MERGERS AND TAKEOVERS: RYANAIR TAKEOVER OF BUZZ AIRWAYS

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1). Motives for mergers/takeovers and the form of takeover of Buzz

Nearly all organisations, at one time or another, have the business objective to grow. The aspirations of growth are fuelled by a plethora of reasons, and although there are a number of motives, the business will value some more highly than others, but will ultimately be affected by all of them.

Recently, a takeover has occurred at Ryanair, with the acquisition of their rival airline Buzz. For Ryanair, this growth will spell an increase in productive capacity, more capital/assets, will allow production to increase, and enables the firm to achieve it's long-term strategic objectives.

(http//news.bbc.co.uk/1/hi/business/7147.stm).

Ryanair's motives and desires of growth would've changed significantly since last year as their largest other competitor 'Easyjet', bought out BA's sister company 'Go!' intensifying the budget airline market competition. (http//travel.guardian.co.uk/news/story/0,7445,888648,00.html)

I have outlined some of the main motives for growth at Ryanair below

· Market Share This has become significantly more important over the last year since the takeover of 'Go!' by Easyjet'. The purchase of 'Buzz' will mean gaining a considerable amount of the market and will leave the budget airline industry with two major competitors, both of similar sizes.

· Elimination of Competition By purchasing a rival you are effectively 'removing' a competitor from the market, which means customers will have less choice of airlines to choose from, this is basically a concept of increasing the market share.

· Economies of Scale By increasing in size, businesses experience something know as 'economies of scale', which are reductions in the average costs of production. This enables a producer to offer their product at more competitive prices a very important competitor advantage in the cut-throat business of economy flights.

(Understanding business, A Norman et al, 1, p1-14)

Chief executive of Ryanair, Michael O' Leary has always favoured organic growth, over expansion by acquisition or merger, but described the takeover as "a bargain that his company couldn't pass up" he continues, This opportunity, at this nominal cost, is the type of offer that we could not refuse.

(CDocuments and SettingsstaplesDesktopRyan air stuff)

Ryanair was growing strongly by rolling out their lowest fare services all over Europe, so the last thing they needed was the distraction of an acquisition, however, the financial cost was small (£15m, although Buzz would have more than £11m of cash on completion, so the net cost of the deal would be around £.5m). Additionally, because Buzz is based at Ryanair's main UK base, the diversification of time management was minimal.

(http//www.businessweekly.co.uk/news/view_article.asp?article_id=757)

Mergers are classified in four different ways (see appendix a). The takeover of Buzz is thought of as 'horizontal integration'. This is the term given when a firm making the same product is bought. This type of acquisition has several benefits

· Eliminates competition.

· Spare capacity/unwanted resources can be discarded.

· Control greater market share.

· Benefit from economies of scale.

· Generates cash flow.

However this type of merger does have drawbacks for the company, mainly in the form of redundancies, but economically, it is beneficial for the company.

(Understanding business, A Norman et al, 1, p14-15).

). How the merger may have an effect on the relevant stakeholders at Ryanair

Businesses are answerable to six different types of stakeholders

· Investors (shareholders, banks)

· Consumers

· Employees (management/staff)

· Suppliers

· Local and Wider Community

· Other Interest Groups (media, politicians, pressure groups, etc).

All of the above groups have an interest (stake) in the success of the business, although their interests will inevitably conflict; for example there is often a big difference between the goals of the management and the interests of a pressure group.

Investors

When a merger/takeover is suggested, investors are usually the first notified as they are often required to provide additional financial backing to support the acquisition (this however is not the case with the Ryanair-Buzz takeover as Ryanair claim to be funding the purchase with its "own substantial cash reserves"). Investors must make the decision whether or not to provide the finance. They are effectively the ones who can 'make or break' the deal.

Consumers

I've previously mentioned that if the market is dominated by few, but large firms, then consumers have less buying choices. This can bring lots of drawbacks to customers. Most commonly prices rise; this could be due to two reasons; firstly because the company has to cover the costs of its recent purchase, and secondly because the business has more market control and can charge more as consumers will have no choice but to purchase from their company. Likewise, customers can also be treated worse by the organisation, knowingly, as there are no rivals for them to turn to.

However, occasionally, prices are cut due to economies of scale having a dramatic effect on operating costs, although this profit-rise usually finds its ways to the investors' pocket rather than passed on, in the form of price cuts to the consumer. The fact that Buzz operates from the same airport as Ryanair (Stansted), should mean that economies of scale should not be hard to achieve. Coupled with the fact that competition will be intensified between Ryanair and Easyjet should mean that there is likely to be no let-up in price-cutting tactics from either firm.

Ryanair has also announced that some of Buzz's more unpopular routes will be dropped, and more recently has chose to opt out of operating from Bournemouth airport, having a negative impact on it's customers.

Employees

In order to return Buzz to profitability, Ryanair will be cutting less popular routes; this will inevitably result in redundancies amongst Buzz's staff.

Management will also feel increased pressure to make the takeover a success as they are answerable to the shareholders, who can vote them out if they feel that they are not performing as well as they should be.

Suppliers

Suppliers can often benefit, as they'll be gaining more orders from the organisation However, this makes them more vulnerable because if the company decides to switch suppliers then the supplier could lose a big source of their income.

Local and Wider Community

There'll be an impact on the economic, environmental and socio-cultural aspects of the local community. Usually the advantages of the economic impact have to be balanced with the disadvantages of environmental/socio-cultural aspects. For example, the takeover of Buzz may improve many people's incomes and could create more jobs in the future, but will create drawbacks such as increased air pollution etc.

Other Interest Groups

Politicians oversee big takeovers like this to stop companies abusing their power and infringing the competition policy. If price-fixing or other restrictive trade practice is found then the organisation is likely to be eligible for investigation by the Monopolies and Mergers Commission (MMC).

Environmental pressure groups often campaign if they feel that the environment is being unnecessarily threatened by business practices, and can often bring bad publicity in the press, painting a bad image of the organisation.

(GNVQ Advanced Business, R. Lewis and R. Trevitt, 15, p 65-66)

). The Potential economies of scale that Ryanair will now gain

Ryanair will benefit from many internal economies of scale with its takeover of Buzz; I will briefly describe what they are

Purchasing economies

This is the most commonly thought of economy of scale; the expansion will result in having increased variable costs i.e. fuel, so Ryanair will be able to buy each unit of fuel cheaper than they could before, saving them money. For example the list price of a Boeing 77-800 is $60m, but by ordering in quantity, Ryanair have recently been able to purchase the planes at under $40m per aircraft. (http//www.businessweek.com/magazine/content/0_06/b761.htm)

Managerial economies

Increased opportunities will be made available to include corporate employees such as lawyers, accountants and marketing staff. This will mean senior management will be able to delegate these specialist tasks to appropriate employees and concentrate on more important tasks.

Financial economies

When large firms gain a good reputation with investors, they find it easier to raise capital for expansion, and if like Ryanair, the company is a plc, they can use the stock market to raise finance. Additionally, large firms can gain a competitive advantage by using their size to negotiate more favourable interest rates as lenders consider these businesses less risky than smaller organisations.

(Understanding Business, A Norman et al, 1, p 10)

As a business increases in size, its average costs tend to fall because it becomes more efficient. The economies of scale I've mentioned are some of the factors that decrease business costs. When economies of scale operate the firm to be working at its most economically, the business is said to be operating at optimum efficiency.

However, there is a limit on size. If an organisation goes beyond the most efficient point, the average costs could rise due to diseconomies of scale. For example this can happen in the following situations

· Machinery/labour being overworked.

· Administrative complexity may create a situation where decision making takes weeks.

· Raw materials may become expensive.

Therefore, it is important that a business stays at its optimum efficiency by monitoring its average total cost (ATC) curve. Please see appendix b.

(GNVQ Advanced Business, Roger Lewis and Roger Trevitt, 15, p404-406)

4). The Potential drawbacks that now may affect Ryanair

Although growth is usually perceived as a sign that the business is operating successfully, it does pose a number of drawbacks, in particular when a company grows by external methods rather than autonomously.

When businesses merge or a takeover occurs, often communication strands breakdown as the different organisations will have a different set of practices, and this could lead to the acquisition to have initial teething problems with communication between the different company's staff, this problem however, should be rectified over time, or alternatively by sending all employees on an appropriate course. The cost over benefit factor must be considered here by the management to decide how dependant the organisation is proficient communication links.

The management of Ryanair would've found that when the takeover occurred, the control of the business would've got more demanding due to increased number of staff, aircraft, and business operations etc. This has a mixed impact, as some staff will find they have increased responsibility (for example the head of human resources at Ryanair will have more staff to oversee, while the head of human resources at Buzz may now have less responsibility, which can lead to low morale in the workplace, or worse to redundancy.

It has been commented that Ryanair could be courting trouble by expanding too fast. However, Mr OLeary brushed aside those concerns. He said "Ryanair was continuing to limit any risks associated with capacity growth by spreading it across its network, launching new bases, new routes from existing bases, and increasing frequency on existing routes." He adds, "We are aware that some commentators fear that we are biting off more than we can chew. We are conscious of this but one cannot always control the timing of opportunities that present themselves"

(http//travel.guardian.co.uk/news/story/0,7445,888648,00.html).

When organisations expand from a small size, they often lose their 'personality', which may have brought them their initial customers; these customers may now seek alternative businesses that can provide a more personal service.

Finally, although it was discussed in the last section, the average total costs will rise if a business gets too large and passes the point of optimum efficiency.

(http//www.geocities.com/r_magion/drawbacks.htm)

If companies grow to such a size that they dominate their market i.e. become a monopoly, then two governing bodies will monitor the organisation; the Competition Commission (CC) and the Office of Fair Trading (OFT). (Please see appendix c).

If any organisations are found to be breaking any of the laws laid down by the CC or OFT, then hefty compensation fines are often instigated. The governing bodies also have the power to stop a merger/takeover from taking place if they feel it's against the public's best interest and would cause competitors to struggle in the business environment.

Appendix A

Appendix B

The average total cost curve shows how economies and diseconomies of scale affect unit costs.

Appendix C

The CC is an advisory body that investigates suspected abused of monopoly power or proposed mergers. This includes investigating

· Any single firm whose current market share is 5 per cent of the national or local market. Or two firms whose joint share is 5 per cent or more.

· Any proposed merger that would result in a firm having assets of 70 million, or a 5 per cent share of the market.

The OFT investigates and reports on any anti-competitive practices. These may include

· Price discrimination

· Predatory pricing (selling below cost to drive out competitors)

· Vertical price squeezing (where a vertically integrated firm which controls the supply of a good charges a higher price for that input to competitors)

· Tie in sales (where the firm controlling the supply of a first product insists that its customers buy a second product from it rather than its rivals

Selective distribution where a firm is prepared to supply only certain retail outlets.

(http//www.bized.ac.uk/stafsup/exams/revec_monop.htm). Bibliography

Books

Understanding Business, A. Norman, M. Norman and P. Short, 1, First Edition, Pitman Publishing, London.

GNVQ Advanced Business, Roger Lewis and Roger Trevitt, 15, Second Edition, Stanley Thornes, Cheltenham.

Websites

http//news.bbc.co.uk/1/hi/business/7147.stm

http//travel.guardian.co.uk/news/story/0,7445,888648,00.html

http//www.businessweekly.co.uk/news/view_article.asp?article_id=757

http//www.businessweek.com/magazine/content/0_06/b761.htm

http//www.geocities.com/r_magion/drawbacks.htm

http//www.bized.ac.uk/stafsup/exams/revec_monop.htm

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