INSTRUCTIONS: Risks and market reaction (5 marks)
Analyse the deal risks and identify possible mitigation strategies. For example: What risks exist for the
acquirer in undertaking this transaction? What approvals would have to be sought before the takeover could
be completed? What are the relevant regulatory risks? What can you learn from sector precedents? What
would be the likely response of target shareholders, and how could this be best managed? How could the
bidder’s strategy manage these risks? What has been the market reaction to the deal evolution so far?
REFERENCES : IN APA 7TH, JUST USE MY REFERENCES
Risks and Market Reaction
1.
Regulatory
Approval
Considering
the nature of WAE being a UK-based company, FMG will need to face regulatory
reviews in both the UK and Australia. Given the fact that WAE’s key position in
the electrification market, authorities such as the Australian Competition
& Consumer Commission (ACCC) and the UK’s Competition and Markets Authority
could raise concerns about monopolistic tendencies and reduced competition in
the electrification technology market (ACCC, 2023). The ACCC could argue
that the acquisition might limit innovation and market options. Less
competition could lead to an increase in price due to a rise in technological
solutions cost. This would negatively impact customers and partners throughout
the supply chain. The ACCC is expected to engage with various industry
stakeholders who might potentially raise objections to the acquisition process,
increasing the uncertainty of the approval of the deal. Therefore, the strategic
goals of the acquisition might be jeopardized since strict regulatory
conditions may hinder the anticipated benefits and synergies FMG hopes to
achieve. Failure to deal with these regulatory concerns might
lead to delays in the acquisition process, imposition of strict conditions, or
even the risk of the acquisition being rejected entirely.
Mitigation
Strategy:
FMG
can deal with these potential risks early on by engaging with regulators such
as ACCC and other relevant authorities as early as possible. This can be done
by proposing clear commitments to maintain fair competition such as offering
open licensing agreements or voluntarily divesting certain parts of FMG’s
business that might be seen as anti-competitive. Drawing from the precedent set
by Microsoft’s acquisition of Activision Blizzard, where similar proactive
measures helped secure regulatory approval (Gomes et al., 2019). Likewise,
Sonic Healthcare’s acquisition of Healthscope depicted the importance of early
engagement with regulators (Sonic Healthcare, 2012). Therefore, FMG can follow a similar approach by
showing its willingness to cooperate in maintaining market fairness by
proposing divestments to gain regulatory approval.
2.
Integration
Risks
Significant
challenges associated with the acquisition remain even after obtaining
regulatory approval and shareholder support. Achieving the planned synergies
and economies of scale depends on how effectively FMG and WAE can be
integrated. Achieving synergies and economies of scale depends on smooth
integration, but challenges like cultural differences, operational
misalignment, and IT incompatibilities could hinder this (Gomes
et al., 2019). Without a well-planned integration, the deal risks could impose a
financial burden on FMG, with unexpected costs and disruptions diluting FMG’s
potential value (Moffett et al., 2014).
Mitigation Strategy:
FMG should prioritize creating a
clear integration plan that focuses on aligning cultures, IT systems, and
operations. Conducting joint workshops can ease cultural differences, while
investing in IT solutions will help minimize system incompatibilities. One
useful precedent is the successful merger of Dow and DuPont where dedicated
integration teams and continuous communication helped manage complex
integration challenges (Gomes, et al., 2019). Therefore, FMG can adopt a
similar approach to achieve smooth transition and mitigate these integration
risks.
3.
Foreign
Exchange Risk
As
WAE is a UK-based company, currency fluctuations between the British Pound
(GBP) and Australian Dollar (AUD) could lead to increased acquisition costs or
impact the financial performance of the combined entity (Coyle, 2016). If the
transaction period is prolonged, the exchange rate volatility might become a
serious risk to FMG.
Mitigation
Strategy:
Upon
mitigating this risk, FMG can adopt hedging strategies like forward contracts
or options, to lock in favorable exchange rates and stabilize acquisition
costs. This could help minimize the impact of significant currency movements,
ensuring the financial predictability of the deal.
4.
Financial
Risk
Financing
the acquisition could increase FMG’s debt levels, potentially affecting its
credit rating and financial flexibility. Excessive leverage might limit future
investments, thereby impacting long-term growth (Kenton, 2023).
Mitigation
Strategy:
Upon
mitigating this risk, FMG could follow a useful precedent by Qualicomm’s
acquisition of NXP which demonstrated of how using a mix of financing can
maintain financial stability and flexibility. Therefore, combining a balanced
debt-to-equity ratio will maintain liquidity and reassure investors.
5.
Shareholder
Approval
For a
successful acquisition, it is essential to secure the support of both WAE and
FMG shareholders. Higher premium might be pushed by WAE’s shareholders
especially if they feel that the current offer undervalues the company’s
potential. On the other hand, FMG’s shareholders might raise associated risks
of integrating a new technology-centered business (Moffett et
al., 2014). Broad support from shareholders is important to meet approval
tresholds and ensure the transaction proceeds successfully (Moffett et al.,
2014).
Mitigation
Strategy:
FMG
should engage directly with key shareholders, clearly outlining the benefits
and long-term growth potential of the acquisition. It is also vital to offer
competitive premium to WAE’s shareholders and address concerns through
transparent communication. This approach can be drawn from Tesla’s strategy in
the SolarCity acquisition, highlighting synergies and clear vision can help
persuade hesitant stakeholders (Thomson Reuters, 2022).
6. Market
Reaction
The announcement
of the acquisition could lead to short-term volatility in FMG’s stock price. Investors
might initially be wary, particularly if they have concerns over the costs of
integrating WAE or doubts about how well the two companies align strategically.
This hesitation could cause short-term dips in the stock price. However, if
investors views the acquisition as a step toward long-term growth, especially
in expanding FMG’s green technology footprint, the reaction could shift to a
positive one (Thomson Reuters, 2022).
Mitigation
Strategy:
To manage these
potential market reactions, FMG should focus on consistent and transparent
communication with investors, outlining the benefits of the deal. This includes
highlighting how WAE’s technology will improve FMG’s capabilities, open new
market opportunities, and contribute to cost savings. Tesla’s acquisition of
SolarCity initially faced skepticism, however, Tesla managed to shift market
perceptions by emphasizing synergies and future growth. This precedent could be
useful for FMG to follow similar strategy.
Reference
list
Australian Competition & Consumer Commission. (2023). Mergers and Competition. Retrieved
from https://www.accc.gov.au/mergers
Coyle, B. (2016). Foreign Exchange and Money
Markets. Pearson Education.
Gomes, E., Angwin, D., Weber, Y., & Tarba, S. (2019). Mergers and Acquisitions: A Critical Reader.
Routledge.
Kenton, W. (2023). How Leveraged Buyouts Work.
Investopedia. Retrieved from https://www.investopedia.com
Moffett, M. H., Stonehill, A. I., & Eiteman, D. K.
(2014). Fundamentals of Multinational Finance.
Pearson Education.
Sonic Healthcare Limited. (2012). Acquisition of Certain Healthscope Pathology
Businesses. Retrieved from https://investors.sonichealthcare.com
Thomson Reuters. (2022). Market Reaction to Mergers
and Acquisitions. Thomson Reuters.