Introduction
The merger of Sainsbury’s with Asda has resulted in a considerable share price rise for both involved parties. According to recent statistics reported by Coatsworth (2018), Sainsbury’s shares surged by 19% after the announcement of the deal. Notably, on April 30, 2018, the company’s share price reached its highest point since 2014 (The Guardian 2018). As Asda, Leyland, and Quinn (2018) state that the value of the company has increased along with the rise in Sainsbury’s share prices.
These achievements seem even more remarkable considering that the share prices of the retailers’ major UK competitors, Tesco and Morrison, have dropped by 2.4% and 4.3% respectively after the merger news (Coatsworth 2018). The positive returns on the M&A announcement indicate that Asda-Sainsbury’s business combination may be promising.
Main body
Overall, the primary reason for changes in the companies’ market prices was an expected success and value of the integrated business. Notably, research evidence verifies the assumption that the return on the announcement for both acquirers and targets largely depends on the perception of the value generated. According to Zhang (2013), such a phenomenon is called an “anticipation effect,” and it implies that forward-looking prices are rooted in “investors’ expectations about the profitability of firms’ future acquisitions” (p. iv).
For instance, Asda and Sainsbury’s will together become one of the largest retailer groups in the UK and will challenge Tesco’s current competitive position. At this point, the combined market share of the two supermarkets is 32% compared to Tesco’s 28% (Leyland & Quinn 2018).
Moreover, the merger will provide Sainsbury’s with access to a massive heft of Asda’s owner, Walmart, through joint purchasing arrangements and, at the same time, Asda may substantially benefit from “own-label expertise” of its new partner (Leyland & Quinn 2018, para. 3). In general, the deal is intended to eliminate existing deficiencies and drawbacks in both enterprises and maximize their competitive advantages.
The discussed changes in market values inform about the significant advantages of M&A deals in the modern business landscape. As stated by Tamosiuniene and Duksaite (2009), the main benefits for buyers in such transactions are linked to a decision to “quickly grow (as opposed to slow growth through their own resources) and to get the access to intangible assets, namely, human capital, structural capital and customer capital” (p. 15).
For example, it is observed that demographic features of customers are disparate in Asda and Sainsbury’s (Leyland & Quinn 2018). Thus, the merger will potentially help attract more diverse consumer groups and substantially broaden the existing customer base. At the same time, when speaking of the main gains associated with M&A from the seller’s perspective, they include an ability to turn equity into cash and to achieve a peak in valuation (Tamosiuniene & Duksaite 2009). Both of these outcomes are observed in the case of Asda.
Conclusion
The enhancement of the structural capital will probably be one of the most significant achievements in the combined Asda-Sainsbury’s business as the organizations will deepen the penetration into the market and expand the coverage, which may consequently result in greater profitability. Nevertheless, the improvements in customer and structural capital are not the only possible advantage of the merger. The value for stockholders may also be generated through the enhancement of the companies’ financial and operational synergies, and so forth (Nguyen 2015). Overall, it is valid to conclude that the Sainsbury and Asda deal may help them access new segments; expand operations, and strengthen their positions across different geographic regions.
Reference List
Coatsworth, D 2018, ‘Everything investors need to know about the merger of Sainsbury’s with Asda’, Shares Magazine. Web.
Leyland, A & Quinn, I 2018, ‘Sainsbury’s Asda £51bn combination play: what we know and what it means’, The Grocer. Web.
Nguyen, TV 2015, Business valuation and pricing in merger and acquisition context, Bachelor’s Thesis, Lahti University of Applied Sciences. Web.
Tamosiuniene, R & Duksaite, E 2009, ‘The importance of mergers and acquisitions in today’s economy’, KSI Transactions on Knowledge Society, vol. 4, no. 3, pp. 11-15.
The Guardian 2018, ‘Sainsbury and Asda agree merger, but MPs warn that jobs are at risk – as it happened’. Web.
Zhang, N 2013, The effects of anticipated future investments on firm value: evidence from mergers and acquisitions, Dissertation, Duke University. Web.