Introduction
Woolworth (WOW) is the largest retailer store that operates in Australia and New Zealand by sales and capitalizations. The company mainly operates supermarkets, which contributed to 80% of the total profits in 2010. Other trades include petrol, food and liquor, which contributed to $ 51.7 billion turnover in the fiscal year that ended in June 2010. The company recorded a 4.8% increase in annual sales in the same period from its 30% market share in Australian food, grocery and liquor (Books 2010).WOW would be seeking a merger and acquisition with a company listed in the Australian Security Exchange (ASX) in order to meet its corporate responsibility as defined in 2010. This report is analysis of a possible merger with JB Hi-Fi (JBH), a company listed in the ASX.
Acquisition objectives
- Merging and acquisition in Woolworth should to expand its operations for maximization of profits. In order for a company to qualify for acquisition, the following objectives are necessarily.
- New Products-The Company should be in a position to bring new products that are marketable, and will sell under Woolworth brand.
- Information Systems and Technology-The Company must have established information systems and technology that market or avail products online. This will ensure easy marketing of products under Woolworth brand.
- Fast Moving Products-Woolworth products are fast moving in retail stores. Any company worth acquisition should deal with fast moving products that are high revenues and profit index.
- Internationally Marketable Goods-Woolworth is an established entity in Australia and New Zealand. The Company must be of similar magnitude or deal with internationally marketable products.
- New Customer Base-In selling the company’s products, Woolworth should benefit through accessing new customers who purchase its products. Merging and acquisition should broaden the market for both companies.
- Free of Obligations-The company should not be subject to ACCC declared assets or other obligations
JB Hi-Fi
JB Hi-Fi is a company based in Australia that specializes in car sound systems, consumer electronics, home entertainment products, music CDs and DVDs. Established in Keilor East, Melbourne, the company has over 130 stores in Australia and 10 in New Zealand according to reports in 2010 according to Sherman (2010). The company sells excellent Hi-Fi brands alongside movies and music. With partnership with worldwide renowned companies like LG, Apple, Compaq, Sony, Sharp, Toshiba, HP and Samsung among others, the company has established a market base in Australia to make it the leading retailers in products by these companies.
SWOT analysis of JB Hi-FiStrengths
- JB Hi-Fi has recorded tremendous growth both in terms of stores and in terms of profits since 2004. Having had 66 stores in 2003, the company had 150 stores in 2010. Having started with music CD’s and DVD’s, the company expanded its operations to include consumer electronics, computers, telecommunications accessories and visuals. The company traded in consolidated comparable stores whose sales grew by 4.8% in the fiscal year that ended in 30 June 2010 with a net profit of 118.7 million Gaughan (2010).
- There has been wide media advertising by the company compared to its rivals in the year 2010 alone. The company’s website has played an important role in establishing the company’s dominance in Australia and New Zealand. The company accesses electronics and computer brands from the manufacturers thereby eliminating intermediaries. Brands have improved the company’s image and reputation, which has expanded its customer base. Some customers trust specific brands and are satisfied to access them at fair prices in JB Hi-Fi
Weaknesses
JB Hi-Fi has spent considerable amount in marketing in recent years. The company spent $ 265,142 in 2010 in marketing compared to $230,411 spent in 2009 for the same period. This has caused an increase in its expenses, thereby hiking product prices. The company is also limited by over relying on CDs and DVDs for sales of music and movies. Current trends are adopting IPods and memory cards for music, which might make the company loose out in music trade. There is also increased access of music online and the company has not strategically positioned itself to deliver these services. The company is losing millions to rival companies who are already selling music and movies in downloadable form (Gaughan 2010).
Opportunities
While older technology is declining at the rate of 23%, there is a 207% growth in products like mp3 and IPod. Investing in information technology has enabled the Hi-Fi retailer increase its sales since innovations in the market are very marketable. The firm is capable of selling these new products at low prices because of lower costs incurred in accessing them. Increase demand in home entertainment products and electrical products has enabled new stores to mature rapidly. Owing from the low costs of availing these products in the market, the newly established stores are finding a niche that support their growth and expansion. The rollout has increased the company’s profit margins and consequently its assets. Acquisition of Clive Antony, Hill, and Stewart in 2004 and 2006 respectively, has increased its market base (Gaughan 2010).
Threats
The company’s operations face threats in new developments. Entry of new techniques in accessing music and movies through downloading them, is threatening the company’s sale of music. The company sales also rely on stocks returns and operating costs, which depend on international trade and policies, which at times are not consistent. Daily innovations introduce new products, which give same or better services, are a threat. Most phones and other electronic gadgets are displacing CDs, DVDs and other music related features since they are incorporated in them. Unless the company trades in them, it risks stocking products that will never sell. The company is also under threat for failure to trade online, a trend adopted by many firms today.
How JB Hi-Fi meets the CriteriaNew Products
Woolworth deals with all retail goods but lacks specific brands in electronics. JB Hi-Fi has access to most domestic electronics due to its partnership with manufacturers from different regions. Selling of music and movies accessories alongside domestic electronics and computer gadgets will ensure a stocked Woolworth.
Information Systems and Technology
Even though it was evident, full exploitation of online trading is not yet in JB Hi-Fi, E-marketing is present. The company has listed most of its products on the internet has enhanced products marketing through promoting brands found on its website
Fast Moving Products
The company deals with domestic electronics, white goods, car systems and music and movies gadgets. These products are subject to innovations and the company ensures they are sold as soon possible. This is because storing a commodity for long might be passed by new technology and risk not being sold at all. The company ensures that the goods are fast moving through the existence of good inventory.
Internationally Marketable Goods
Contracts with world-renowned companies have enabled JBH to do trade in international level. Distribution of music and movies from different regions out of Australia has enhanced the company’s world recognition. Trade in electronics from Apple, Sony, Phillips, Toshiba and HP is a clear indication that the company has not limited itself to Australia and New Zealand alone.
New Customer Base
This will also bring a different customer base not present before trading these goods. Adopting the products and branding them under Woolworth will enable the Woolworth to sell its products too thereby having new customers. Acquiring of some stores owned by JBH will also mean new stores for Woolworth in new locations
Obligations
JBH was forced to take a “court-enforcement undertaking for contravening section 45 of the Trade practices Act of 1974,” Guan (2008). ACCC accused JBH of forcing a rival company called Satisfaction to close its stores. For this, a court-enforcement was issued requiring JBH not to “enter into a contract with a person with whom it is likely to be in competition with, that might him cease trading,” according to Guan (2008). This obligation is in operation for three years since 2008, makes JBH fail to meet one objective of Woolworth.
Acquisition Strategy
- Acquisition of other companies is aimed at expanding Woolworth Assets and increases its trade. JBH is a good company with which these objectives will be achieved besides having a big investment with prospective returns. According to the SWOT analysis done, it is evident that JBH needs to diversify its products to survive stiff competition from rivals.
- As such, Woolworth will offer an acquisition request through the three managing directors of JBH. The acquisition bid will be off market to convince the managing directors on the need of acquisition and the benefits. The managers will then convene a board meeting, whose approval will be a green light for the merge.
- There will be no management changes in the company for the first six months, but an increase in new products and staff the firm’s stores. Besides the cash paid for the merging, Woolworth will extend a contract to both the management for two years after which new terms will be set, following the trend in Woolworth. The acquisition will be in two phases. The first will take place for six months after the agreement and will require Woolworth to take 70% control of JHB, before a final 100% control after that
acquisition timetable in 2011:
- 2th February – Woolworth management approaches JBH directors for briefing on intention to acquire JBH.
- By 3 March – Woolworth receives feedback from the managers and board of directors. A positive response will lead to the next stage. If the managers refuse the deal, a new strategy to convince them will be set by 15 March 2011. Otherwise, a market strategy will be considered, where by Woolworth will acquire enough shares in JBH to acquire owner rights.
- 15th March – Joint teams made of managers and board of directors from both companies form a feasibility team that will look at the benefits of merging. They will draft the terms and conditions for the merging.
- 25th March – management of both parties with assistance from external auditors does the pricing of the acquisition.
- 30th March – Board of directors from both parties alongside the management, sign the terms of agreement as concurred by the feasibility teams.
- 1st April – The deal is finalized and written documents signed.
- 4th April- The deal publicized
- 5th September- Woolworth takes control of JBH.
Valuation
The company, which made $ 118.65 million net profit after tax in 2010, has a market capitalization of $ 1,921 million for an equivalent 109 million shares. Its total assets are valued at $ 61.54 million. This amounts to $ 2 billion and is worth the taking especially after comparing it with its peer companies as observed in the table below (Sherman 2010).
Funding
Woolworth will sell 31 Australian shopping centers to retail stores to raise $ 900 million. These are non-core assets available for sale. $ 469 million will come from available cash in balance sheet. $ 435 million will be raised from splitting and selling 200 million shares. $ 96 million from sell of old machinery and vehicles sold as second hand. $ 100 million debts cleared.
Completion Issues
JB Hi-Fi is under ACCC regulations from a court-enforcement in 2008. This will end in 2011, which means Woolworth will rely on JBH management for one year after acquisition to prevent violating the obligations. The terms of agreement before merging will consider ACCC regulations. The merging will improve both companies thereby conforming to ACCC regulations. Woolworth will however ensure all regulations are observed. The management of JBH will be intact until 2012. Assuming that the merger will increase customer base, JBH will be transformed to operate like Woolworth in mid 2012 after a years support by Woolworth to ensure its smooth running. It will take three years for Woolworth to realize returns of investment.
References
- Books Patrick A. Gaughan (Author), LLC. (2010) Supermarkets of Australia: Aldi, Franklins, Bi-Lo, Coles Supermarkets, Woolworths, Safeway, IGA, IGA, Supabarn Supermarkets, Jewel Food Stores. Tennessee, LLC Books.
- Gaughan, P. (2010) Mergers, Acquisitions, and Corporate Restructurings. San Francisco, Wiley.
- Guan, L. (2008) JB Hi-Fi to open more stores despite ACCC problems in Ballarat. CRN 13(6).
- Sherman, A. (2010) Mergers and Acquisitions from A to Z. New York,AMACOM. Andrew J. Sherman (Author)