Synergies That Burger King Hopes to Achieve from the Merger - Assignment Example

Financial Management: Mergers and Acquisitions By Synergies that Burger King hopes to achieve fromthe merger. Burger King Worldwide looks to benefit a lot from its merger with Tim Hortons. The U.S. Company stands to gain in several key ways including incremental revenues, course tax savings and better menu resources. The merger might not actually place Burger King Worldwide in a position to outpace its competition, but it will certainly enable the company to catch up and close the gap with its rivals. Burger King, ca now ease the intense competitive pressure from other U.S based fast-casual segment, top on the list being Chipotle Mexican Grill Burger and McDonalds McCafe which has its own Seattle Best coffee by Starbucks (Latash,2008). The merger will help reduce the cost of production of coffee, which is the main reason why the Burger King Company lagged behind in the industry. To illustrate further on this synergy, the BKW has found an already established partner in the field of coffee, which is a vital breakfast menu in America. The Burger King Company does not need to establish its own coffee brand from scratch since it now has a partner in that field. The partner already enjoys economic of sale from the massive client base it serves thus transferring the same to Burger King Worldwide. The merger will help BKW develop and strengthen the brand appeal to compete with McDonalds McCafe. The merger presents an opportunity for BKW to benefit from additional resources from Canada. This is because Tim Hortons highly dominates Canada’s market share of baked goods (with more than 70%) in comparison to other American companies. Tim Hortons also has 75% of the coffee market, which is much more than the combined market shares of Starbucks and McDonalds in Canada. Burger King can take advantage of Tim Hortons lead and use it to enhance its dominance in the country. Looking deeper into growth and Revenue enhancement, the merger presents better opportunities for expansion. Having recorded annual sales of at least 3 billion dollars last year, Tim Hortons enjoys an impressive growth rate and steady margins. On the other hand, Burger King has kept on struggling against domestic companies, despite its major presence of in the country. The company is more likely to experience growth by venturing outside the U.S. In terms of revenue enhancement, the merger will enable tax inversion, thus allowing Burger King to enjoy lower corporate tax in Canada. Tim Hortons enjoys a 15% federal tax rate and a 11.5% corporate tax rate in Ontario. These rates in Canada are significantly lower that the tax rates in America. A combined tax rate of 26.5% on the merged companies translates into more profits retained and subsequently, higher value for the shares in the company. Synergies that Tim Horton hopes to achieve from the merger. Tim Horton will achieve growth from the merger because despite having a very strong brand appeal in its home country, the company has been struggling to venture into the American market (Penfold, 2008). Burger King has over seven thousand stores in the U.S. This means that the company will have smooth transition into the American market share. A wider portfolio or production usually comes with additional economies of scale. The merger will enable Tim Horton acquire discounts from suppliers of coffee and other raw materials like wheat and sugar. These additional resources will help reduce the cost of production, which will help Tim Hortons further diversify and improve food offerings in the breakfast segment. This will help the company compete fairly with top offerings by rival companies such as Starbucks, and McDonalds. Better products sold to a larger customer base translate into higher profits and subsequently, revenue enhancement for the company. Tax inversion in relation to U.S. corporations and present arguments why this merger may not be motivated by tax inversion. Tax inversion is a term used most frequently in relation to US corporations in reference to the relocation of a company’s headquarters to a country with lower-taxes levied on corporations. The company that does this usually retains its material operations in the country with higher-tax whatsoever. Also called corporate inversion, despite its difficulty to be definitive, the phenomenon first prevailed in the 1990s, whereby US companies sought to relocate places such as Bermuda, considered tax havens. However, more recently, US laws have changed; and publicity focuses on tax inversions carried out through mergers with companies in foreign countries with lower corporate tax charges. Examples of companies that used the tax inversion in U.S and received a great deal of publicity are Pfizer and AstraZeneca. This proposed merger in April 2014 was arguably the first of the tax inversion kind. Since then, more recent press coverage focuses on large multinational public companies as having taken part in most of the corporate inversions. However, privately held companies and middle-market companies can also invert taxes and acquire similar tax benefits (Stahl & Mendenhall 2005). It is safe to say that tax inversions are some form of technique to avoid paying taxes. Although a number of factors drive the occurrence of this practice, the most dominant factor is the income tax imposed through the US tax code, on profits earned by American companies on their business activities abroad. This triggers a strong need for American corporations with large overseas investments to want to rebrand themselves under the name of a foreign corporation so that they return earnings made on foreign grounds without double taxation. According to the book ‘Tax planning with holding companies - repatriation of US profits: concepts, strategies, structures.’ the matter at hand is as simple as accepting that the U.S. taxes profits at a rate of 39% (irrespective of where they are earned) higher than other financially stable countries. By inverting, a U.S. company chooses to become a foreign company through a merger and no longer owes tax on its foreign profit to the U.S. federal state. It however still owes American tax on its profits made on American soil (Eicke, 2009). Unlike the United States, other countries (like Canada) do not generally tax foreign earned income. Therefore, the concept of tax inversion largely affects just the U.S.A. However, in this case, some industry analysts say that the merger may not be due to tax inversion They say that lower tax rates might not have been the reason behind the merger between Tim Horton’s and Burger King Company. According to them, BKW has been looking for a partner franchise that would assist it to facilitate its morning offerings; just like its rival company McDonald has established dominance in morning coffee segment of the industry to complement its fast-food burger chain (Schlosser, 2012). Burger King is sixth among largest global fast-food chain, behind McDonald’s, KFC, Pizza Hut, Subway, and Starbucks. Tim Horton’s is not in the top ten but has a large presence in Canada and northern U.S. States. Based on these statics, the new merger company will become the third largest fast-food retailer worldwide. Comparison of the quarterly performance of the two companies A comparison of the revenue trends of both companies based on the quarterly reports of the past two years, gives different findings. Burger King Worldwide recorded a 6% decrease in revenue during the second quarter of 2014. The company attributes this mainly to increased competition and the net re-franchising of three hundred and sixty of the companys restaurants in the previous year. Unlike Burger King, Tim Hortons has had a smooth run. It seems that the company is expanding its client base for coffee and doughnuts in Canada. The country’s largest food service company closed the quarter with a nine percent revenue growth, a three percent same-store growth in Canada and six percent revenue growth in the U.S. In terms of earnings growth, Burger King Worldwide has recorded a slight decrease as well due to cost of production and competition it faces from rival companies. The pricing of its products remains under cutthroat competition, so the company can only increase its earnings growth through expanding its client base. On the other hand, Tim Horton’s company has had an impressive earnings growth over the two years. This is because of its loyal clientele in Canada and its dominance in its area of operation. The price earnings ratio of the two companies has improved over the two years, though the price earnings ratio of Tim Horton’s s significantly higher. In mu evaluation of this merger, I think Tim Horton’s Company has more bargaining power (more advantage) over Burger King Worldwide Company because BKW has much more to gain from the merger (Bruner, & Bruner 2004). In my point of view, other than the benefits that Burger King Worldwide gain through the tax implications on the company, the merger will go a long way in ensuring a global unit expansion of both companies. Burger King is already in partnership with 3G Capital. This private equity firm has a long list master franchisees that BKW can use to its advantage to promote Tim Horton’s Company into a global brand. Well, despite this fact, looking closely at the individual companies and their financial statistics, it is evident that Tim Horton’s company is doing great by itself. It only seeks to expand its presence. Moreover, Canada has a favourable corporate tax rate so the company can comfortably manage by itself On the other hand, Burger King Worldwide has huge presence but the stiff competition and unfavourable corporate taxes are chocking its progress. BKW needs this merger, in order to survive (Cooper & Finkelstein 2010). Conclusion In my point of view, the merger by the two companies is mutually beneficial to each of them. This is one of the reasons why shortly after the merger, shares of Tim Horton’s were up nearly 20 percent at $75.23 on the New York Stock Exchange, while Burger King rose more than 17 percent to $31.83. The shareholders in the respective countries understand the positive implications of the merger and hence the enthusiasm in investing additional capital in both firms. In terms of strength, the merger is essential in pushing the limits in both companies in terms of performance; therefore, we can say that the companies will have equal strength in the end. They also do not have to worry about the government regulations as technically, the U.S based company has not gone against any law whatsoever. The merger has however prompted the U.S government to find ways to curb this phenomenon. References Schlosser, E. (2012). Fast food nation: the dark side of the all-American meal. Boston, Mariner Books/Houghton Mifflin Harcourt. Penfold, S. (2008). The donut: a Canadian history. Toronto [u.a.], Univ. of Toronto Press. Latash, M. L. (2008). Synergy. Oxford, Oxford University Press. http://site.ebrary.com/id/10254395. Stahl, G. K., & Mendenhall, M. E. (2005). Mergers and acquisitions: managing culture and human resources. Stanford, Calif, Stanford Business Books. Bruner, R. F., & Bruner, R. F. (2004). Applied mergers and acquisitions. Hoboken, N.J., J. Wiley. Cooper, C. L., & Finkelstein, S. (2010). Advances in mergers and acquisitions. Bingley, Emerald. http://www.myilibrary.com?id=298693. Eicke, R. (2009). Tax planning with holding companies - repatriation of US profits: concepts, strategies, structures. Alphen aan den Rijn, Kluwer Law International. Loefton, E. P. (2008). Emerging business issues. New York, Nova Science Publishers. (Loefton, 2008). Read More