MODULE: Quick Food Service Operations

Chapter 2: Merger in Quick Food Services Operation

Learning Objective:
 Discuss the reason in merger on fast food operation
 Analyze the reason in merger on fast food operation
 Assess the students after the end of the lesson

The Largest Restaurant Acquisitions of the Past Two Decades

In 2015, estimates pegged the value of restaurant mergers and restaurant
acquisitions (M&A) in the US at roughly $120.8 billion, jumping 58% from the
previous record the prior year. In 2016, the value of those deals was down some
23%, but the number of deals was up, with restaurant deals comprising 1.1% of
all (13,142) M&A deals.

Between 2004 and 2016, the number of restaurant acquisitions and mergers in
the US increased by 86%. And in recent years, deals have gravitated more
towards strategic (rather than financial) deals: the share of strategic deals
increased 16% over the same time period, in fact.

Restaurant valuations are seeing a surge, as well. Despite fluctuating between

2008 and 2015, the median valuation for publicly-held restaurants increased 8%
from 2016 (from data collected at the end of May) and is now nearing 2015
levels.

So what does this mean for the future of restaurant acquisitions? For one thing,
they’ll continue growing in number and in value. And the strategic factor suggests
that a level of understanding (one supported by a specialist with knowledge of
the external and internal factors affecting restaurants today and tomorrow) will be

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much-needed. Below, we round up some of the most notable restaurant
acquisitions in recent history, including the largest (in terms of value) from the
past two decades, along with a handful of smaller deals that were large for their
geography.
THE LARGEST RESTAURANT ACQUISITIONS OF THE PAST 20 YEARS

Restaurant Company: Tim Hortons

Buyer: Burger King
Seller: Company
Price: $11.4 billion

In 2014, Burger King struck a deal to buy the Canadian doughnut and coffee
chain Tim Hortons for approximately $11.4 billion, making for what became ―one
of the biggest fast-food operations in the world.‖ The two companies essentially
formed a new, global company — one with operations based in Canada.

Restaurant Company: Panera

Buyer: JAB Holdings
Seller: Company
Price: $7.5 billion
While rumors swirled that that Panera might
be acquired by one of its peers in the
restaurant industry (like Domino’s,
Restaurant Brands International, or
Starbucks), the bakery and cafe chain
eventually found a new parent in JAB, the
German-based conglomerate that’s also
acquired Krispy Kreme, Keurig, and Peet’s Coffee & Tea.

Restaurant Company: Burger King

Holdings
Buyer: 3G Capital Partners
Seller: Company
Price: $3.87 billion
Just eight years after being sold off by
Diageo, Burger King found itself in the midst
of another restaurant acquisition. In 2010,
the fast-food giant agreed to sell itself to 3G
Capital, an investment firm with roots in
Brazil, in a deal valued at $4 billion,
including the assumption of debt. At the time, the deal marked the largest
leveraged buyout of a fast-food chain ever.

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Restaurant Company: OSI Restaurant

Partners (now doing business as Bloomin’
Brands)
Buyer: Bain Capital, Catterton
Management, Kangaroo Acquisition
Seller: Company
Price: $3.34 billion
It was November 2006 when OSI
Restaurant Partners (then parent company
of Outback Steakhouse, Carrabba’s Italian
Grill, and Bonefish Grill) was sold in a $3.3
billion deal. The casual-dining company said
it would be acquired by Bain Capital and Catterton Partners in what was at the
time one of the largest restaurant acquisitions ever. The company now does
business as Bloomin’ Brands.

Restaurant Company: Wendy’s

Buyer: Triarc Cos., Trian Fund
Management (Arby’s)
Seller: Company
Price: $2.46 billion
In April 2008, Triarc, the parent company
and franchisor of the Arby’s Restaurant
Group, and Wendy’s International
completed their merger transaction. The
combined company — Wendy’s/Arby’s
Group, Inc. — would be, according to then-
CEO Roland Smith, better positioned to
―deliver long-term value to stockholders through enhanced operational
efficiencies, improved product offerings, shared services and strong human
capital.‖

Restaurant Company: Dunkin’ Brands

Buyer: Carlyle Group, THL Partners, Bain
Capital
Seller: Pernod Ricard SA
Price: $2.4 billion
In December 2005, Dunkin’ Donuts
announced that a consortium of global private equity firms (consisting of Bain
Capital Partners LLC, The Carlyle Group and Thomas H. Lee Partners LP)
completed the acquisition of Dunkin’ Brands Inc. from Pernod Ricard SA for $2.4
billion in cash. At the time, the PE firms said the deal would provide the
resources needed to support the company’s growth plan, making Dunkin’ Brands
―ideally situated to execute its strategy across the Dunkin’ Donuts, Togo’s and
Baskin-Robbins brands and geographies.‖
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Restaurant Company: Kuwait Food Company
(Americana)
Buyer: Emaar Properties
Seller: Al Khair National
Price: $2.36 billion
In June 2016, A UAE-based investor group led by Emaar Properties chairman
Mohamed Alabbar announced it had agreed to buy Kuwait Food Company
shares from its majority stockholder for $2.36 billion. the deal allowed the
investor group to acquire a 26% stake in Kuwait’s Americana, the company that
operates KFC and Pizza Hut restaurants in the Middle East and North Africa.

Restaurant Company: Burger King

Buyer: Burger King Holdings, TPG Capital,
Bain Capital, Goldman Sachs
Seller: Diageo
Price: $2.3 billion
Diageo, the world’s largest liquor company,
sold its restaurant chain, Burger King, to a
private equity consortium for more than $2.2
billion in 2002. At the time, the London-
based Diageo was looking to transform itself
into a company focused on liquor sales.
Diageo once owned brands including Pillsbury and Häagen-Dazs, as well as
Johnnie Walker, Guinness, Smirnoff, Baileys, Cuervo, Tanqueray, and Captain
Morgan.

Restaurant Company: McDonald’s China

Buyer: CITIC, Carlyle Group
Seller: Company
Price: $2.1 billion
In January 2017, McDonald’s sold most of China,
Hong Kong business to state-backed conglomerate
CITIC Ltd and Carlyle Group LP for up to $2.1
billion. The 20-year deal capped months of
negotiations between the fast-food chain and
private equity firms including Carlyle and TPG Capital Management LP.

Restaurant Company: Red Lobster

Buyer: Golden Gate Capital
Seller: Darden Restaurants Inc.
Price: $2.1 billion
Darden sold Red Lobster to Golden Gate
Capital for $2.1 billion in July 2014. In the years since the restaurant acquisition,
the seafood chain has turned to overseas expansion in search of a comeback.
The chain has opened more than 20 international locations since it was acquired
in 2014, bringing the number of Red Lobster’s overseas restaurants to at least 51
(excluding Canada).
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Restaurant Company: Applebee’s

Buyer: IHOP
Seller: Company
Price: $2.05 billion
In one of the most reported restaurant
acquisitions in recent memory, IHOP made
a $1.9 billion bid for the struggling bar-and-
grill chain Applebee’s in 2007. Both brands have struggled to regain their footing
(along with dozens of others in the Casual Dining space) in the years since,
though. In August 2017, it was reported that some 100 Applebee’s locations and
roughly 20 IHOPs would shutter their doors. An earnings report released the
same week showed that sales fell by more than 6% at Applebee’s and nearly 3%
at IHOP in the previous quarter.

Restaurant Company: Popeye’s

Buyer: Restaurant Brands International Inc.
Seller: Company
Price: $1.8 billion
Restaurant Brands International made
headlines in 2017 when it announced it
would acquire Popeyes Louisiana Kitchen
for $1.8 billion in cash. The company is
expected to use its international reach to bring Popeyes’ to new geographies
around the globe. Restaurant Brands was formed in 2014, through an $11 billion
merger between Burger King and Canadian chain Tim Hortons).

Restaurant Company: Bob Evans Farms

Buyer: Post Holding
Seller: Company
Price: $1.5 billion
In September 2017, shares of Bob Evans
Farms’ soared following the announcement
that Post Holding Inc. (maker of Honey
Bunches of Oats and Grape-Nuts cereals),
would buy the company for roughly $1.5
billion. After activist investor Thomas
Sandell began pushing for change, Bob Evans announced it would split the
company in 2017, when it sold its 522 Bob Evans restaurants to private-equity
firm Golden Gate Capital in a $565 million deal. The chain was then taken private
as Bob Evans Restaurants.

Restaurant Company: Rare Hospitality

(LongHorn and Capital Grille)
Buyer: Darden
Seller: Company
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Price: $1.4 billion
Darden Restaurants, the operator of the Olive Garden and Red Lobster
restaurant chains, agreed to buy Rare Hospitality International Inc. for about $1.4
billion in 2007. The Atlanta-based Rare owned, operated, and franchised 287
LongHorn Steakhouse restaurants and 28 Capital Grille restaurants at the time.

Restaurant Company: Krispy Kreme

Doughnuts
Buyer: JAB Holdings
Seller: Company
Price: $1.35 billion
In 2016, German conglomerate JAB Holdings acquired Krispy Kreme Doughnuts
Inc. for a cool $1.35 billion. The deal marked the latest feather in the cap for JAB
which, that same year, had also acquired Caribou Coffee, Einstein Noah
Restaurant Group, Peet’s Coffee & Tea, and Stumptown Roasters.

Restaurant Company: Starbucks

Buyer: Starbucks
Seller: Uni-President Enterprises, President
Chain Store Corporation
Price: $1.3 billion
In June 2017, Starbucks announced the
largest single acquisition in its history, a
roughly $1.3 billion deal that would allow it
to acquire the remaining 50% share of its
East China business from joint venture
partners Uni-President Enterprises and
President Chain Store Corporation. The
deal paves the way for Starbucks to own
100% of the approximately 1,300 locations in the Shanghai and Jiangsu and
Zhejiang Provinces.

Restaurant Company: Chuck E. Cheese’s

Buyer: Apollo Global Management LLC
Seller: CEC Entertainment Inc.
Price: $1.3 billion
In 2014, Apollo announced it would buy out
Chuck E. Cheese’s parent CEC
Entertainment, which operated 577 of the
kid-friendly restaurants, for $1.3 billion,
including the assumption of debt. In recent months, Apollo has been rumored to
be considering a sale of the chain. In May, Bloomberg reported that the company
was in talks with investment firm Ares Management LP over a sale that could
value Chuck E. Cheese’s at roughly $2 billion.

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Restaurant Company: Domino’s

Buyer: Bain Capital
Seller: Company
Price: $1.1 billion
In 1998, Bain Capital (then led by Mitt
Romney) made a splash in signing a more-
than $1 billion deal for Domino’s Pizza.
Unlike many other acquisitions, Domino’s
was not in need of rescue or turnaround at
the time. Instead, the company’s founder
(Thomas Monaghan) was looking to cash
out all but a small stake and use the
proceeds to start a Catholic university. Bain
reaped a 500% return on its investment over
the next 12 years.

Restaurant Company: PF Chang’s

Buyer: Centerbridge Partners
Seller: Company
Price: $1.1 billion
It was 2012 when PF Chang’s China Bistro
sold for $1.1 billion to Centerbridge
Partners. At the time, the Asian concept
was struggling to shore up sales and foot
traffic, and hoped the deal would provide it
with greater flexibility to focus on a ―long-
term strategic plan of elevating the guest experience, enhancing the value
proposition, growing traffic and improving the performance of the company’s
brands.‖

Restaurant Company: CKE Restaurants

Buyer: Apollo Global Management
Seller: Company
Price: $1 billion
In 2010, once-rumored Labor Secretary
Andrew Puzder sold CKE to Leon Black’s
private equity firm Apollo Global
Management, in a deal that allowed Puzder
to remain CEO. Apollo invested $436 million
in the buyout and collected $996 million
when exiting in November 2013, three and a
half years later, according to reports from the time. In 2013, Roark Capital inked
a deal to acquire CKE from Apollo. That deal reportedly valued CKE at between
$1.65 billion to $1.75 billion.

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Restaurant Company: Peet’s Coffee & Tea
Buyer: Joh. A. Benckiser, BDT Capital
Seller: Company
Price: roughly $1 billion
In 2012, Peet’s Coffee & Tea was acquired
for $974 million by JAB Holding. In 2015, it
was announced that Peet’s would acquire a majority stake in the Chicago-based
Intelligentsia Coffee & Tea. JAB has since gone on to acquire a number of large
coffee and bakery chains, including Caribou Coffee and Panera.

Restaurant Company: Portillo’s

Buyer: Berkshire Partners
Seller: Portillo Restaurant Group
Price: Undisclosed (reportedly nearly $1
billion)
In 2014, Chicago-based Berkshire Partners
announced its acquisition of Portillo’s for
nearly $1 billion. The hot dog chain
operates 38 locations in four states, though
the acquisition was meant to increase the
number of units and expand to new
markets.

Restaurant Company: Cheddar’s Scratch

Kitchen
Buyer: Darden
Seller: Company
Price: $780 million
In March 2017, Darden Restaurants agreed to buy Cheddar’s Scratch Kitchen for
$780 million from a group of stockholders, including private equity firms L
Catterton and Oak Investment Partners. Cheddar’s currently has 165 locations,
including 140 owned and 25 franchised, in 28 states, though Darden has noted
the chain has ―significant growth opportunities in new and existing markets‖ and
average annual restaurant volumes of $4.4 million.
Restaurant Company: Einstein Bros. Bagels
Buyer: JAB Holding Company
Seller: Einstein Noah Restaurant Group
Price: $374 million
JAB announced it would purchase the parent
company of Einstein Bros. Bagels for $374 million
in 2014. The bagel purveyors stock soared 50%
upon the news. No stranger to restaurant
acquisitions, in the years since JAB has continued
to add to its cadre of coffee and breakfast chains,
leading some to deem it the company ―taking over
breakfast in America.‖

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OTHER NOTABLE RESTAURANT ACQUISITIONS

Restaurant Company: Aramark Corp.

Buyer: Consortium including Thomas Lee
Partners, Warburg Pincus, and The
Goldman Sachs Group
Seller: Company
Price: $6.09 billion
Also not technically a restaurant acquisition but a big one for foodservice
nonetheless. In 2006, food services company Aramark, which provides food to
institutions including companies, colleges and universities, sports stadiums, and
hospitals, announced it would be acquired by a group led by the company’s chief
executive and a group of investment funds, for $6.3 billion. Aramark valued the
deal, including debt, at $8.3 billion.

Restaurant Company: OpenTable

Buyer: Priceline
Seller: Company
Price: $2.6 billion
While it’s not technically a restaurant acquisition, the purchase of OpenTable
certainly had ramifications for the industry. In 2014, travel reservations giant the
Priceline Group announced it had acquired online restaurant reservations site
OpenTable for $2.6 billion. At the time, OpenTable was generating less than
$200 million in annual revenue, and many have argued Priceline overpaid for the
platform. In the third quarter of 2017, Priceline announced it had taken a $941
million non-cash impairment charge against OpenTable’s goodwill and would be
slowing down the pace of OpenTable’s growth. A number of competing
reservation sites have cropped up since the acquisition, including Resy, Reserve,
and Yelp’s platform.

Restaurant Company: Sodexo Inc.

Buyer: Sodexo Alliance
Seller: Company
Price: $1.85 billion
In 1998, Sodexho merged with Marriott
Management Services, at the time one of
the largest food services companies in North America, to become one of the
largest food services providers in America. In 2001, Sodexho Alliance acquired
the outstanding shares of Sodexho Marriott (the Marriott name has since been
dropped and the North American unit is now known as Sodexo Inc., a wholly-
owned subsidiary of Sodexho Alliance). At the time, Sodexho Inc. was one of the
three largest corporations in North America offering outsourced support services
(including food, laundry, and housekeeping) to businesses and public institutions.

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Restaurant Company: Dave & Buster’s

Buyer: Oak Hill Capital Partners
Seller: Wellspring Capital
Price: $570 million
In 2010, entertainment chain Dave &
Buster’s sold to Oak Hill Capital Partners in
a $570 million deal. At the time, partners at
the firm said they saw the restaurant chain
as a very strong candidate for a successful
initial public offering. The chain eventually went public in 2014.

Restaurant Company: Checker’s

Buyer: Oak Hill Capital Partners
Seller: Sentinel Capital Partners
Price: $525 million
In March 2017, private equity firm Oak Hill
Capital Partners again made headlines
when it announced plans to buy the Tampa-
based Checker’s fast-food chain from its equity ownership for roughly $525
million.

Restaurant Company: Long John Silver’s,

A&W All American Food Restaurants
Buyer: Tricon Global Restaurants, Inc.
(Yum)
Seller: Yorkshire Global Restaurants
Price: $320 million
In 2002, Tricon Global Restaurants signed an agreement to acquire Long John
Silver’s and A&W All American Food Restaurants, then owned by Yorkshire
Global Restaurants, for $320 million in cash. Tricon underwent a name change
that same year and now goes by a more-familiar moniker: Yum!

Restaurant Company: Kahala Brands

Buyer: MTY
Seller: Company
Price: $300 million
Canadian company MTY Food Group Inc.
acquired Kahala Brands, the Arizona-based
operator of a cadre of brands including
Pinkberry, Blimp, and Cold Stone
Creamery, for $300 million.

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Restaurant Company: Levy
Buyer: Compass Group
Seller: Company
Price: $250 million
Under a deal closed in April 2006, Larry Levy, one
of the biggest names in Chicago’s restaurant
scene, sold his restaurant and catering business to
British foodservice firm Compass. Compass
acquired a 49% stake in Levy (parent company of
restaurants including Spiaggia and Bistro 110) in
2000. In 2006, Compass acquired the remaining
51% of Levy Restaurants for $250 million.

Restaurant Company: La Tagliatella

Buyer: AmRest Holdings
Seller: Company
Price: $233 million

In 2011, AmRest Holdings announced the

closing of its acquisition of Restauravia
Grupo Empresarial S.L., which put the company in ownership of 76.3% of
Restauravia shares with the remaining 23.7% comprised of rolled over equity
from Restauravia’s management. The Spanish-based Restauravia was the
owner of La Tagliatelle (which, at the time, comprised 105 Italian casual dining
restaurants) and 30 KFC units. At the time of the acquisition, AmRest announced
plans to extend its reach in KFC (the company already operated a number of
KFC units in Europe) and double the number of La Tagliatella restaurants within
five years.

Restaurant Company: Tam’s Yunnan Rice

Noodle
Buyer: Toridoll Holdings Corp.
Seller: Jointed-Heart Catering Holdings
Limited
Price: $127+ million
Japanese restaurant group Toridoll, the
country’s largest operator of noodle shops
and eateries, announced it would take
control of the Hong Kong company operating Tam’s Yunnan Rice Noodles
outlets, in a takeover valued at 15 billion yen (or roughly $127 million).

As we’ve seen historically, future restaurant acquisitions will hinge largely on

trends: the popularity of QSR and burger concepts will likely lead to future
mergers or acquisitions, for instance. In 2016, 38 QSR chains made more than
half-a-billion dollars in sales. Family casual chains, as well as burger
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(Whataburger, McDonald’s, In-N-Out, Culver’s, Steak & Shake) and some
chicken concepts (Chick-fil-A, El Pollo Loco, Bojangles) are among the top
earners, each bringing in an average of more than $1.7m in sales per unit.

Urbanization and the rise of e-commerce will give rise to the acquisition of chains
that have historically been featured in malls, while cannibalization will force s
https://aaronallen.com/blog/largest-restaurant-acquisitions

What Happens When a Company Merges?

In a capitalist economy, competition in business is a good thing. The basic
theory is that competition helps create jobs and keep prices fair. Competition
can be brutal, however, and some businesses cannot keep up. In some cases,
the choice could be either to close shop or merge with an existing company.
During a merger and acquisition, two businesses combine to create one entity.
The entity created during the merger may keep the name of one of the
businesses or take on an entirely new identity.

Horizontal Merger
Horizontal mergers occur when two competitors merge or become one entity.
An example would be if Kroger and Meijer, two grocery store chains, joined
together. Horizontal mergers may result in a monopoly, however, which is
generally prohibited by federal laws. Interested parties can attempt to block the
merger if they believe it will violate anti-trust laws. For example, in August 2011,
the U.S. Justice Department filed a lawsuit to block a proposed merger between
AT&T and T-Mobile, two of the companies largest cellular phone companies.

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Vertical Merger
Vertical mergers occur when one company merges with or acquires another
company in the same industry, but with a different role in the production cycle.
According to the FreeDictionary.com, one business typically absorbs either a
customer or supplier. For example, vertical merger occurs if Widgets Inc. sells
materials that Weevils Inc. uses in its products, and Weevils Inc. buys Widgets
Inc. The issue here is whether the acquisition by Weevils Inc. would prevent its
competition from acquiring the same materials. Interested parties could attempt
to block this type of acquisition if it would result in unfair competition and violate
anti-trust laws.

Employee and Stock Issues

A merger is unsettling, especially for the merging company. Employees may
wonder whether their jobs are safe or what will happen and shareholders may
wonder what will happen to their stocks. The answer depends on the
circumstances. The company acquiring the merging-company may initiate
layoffs, keep the staff or offer severance packages, for example. An employee’s
job could remain the same, or the new boss may add or subtract job duties.
With regard to stocks, often, the new company may simply buyout the old
shares or exchange the old shares for new ones based on a prescribed
formula.

Other Issues
The specifics of the merger depend heavily on individual facts and
circumstances. There are other types of mergers, as well. A conglomerate
merger, for example, involves the merge of two companies who have nothing in
common, but choose to collaborate and form one entity. To avoid confusion and
answer questions, it may be helpful to provide employees with a newsletter
explaining the process and the ramifications. Readers who are unsure of what
will happen and want to protect their legal rights should speak to an attorney in
their area for independent advice.
https://smallbusiness.chron.com/happens-company-merges-23180.html

What are the Different Motives for Mergers?

Companies pursue mergers and acquisitions for several reasons. The most
common motives for mergers include the following:

1. Value creation
Two companies may undertake a merger to increase the wealth of their
shareholders. Generally, the consolidation of two businesses results in synergies
that increase the value of a newly created business entity. Essentially, synergy
means that the value of a merged company exceeds the sum of the values of two
individual companies. Note that there are two types of synergies:

 Revenue synergies: Synergies that primarily improve the company’s

revenue-generating ability. For example, market expansion, production

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MODULE: Quick Food Service Operations
diversification, and R&D activities are only a few factors that can create
revenue synergies.
 Cost synergies: Synergies that reduce the company’s cost structure.
Generally, a successful merger may result in economies of scale, access
to new technologies, and even elimination of certain costs. All these
events may improve the cost structure of a company
2. Diversification
Mergers are frequently undertaken for diversification reasons. For example, a
company may use a merger to diversify its business operations by entering into
new markets or offering new products or services. Additionally, it is common that
the managers of a company may arrange a merger deal to diversify risks relating
to the company’s operations.
Note that shareholders are not always content with situations when the merger
deal is primarily motivated by the objective of risk diversification. In many cases,
the shareholders can easily diversify their risks through investment portfolios
while a merger of two companies is typically a long and risky transaction. Market-
extension, product-extension, and conglomerate mergers are typically motivated
by diversification objectives.

3. Acquisition of assets
A merger can be motivated by a desire to acquire certain assets that cannot be
obtained using other methods. In M&A transactions, it is quite common that some
companies arrange mergers to gain access to assets that are unique or to assets
that usually take a long time to develop internally. For example, access to new
technologies is a frequent objective in many mergers.

4. Increase in financial capacity

Every company faces a maximum financial capacity to finance its operations
through either debt or equity markets. Lacking adequate financial capacity, a
company may merge with another. As a result, a consolidated entity will secure a
higher financial capacity that can be employed in further business development
processes.

5. Tax purposes
If a company generates significant taxable income, it can merge with a company
with substantial carry forward tax losses. After the merger, the total tax liability of
the consolidated company will be much lower than the tax liability of the
independent company.

6. Incentives for managers

Sometimes, mergers are primarily motivated by the personal interests and goals
of the top management of a company. For example, a company created as a
result of a merger guarantees more power and prestige that can be viewed
favorably by managers. Such a motive can also be reinforced by the managers’
ego, as well as his or her intention to build the biggest company in the industry in
terms of size. Such a phenomenon can be referred to as ―empire building,‖ which

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MODULE: Quick Food Service Operations
happens when the managers of a company start favoring the size of a company
more than its actual performance.

Additionally, managers may prefer mergers because empirical evidence

suggests that the size of a company and the compensation of managers are
correlated. Although modern compensation packages consist of a base salary,
performance bonuses, stocks, and options, the base salary still represents the
largest portion of the package. Note that the bigger companies can afford to offer
higher salaries and bonuses to their managers.

What is a Merger?

A merger is referred to as a financial transaction in which two companies join

each other and continue operations as one legal entity. Generally, mergers can
be divided into five different categories:

1. Horizontal merger: Merging companies are direct competitors operating

in the same market and offer similar products and/or services.
2. Vertical merger: Merging companies operate along the same supply
chain line.
3. Market-extension merger: Merging companies offer comparable
products and/or services but operate in different markets.
4. Product-extension merger: Merging companies operating in the same
market offer products and/or services complementary to each other.
5. Conglomerate merger: Merging companies offer completely different
products and/or services.
Note that the type of merger selected by a company primarily depends on the
motives and objectives of the companies participating in a deal.

Related Readings
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification
program for those looking to take their careers to the next level. To keep learning
and advancing your career, the following CFI resources will be helpful:

 Acquisition Structure
 Financial Synergy
 M&A Considerations and Implications
 Merger Consequences Analysis
https://corporatefinanceinstitute.com/resources/knowledge/deals/motives-for-mergers/
.

What Happens to Employees When an Acquisition Occurs?

For someone starting a business, an acquisition is one of the best things that
can happen. It usually means a company has gained enough traction to get
noticed by someone much bigger and more successful. But the business being
bought is likely stocked with its own team of employees, and each will
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immediately start worrying about what will happen to their own jobs. In some
cases, employees are let go, but in many others, they’re merged into the new
company or allowed to remain with the previous company under new owners.

Company Acquisition and Employees

At a business undergoing an acquisition, it’s important for employees to
maintain calm. Employees will understandably be concerned, and their
concerns aren’t unwarranted. Approximately 30 percent of workers are deemed
redundant after a business is purchased when both companies are in the same
industry.
But that statistic doesn’t necessarily mean any of your employees are at risk of
hitting the unemployment line. Even if you later need to cut back, those workers
could be shifted into other positions within the company. Either way, employees
aren’t helpless as they wait to see what happens next.

Immediately Following Acquisition

After the initial announcement of a company acquisition, there’s generally a
period of silence. It may seem during this time that nothing is happening, but
there’s plenty of hard work going on behind the scenes. The buyer should dig
into the company’s books and make some serious decisions about how to move
forward.

During this quiet period, it’s important for the leadership team to keep the lines
of communication open with employees, who will likely be nervous. If possible,
have the acquiring business meet with employees to answer questions.
Employees can help ensure their own positions within the new business
structure by working hard and showing up at meetings to get the information
they need.

Buyers and Payroll Expenses

When one company buys another company, employee acquisition generally
isn’t the top concern. The acquiring company is generally focused on growing
its portfolio, and existing employees show up as a fairly large line item on the
company’s monthly expenses. If the buyer sees that the budget needs to be
trimmed, payroll expenses are only one of many ways that can be
accomplished.

What an acquiring business is most worried about is waste. If two businesses

have fully staffed accounting teams and they merge into one, someone at the
top will look at a way to streamline the team, which may mean some layoffs.
While it might be assumed that the buying company will go with its own
employees, the smaller business’s team may have some people who are more
qualified, or the buying business may have underperforming employees who
were on their way out even before the acquisition.

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Different Buyout Types
Before a business automatically assumes there will be any change at all to
employees after merger, it’s important to note that not all buyouts are equal. In
some cases, one business buys another simply to grow its own financial
portfolio. The purchased company will remain in place, allowed to operate
exactly as it did before.

However, in many other cases, a few things merge while others remain the
same. Your web development company may have been bought by a media
company, for instance, because it sees the need to move into internet-based
offerings. The buying company is interested in leveraging the expertise of your
tech teams, so they’ll likely be safe, but supporting staff like management and
HR may have reason for concern.

What Employees Can Do

If layoffs do happen, they’ll likely target redundant workers. So one proactive
thing employees can do is try to reduce the risk that they’ll be seen that way. In
some cases, the acquiring company will sit down with each employee and
discuss current work responsibilities. This is the chance for employees to stress
any specialized skills that set them apart from others in their field.

Although employees will understandably be distracted, it’s important to stress

the importance of continuing business as usual. The business will be under a
microscope in the early days, so that isn’t the time to have the lowest sales ever
or fall behind on administrative tasks like sending invoices and paying bills.

Issues Leaders Face

In addition to morale issues associated with fear and uncertainty, management
will also face challenges when it comes to implementing change. Employees
who have gotten used to working a certain way may push back against new
processes or technologies. Even something as simple as a change to the way
time sheets are submitted can bring complaints from employees who are
already stressed.

Good leaders know how to set a good example during upheaval, primarily by
remaining calm and continuing to work hard. They also see the signs of
dropping morale and work to address it on a person-by-person basis. If an
employee feels overwhelmed by the new software the team is being asked to
use, for example, it might be worth looking into training options to get everyone
up to speed.

Changes in Personnel
In an employee acquisition, executive management often comes under fire. A
business’s top leaders, including the CEO, will usually be eliminated or
absorbed into the management team at the new business. For employees, this
can be a tricky time as they try to determine what will be expected of them
during and after the transition.
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Leadership isn’t the only way personnel changes will affect your employees. If
the new leadership eliminates some positions, the remaining personnel will be
left to handle the work the departing workers used to do. Whether layoffs
happen or not, teams may find it tough to learn new processes and merge with
other employees who have been working with the parent company for years.

Changes to Benefits
In addition to changes in leadership and operations, employees after mergers
or acquisitions often see their benefits change. No business wants to maintain
two separate healthcare and retirement plan structures, and generally the
acquiring company will choose. You’ll probably have a company-wide meeting
or phone call to explain the new benefits, as well as a special enrollment for all
the employees coming over from the purchased company.

However, employees with the company being acquired will understandably

have concerns about the benefits they’ve already accrued. Employees with
pensions, for instance, will be concerned about losing the credit they’ve put
toward retirement, but the Employee Retirement Income Security Act will
provide protection for that. The acquiring business should work hard to make
sure all employees are satisfied, because positive morale is in the best interest
of the company as a whole.

What Happens to Stock Options?

For employees who hold stock options, a company acquisition brings even
more questions. When stock options are issued, they come with a vesting
schedule, which ensures you stay with the company a specific amount of time
to earn the right to purchase those shares. If an employee holds options, that
means those shares aren’t vested yet, so the acquirer could cancel the options
or speed up the vesting process so that employees are paid and the debt is
settled.

For vested shares, the acquiring company can either pay the amount in cash or
substitute the shares in the old company with new shares. The latter benefits
the new company because it strengthens its shareholders. If the acquiring
company hasn’t yet gone public, the new shares could also be of greater value
down the road than the shares in the previous company.

Losing Remaining Employees

With any employee acquisition, leaders with both the acquirer and the acquiree
must worry about losing employees through resignations and retirement. It’s not
unusual for a few top-performing workers to leave during a merger or
acquisition, even if they know for certain their jobs are safe.

There are a few reasons a business’s best employees may consider

leaving:
 Poor communication
 Loss of treasured team members
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 Loyalty to terminated supervisors
 Uncertainty about status in the new organization
 Resistance to change

If you have long-term employees who are eligible for retirement, you may see
that the change that comes from an acquisition pushes them to make the leap.
For them, it’s easier to retire now than to put all the work into learning new
processes, only to retire in a few years.

Screenings and Vetting

After merger or acquisition activity, employees may have to go through a
qualification process. The new company may have stricter hiring practices than
the smaller business, especially if it’s an early or midstage startup. This could
include having every employee go through the interview process or, at the very
least, submit a resume for the acquiring company to keep on file.
Interviewing may not be the only concern, though. Some companies
background screen each employee during the hiring phase, especially if they’re
in a situation where they’re going into customers’ homes. Whether you were
given one when you were hired or not, you may be required to undergo both a
background check and a drug screening – so make sure you’re prepared for
that.

Signs a Layoff Is Looming

The environment post-acquisition can be tense, as workers wait to see if their
jobs are on the chopping block. Although the acquiring company will likely want
to get everything in line before making cuts, it’s important not to drag it out so
long that it drops morale. Employees should try to avoid spending so much time
stressing about it that they let it affect they're overall well-being.

There are some surefire signs that layoffs are looming. Of course, the biggest
one is the acquisition itself and the fact that the acquiring business is taking an
in-depth look at operations. However, if a team is about to undergo massive
layoffs, executives can tend to neglect those areas of the business, even
shifting some of the work over to other employees. If the manager of a team is
laid off or relocated and the team beneath that person gets no guidance, that
could also make those employees anxious.

Moving on After Termination

For some employees, an acquisition may mean the end of the road with that
business. If you’re one of the unfortunate few, you may find that you’re faced
with some very crucial decisions. It’s important to carefully review any letter
you’re asked to sign and, if necessary, consult an attorney. This is especially
vital if the letter inhibits your ability to work for a competitor.
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