
The first key bid defence strategy that is usually applied by the target company is attributed to the poison pill. The poison pill strategy is generally implemented by the target company to safeguard financial and non-financial interests, which could be hampered owing to forceful acquisition from the bidding company. The application of poison pill can be further measured in quantitative aspects for Reynolds American Plc through identifying the Environmental, Governmental and Social aspects (ESG), which can be rated in a score achieved as 91 out of 100 (reynoldsamerican.com, 2021)
The second bid defence strategy, which is generally employed by the target company can be associated with the formation of a staggered board. As opined by Amihud et al. (2018), the process of staggered board is considered to be a complex one and the rationale associated with the implementation of this process is purely based on emphasising shareholder voting. The additional rationale attached with Reynolds Plc to form a staggered board can be further attributed with safeguarding its financial interests from uncalled hostile perpetrators in the market.
The identification of Prospective Targets can be further classified for identifying the target market zone as well as establishing financial prosperity and product diversification. These can be further categorised for both BAT and RA based on the following classifications
The first important criteria for identification of targets can be attributed to the demographic division. Demographic division mainly consists of age, gender, religion factors which enables BAT and RA to strategically position their target market and earn incremental financial and competitive advantage in the FMCG industry. Karmakar et al. (2021), further explained and opined that strategic emphasis on demographic factors is an important consideration that presents an opportunity to encash market and financial growth. The demographic targeting for BAT and RA can be further quantified by an increasing number of tobacco sales particularly in Europe as well as the United States.
Figure 2: Demographic Targeting
(Source: Statista.com, 2022)
Level of income is the second procedure identified as the prospective targets for both BAT and RA, where special emphasis is being provided to diversify tobacco products based on household income earned by individuals. The major target is generally considered for high income group individuals and strategic implications are being applied by both the companies for satisfying the needs of customers. This can be further identified by generating hjgher revenue from sales in the FMCG market in both UK and USA.
The third important metric for identification of prospective targets can be attributed to determination of market aesthetics by both BAT and RA. As expressed, and explained by Hatan et al. (2021), market aesthetics can be further identified by market size, customer orientation as well as profitability prospects of another industry competitor. The determination of market aesthetics can be further justified for BAT and RA by successfully complying with research and development of FMCG companies and identifying how much profitability can be expected from taking over the other company.
Merger & acquisition is a wide aspect of accounting where rules and laws should be followed by both organizations. After takeover of Reynolds American Plc, sales volume would much higher for British American Tobacco Plc, which would be used as an ethical process of business expansion. Furthermore, ethical practice in merger & acquisition, production facility to distribution process is operating with larger scale. Valuation of the targeting company is important for a merger to provide all information in the government domain. The valuation of the bidding company can be further estimated through financial synergies, which implies higher combined performances of both BAT and RA. In this scenario, the bidding company is considered to be BAT and the valuation of assets and liabilities for the year 2020 is considered to be GBP 137,960 million (bat.com, 2021).
The valuation of the target company is also considered to be an important aspect of the regulatory concerns involved in the merger and acquisition process involving BAT and RA. There are three different types of synergy that have been considered for merger & acquisition. Based on regulatory concern, revenue Synergies of both organisations would be better for future business i.e., both organisations involved with tobacco business where merger would be more effective to target a larger number of customers. In order to understand the valuation of the target company, it is essential to evaluate the total assets and total liabilities for the financial and fiscal year 2020. The numerical valuation of total assets and total liabilities for the year 2020 of RA has been calculated as $ 51,689 billion (rns.com, 2021). Hence, the valuation of the target company is considered to be marginally lower than that of the bidding company BAT owing to the takeover of Reynolds Plc. The reduced valuation of the assets and liabilities of RA can also be attributed to the fruitful application of financial synergies.
Divestment are the major corporate restructuring transactions and and individual companies removing many boundaries to create more values during the acquisition. The contractionary strategies are the major reasons of asset restructuring which is reduces major boundaries during takeover of Reynolds American Plc. In order to, increase the capital allocation techniques of the individual strategies are necessary during restructuring and that can be increase more value during the takeover (Aalbers et al. 2019). The expansion strategies are necessary such as mergers and acquisitions, alliances or joint ventures are necessary to increase more scope during the takeover.
A restructuring plans is the formal arrangement between the company and creditors and sometimes individual company is facing financial difficulties during the same process. The restructuring plans are necessary to identify the strength and weakness of the current organizational structure. In order to design of the new structure is necessary to efficiently communicate with the debt rescheduling process (Estrin et al. 2021). During initiation of restructuring plan arrangement scheme can be rescheduled by the liquidator or administrators. The purpose of restructuring is depending on the “corporate management terms” which is followed by British American Tobacco Plc during takeover of Reynolds American Plc.
Divestment strategies are efficient way when the particular business line does not perform according to the expectations. During the same time liabilities become increased instead of assets. The divesting methods are described the business units and which is necessary to increase profit making ideas of the business. The prevention of monopoly market sometimes facing financial difficulties and business is trying to sell their non-core assets. Sometimes better investment opportunities are involved by the divestment strategies which is efficiently focusing on the primary business process.
Target identification is the actual process of recognize the direct molecular target which is aimed to finding the efficiency level in individual organization. During takeover of the company translations of the small molecular is necessary which is conducted by the experimental process. Target identification is the efficient techniques which is adopted by British American Tobacco Plc during the takeover. However, combination of different types of approaches is necessary which is identifying the mechanisms to ensure the engagement of the target (Toms et al. 2020). Target validation is the first step of during discovering the benefits that helps to develop effective communication strategies in the market.
Identify financing methods are necessary during the investment which is included by the payment terms, cost of capital structure of the investors or lender. There are two important financing methods which are equity financing methods and debt financing methods which are important during the tax deduction consideration methods. The best sources of financing is depends on the venture capital as well as efficient business angles. Financial bootstrapping are involves by the common buyouts and that can be classified the financial methods investment. The important factors are considered by the financing methods which are significantly described the repayment terms during the investment.
In order to establish suitable post-merger integration plans, it is important to identify the cultural resemblance of both the organisations BAT as well as RA. Hence, the company has to follow the strategic partnership in the firm to grow the liquidity as well as sustainability in the firm. Therefore, it can be beneficial for the firm if the company can build an investment plan with the employees. Long term investment funds can give a better return in the upcoming days. As both companies belong to the FMCG sector and are involved in manufacturing and production of tobacco products, the cultural valuation is considered as an integral part of the business process in the markets. The cultural resemblance of both the organisations can be further considered as an important metric owing to geographical division of both the companies. BAT is generally involved in manufacturing and selling of tobacco products in the United Kingdom, while RA is generally involved in the manufacturing and selling of tobacco products in the United States of America. According to Sakalem et al. (2021), Cultural resemblance and importance in the FMCG market and merger process is further considered important owing to various financial and economic opportunities, which could boost financial and operational metrics for both companies.
The effects in operational, functional and managerial fleet size can be further measured owing to the merger and acquisition process occurring due to the post-merger integration plan. Owing to merger of a company, the target company loses partial bhold in all the operational, functional and managerial fleet size, which leads to facilitation of daily operations at reduced rates. Hence, the effects in operational, functional and managerial fleet size due to merger results in reduced workforce, reduction in key functional areas as well as reduction in the bandwidth of managerial size in RA. As opined by Davidson et al. (2018), the bidding company is at a favourable position in terms of managing the operational, functional and managerial fleet size and can smoothly facilitate quick operational work. The growth in operational structure can be further identified by an increase of 4.03% in employees from 2019 to 2020.
Figure 3: Growth in Employees of British American Tobacco Plc
(Source: macrotrends.net, 2022)
From the upward project it has been recommended that the company British American Tobacco Plc has to generate more profit in the business to compete with the other competitors. On which the merger and the acquisition cannot create a better revenue structure in the firm so the company has to follow more strategy in the business. The company has to set an aim and objective in their firm to get better marginal profit in the firm and have to focus on the repeated customers. On which the company can track the records of customers, and the company has to offer more discounts on the products, by which the consumer can attract to the products. On the other hand, the company has to follow the market strategy of customer retention on which the firm is able to check the track record of the firm. Beside, British American Tobacco Plc built a sales funnel in the business to grow the sales structure in the firm. On the other hand, the company needs to use some terrific ideas in business to generate the flow of the products in business such as the company can participate in various marketing events to promote their business in a long structure. Hence, the company has to follow the strategic partnership in the firm to grow the liquidity as well as sustainability in the firm. Therefore, it can be beneficial for the firm if the company can build an investment plan with the employees. Long term investment funds can give a better return in the upcoming days. On which long term investment in the firm can create a huge profitability structure in the business. It grows the profitability structure in the firm, as beside the firm will get benefit with the help of the multiple investment funds in their business.
It has been concluded that from the upward research the project is based on the merger and acquisition of British American Tobacco Plc as well as Reynolds American Plc. On the other hand, British American Tobacco Plc can be a significant player in the retail industry and fast-moving consumer goods segment. The company British American Tobacco Plc has followed some basic strategies to run the business in huge profit, such as Friendly Takeover, Leveraged Capitalisation, Golden Parachutes, Staggered Board, Poison Pill which indicate the company will run the business in a profitability structure. On the other hand, the additional rationale attached with the Reynolds Plc from board which creates a further attribute with the safe guard in the financial interests from the not called hostile in the huge market range. In order to evaluate the cultural valuation of the company, Reynolds Plc considers it as an integral part of the processing of the business in the economical market range. On another hand, the cultural valuation of the company from both of the organisations can be further considered as the most vital metric in the geographical division of these two companies.
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