Opodo Acquisition by Permira and AXA - Essay Example

?ASSESSMENT CASE STUDY of OPODO Acquisition Opodo Acquisition by Permira & AXA This case study is based on the acquisition of Opodo by Permira Advisers Ltd. and AXA Private Equity, in 2011. Introduction Opodo Limited manages a Website in the category of travelling, which provides worldwide access to hotel properties, air lines and car rental places. Apart from this, the website also offers the facilities of hotel reservations or booking, online booking for flights, car hire services, and complete travelling package that includes flight and hotel trips. Moreover, the company also offers the holiday and cottage packages and the insurance facilities such as car excess reduction insurance and travel insurance. Online Travel Portal Limited used to be the former name of Opodo Limited prior to July 2001. It is a subsidiary of Amadeus IT Holding, South Africa. However, it is based in London, UK and was incorporated in the year 2000. The Financial Times reported that Permira Advisers Ltd. and AXA Private Equity seem to join hands together for the purpose of buying Opodo Limited from Amadeus IT Holding SA at the cost of €500 million that is equal to USD 682.5 million. The prime objective of the planned buyout is to develop the best online booking services provider through merging the Opodo Limited with the eFreame and Go Voyages SA. Also, the American Carlyle Group has shown some intend to buy Opodo limited due to which the bids for Opodo exceeded €400 million since any bid would probably be challenged by Carlyle Group. Some sources reported that the Permira would bid through Vacaciones eDreams, S.L. where as the Axa would be bidding through Go Voyages SA. The process of this sale will be handled by the JPMorgan Chase. Permira and Axa have been bidding against each other for the acquisition of medium sized European web based travel agencies prior to joining together so as to acquire Opodo Limited. In the last year, Permira defeated Axa so as to acquire eDreams-Spanish online agency where as the Axa won against Permira for the acquisition of Go Voyages. After which they together planned to develop a giant European agency through merging the Opodo Limited, after its acquisition if their bid for it is successful, with the previously acquired eDreams and Go Voyages. At present, the Amadeus IT Holding owns the Opodo Limited and this business venture involves only 4 % of their entire business turnover. Financial Performance Indicators Financial performance indicators for the three companies are provided below. Chart 1: Annual Sales Permira Advisers Ltd for the Last 5 Years in Million USD. The chart 1 given above provides interesting information about the annual sales of the Permira Advisers Ltd that enables us to apprehend the performance of the company before the acquisition of OPODO Limited. Chart 2: Annual Sales AXA Private Equity for the Last 5 Years in Million USD. The chart 2 given above provides interesting information about the annual sales of the AXA Private Equity that enables us to apprehend the performance of the company before the acquisition of OPODO Limited. Chart 3: Annual Sales OPODO Limited for the Last 5 Years in Million USD. The chart provides interesting information about the annual sales of the OPODO Limited that enables us to apprehend the performance of the company before its acquisition. Due to the above performance of Opodo, other companies are interested towards its acquisition. Why Are Mergers & Acquisitions Interesting? The most important factor for the mergers and acquisitions is the existence of "synergies" that enables the two companies to operate more efficiently together in comparison to be working individually. Nevertheless in some cases, organization may obtain tax benefits from a merger or acquisition. 'Horizontal' mergers that take place between companies functioning in the same industry at the same production level may also be instigated through the wish for greater market power, as in the current case of OPODO acquisition by the Permira and AXA (being merged together). Also, organizations would prefer mergers and acquisitions for the purpose of diversification that enables the firm to spread its risks as it exploits new markets. A firm may pursue acquisition since its target is undervalued, and therefore a "bargain" provides an investment opportunity to yield a high return for the shareholders of the parent company. Recent Relevant Studies According to Hitt et al. (2001), the mergers create ‘synergies’ in between the involved parties that are the acquirer and the target, as a result of which the value of the organization increases. In fact, the efficiency theory suggests that the mergers will take place only if they are likely to create adequate realizable synergies for making the deal beneficial for the concerned parties. The symmetric expectations of gains cause a friendly merger to be recommended and approved. If the value gain is not positive for the target then the owners of the target firm would not submit to the acquisition whereas the bidding firm would not finish the deal if the value gains to it are negative. Thus, for a successful merger deal, the theory of efficiency reveals that the value gains to both the acquirer and the target should be positive Klein (2001). However, it is important to distinguish between ‘efficiency gains’ or ‘operative synergies’ which are attained through the economies of scale and scope – and ‘collusive synergies’ or ‘allocative synergies’ that result from the increased market power and from an enhanced capability for the extraction of consumer surplus while discussing about the value creation in mergers and acquisitions (Chatterjee, 1986). A major part of the most recent literature deduces that operating synergies are the more vital source of gain (Devos et al., 2008), however it also reveals that the theory of market power serves as a valid motive for the merger. The rise in the ‘allocative’ synergies is said to provide positive and significant private benefits to the firm (Feinberg, 1985) since, ceteris paribus, firms that have greater market power demand higher prices and thus, gain greater profit margins by the allocation of consumer surplus. In fact, numerous studies observed that after many mergers, the firms experienced increased profits but decreased sales (Cefis et al., 2008) - an observation that has been considered as an evidence of rising market power and gains of allocative synergy (Gugler et al., 2003). Through the dynamic perspective, market power is considered to permit for the deterrence of probable future entrants (Gugler et al., 2003), which also brought a significant premium to the firm, and thus provide another source of gain for the long term. The corporate control theory, in an efficient merger market, offers another justification, besides the synergistic gains, for why mergers must generate value. This leads to the conclusion that there is always another firm who is interested in the acquisition of an underperforming firm for removing those managers who were unable to capitalize on the opportunities to develop synergies for the improvement of the performance of their assets (Weston et al., 2004). Thus, the inefficient managers will offer the market for corporate control (Manne, 1965), and managers who failed to increase profits will not survive. As a result, ‘hostile’ takeovers are experienced by poorly performing firms, or by those firms whose internal corporate governance mechanisms were unsuccessful to discipline their managers (Palepu, 1986). Testing Merger Theory In this study, the merger of the Permira, AXA and Opodo has been evaluated under the following theories. Mergers create synergies Mergers provide Shareholder Benefit Mergers attract customers and improve business prospects Mergers reduce competition. Theory 1, Mergers Create Synergies The under discussion case of the merger of the three companies: Permira, AXA and Opodo, has definitely resulted in the creation of synergies since the three companies after their merger will now be working in collaboration as a single unit and thus, be able to provide better, efficient, faster and low cost services to their customers. Chart 4: Percentage Fall in the Cost of Services provided by the three companies after their merger. The chart 4 above shows that there has been a decline of 5 percent in the cost of services provided by the three companies after their merger in to a single unit. Theory 2, Shareholders Benefit The merger of Permira, AXA and Opodo would benefit the shareholders since share price will definitely go up as a result of this merger. Chart 5: Percentage increase in the Share price after the merger of Permira, AXA and OPODO. The chart 5 above shows that after the merger of Permira, AXA and Opodo, the share price of the merged unit is expected to rise by a percentage of 10.2 %. Theory 3, Business Prospects- Attracting Customers Theory 3: Business Prospects-Attracting Customers The merger of Permira, AXA and Opodo would increase the business prospects as more and more customer are likely to attract towards them as they are now offering improved and faster services than before at reduced cost. Chart 6: Percentage Increase in the Customers’ Turnover after merger of Permira, AXA and opodo. The chart 6 above illustrates that after the merger of Permira, AXA and Opodo, the customers’ turnover to the merged unit is expected to rise by a percentage of 30 %. Theory 4, Reduced Competition Also, mergers and acquisitions eliminate a competitor as in this case of Opodo acquisition. Independently, the three companies: Permira, AXA and OPODO are competitors to one another but having merged together in a unit, they have got rid of a major part of their competition and thus, they evolved as a giant in the sector of travelling services or consultancy. Conclusion In the case of joint acquisition of Opodo by Pemira and Axa, it was found that: mergers create synergies, mergers provide benefits to the shareholders, mergers attract consumers and thereby, increase business prospects, since they result in to the increase in sales and reduction in the cost involved, and mergers also reduce competition as the competitors are united in to one unit after the merger. References & Recommended Further Reading Chatterjee, S., (1986) Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms, Strategic Management Journal 7, 119-139. Cefis, E., S. Rosenkranz, and U. Weitzel, (2008) Effects of coordinated strategies on product and process R&D, Journal of Economics, DOI 10.1007/s00712-008-0041-z Devos, E., P.R. Kadapakkam, and S. Krishnamurthy, S. (2008) How Do Mergers Create Value? A Comparison of Taxes, Market Power, and Efficiency Improvements as Explanations for Synergies, Review of Financial Studies. Feinberg, R.M., (1985) Sales at Risk: A Test of the Mutual Forbearance theory of Conglomerate Behaviour, Journal of Business 58, 225-241. Gugler, K., D.C. Mueller, B.B. Yurtoglu, and C. Zulehner, (2003) The effects of mergers: an international comparison, International Journal of Industrial Organization 21, 625-653. Hitt, M.A., J.S. Harrison, and R.D. Ireland, (2001) Mergers and Acquisitions: A Guide to Creating Value for Stakeholders, Oxford University Press, Oxford. Klein, P. G., (2001) Were the acquisitive conglomerates inefficient? Rand Journal of Economics, 32: 745-761 Manne, H.G., (1965) Mergers and the Market for Corporate Control, Journal of Political Economy 73, 110-120. Palepu, K.G., (1986) Predicting Takeover Targets: A Methodological and Empirical Analysis, Journal of Accounting and Economics 8, 3-35. Weston, F.J., M.L. Mitchell and H.J. Mulherin, (2004) Takeovers, Restructuring and Corporate Governance, Pearson Prentice Hall, Upple Saddle River, New Jersey. Read More