Chapter 14 • Corporate restructuring
that this is not always the case for those of the bidder. As far as the evidence goes, it
appears that mergers involving targets that operate in the same area of business as the
bidder tend to be successful: in other words, diversifying mergers are not successful.
This lack of clarity on the benefits of mergers may well explain why the number of
UK mergers seems to have reduced fairly dramatically from the late 1980s until 2002
(see Table 14.1). The increase in numbers since then may well be accounted for by the
rise of private equity funds. Other possible reasons for the decline in merger activity
during that period include:l a greater professionalism among corporate management leading to fewer cheap tar-
gets; and
l a change in the perceptions of corporate managers of the desirability of large,
diversified units. This point is raised again, in the context of divestment, later in this
chapter.International mergers
As we saw earlier in the chapter, the increasing internationalisation of commerce has led
to mergers between businesses in different countries. The EU’s single market, which
started in 1993, seems to have led to UK businesses being particularly active in mergers
with those in other EU countries. An example is the 2006 hostile takeover of the UK’s
BAA plcby the Spanish business Ferrovial, which we met earlier in the chapter.14.4 Divestments
In certain circumstances a business may wish to sell off some part of its operation, per-
haps a division or subsidiary company. Possible reasons for this are considered below.Reasons for divestments
A desire to concentrate on core activities
A business operating in a range of areas of activity, either as a result of organic growth
or following mergers, may decide that it would prefer to concentrate on its main area
of expertise. Such rationalisations have become quite common recently and possibly
reflect a view, which we shall discuss in Chapter 16, that the future lies with smaller,
more focused businesses.
An example of a recent sell-off, where the reason given was a desire to concentrate
on core activities, was provided by the airline British Airways plc. BA sold its sub-
sidiary GB Airways Ltdto its ‘no-frills’ competitor easyJet plcfor £103.5 million in
October 2007.
Datta and Iskandar-Datta (1996), looking at UK data, found that divestments aimed
at the sale of assets that do not strategically fit the business’s core activities tend to be
beneficial to shareholders’ wealth.A wish to get rid of some part of a business that is causing problems
One typical problem would be a lack of profitability. This reason, together with the
desire to concentrate on core activities, perhaps provides an example of the opposite
of synergy, that is, a ‘five plus one equals four’ syndrome, where the sum of the parts