Merger of Boots Group PLC with Alliance Unichem - Essay Example

The Merger of Equals The announcement of the proposed merger of Boots Group PLC with Alliance Unichem on 3rd October 2005, will result in the creation of UK's largest pharmaceutical company. When completed, the combined companies will own a 40 percent market share of the wholesale and a 17 percent share of the pharmacy market (BBC, 2005). Though it has been to referred to as the 'merger of equals' by its directors, it is a merger of two complimentary companies. They each have their own motivations and divergent reasons for entering into a merger. They are also driven by a common goal, growth. The product and market differences currently enjoyed by Boots and Alliance, will merge together in the hopes of stimulating greater growth than could be expected as separate entities. Their confidence in growth in shown by the fact that they will be paying 2.5 times of dividend despite the two companies having different dividend policies. It is aimed that the merger will be finalised in April 2006. Most companies, if not all, do mergers because they expect to perform better and be worth more together than as being apart. There are numerous benefits that companies gain from mergers and the Boots-Alliance deal is no different. Alliance had long ago announced that its plans for growth included acquisitions and mergers. With a history of acquiring patents and new pharmaceuticals to add to their product line, the addition of the Boots health and beauty line will be an appropriate addition to spur revenue growth. Alliance's drug pipeline, though not dry, has few new pharmaceuticals on the horizon. Isprelor, a new delivery method for the existing drug Misoprosol, is set for release sometime in 2006. Posidorm, a synthetic Melatonin, has entered late stage trials and hopes are for a 2007 release date (Alliance-Unichem). Posidorm, if approved, is expected to increase the Boots-Alliance revenue stream by as much as 20 percent in 2008. The addition of Boots will give them a much-needed boost in the interim. Boots, on the other hand, will gain access to Alliance's distribution and wholesale network. Boots has recently struggled with declining sales in their core high street locations, and that has been the source of the bulk of Boots' problems. It was recently reported that underlying sales had fallen 1.6% in the second quarter, and there was no indication that conditions for business would be improving with in the next couple of months. In fact, Boots may not be seeking growth as much as they are looking for survival (Times Online, 2005). Forced to cut prices in an attempt to compete with supermarket outlets such as Tesco and ASDA, Boots has recognised the need to expand their market and diversify their product line. The additions they made in optometry and dental services have been largely unsuccessful. Shareholders and analysts have suggested that Boots should revamp their current locations and open stores in residential neighbourhoods. They would face difficulty expanding during their extended period of declining sales, and it may be met with investor opposition. The merger, however, will give Boots access to Alliance's outlying, residential storefronts as well as their wholesale distribution network. . If the two companies proceed with the transaction, they will promote international growth in which both companies individually are already performing well. Alliance sales are strong in Europe and the merger will give Boots a greater presence in Norway, The Netherlands, and Italy. Alliance will benefit from the experience and limited inroads that Boots has made in the Asian market. As a large multinational company, they will have more power over smaller pharmaceutical companies and be able to gain economies of scale, rendering both firms more competitive and able to charge lower prices for their products. . Economies of scale that will be gained, apart from the cost, will be managerial economies whereby both firms, although in the same industry, will have more skill in management and be more efficient. The merger is expected to result in a 100 million pound savings by the fourth year of operation (Taipei Times, 2005, p.12). As the newly formed company isolates redundancies, more savings can be expected. Initial job loss is expected to be minimal. "We see around 1,000 [job losses] emanating from this particular transaction," said Boots' chairman Sir Nigel Rudd, adding that this was "not a significant number" considering the combined group's 100,000 staff. However, that may be subject to change due to store closures in overlapping locations. (BBC, 2005) Regulatory requirements may also force the closing of some locations. Boots will benefit by merging with a market leader that has been through the growing pains on a merger before. The Alliance Unichem Group is already a result of a merger, which took place in 1997 between Alliance Sant SA and Unichem Plc. Their previous involvement in a number of mergers and acquisitions should prevent repeating previous errors and help smooth the process of integrating Boots. The transition, if executed properly, will be a boost for investors. A wider market, with minimum overlap, cost reduction by eliminating redundancies, and the ability to lower prices with the aim of being more competitive has the potential to make Boots-Alliance not only the largest pharmaceutical company, but also the industry benchmark. Moreover the merger of Alliance and Boots could diversify the corporate risk. The income of the combined firms will be less volatile as its cash flow comes from a wider variety of products and markets. Though this is a reduction of total risk, it has a little or no effect on the systematic risk. The risk of branding the Alliance pharmacies with the Boots name has fallen to some critical scrutiny. Critics have questioned the wisdom of Alliance in light of rebranding a pharmacy with a name typically associated with toiletries. That risk should have minimal impact as the Alliance line of products will be the selling point. If the merger can indeed reduce costs to compete with Tesco and ASDA, the name will become an asset. Alliance will continue their goal of expansion through acquisition at a minimal cost. The 2004 acquisitions of Periostat and Forceval in 2004 have each realised growth rates of the mid-teens (Alliance-Unichem). The addition of Boots will aid to increase sales without incurring long term financial commitments. Boots will get revamped, new locations, and outlets it otherwise may be reluctant to finance. The merger of equals seems to be an acquisition of Alliance by Boots, as Boots investors will own 52 percent of the new company and Boots chief executive will assume the helm at Boots-Alliance (Kuo, 2005). But these are paper numbers and symbolic inside political posturing. Both companies have differing motives and they both have the potential to benefit from the move. The result will depend on the ability of both new partners to execute the plan and not run over the other member in the process of the merging. References Alliance-Unichem (2005), 2005 Annual Report. 2005, Available from: [Accessed 3rd December 2005] Goodman, M. (2005), 'Boots Merger is a Matter of Chemistry'. Times Online. [Internet] 2nd October 2005, Available from: < http://business.timesonline.co.uk/article/0,,9074-1806886,00.html> [Accessed 3rd December 2005] Kuo, C. (2005), Market Comment. [Internet] 3rd October 2005, Available from: [Accessed 3rd December 2005] Taipei Times, (2005), 'Boots, Alliance Unichem Announce Plans to Merge'. Taipei Times. [Internet] 4th October 2005, Available from: [Accessed 3rd December 2005] Read More