Corporate level strategy seeks to determine the appropriate blend of business ownership or corporate scope as a means to maximizing shareholder value. At any given historical juncture, an organization has a finite set of resources, strengths and competencies with which it can exploit opportunities for profit. After all there may be stronger, more imaginative or better-managed competitors that may limit expansion opportunities. To secure competitive advantage corporate strategists must maintain strategic fit between internal strengths market opportunities. At the same time, they must overcome internal weakness and counter loaming external threats. At a minimum, corporate strategy paves the way to a promising future. It also cautions against intransigence. Therefore strategic choice is an ongoing process rather an event. At its core, therefore corporate strategy seeks to define the organization’s operating terrain and how it should create value in component units (Hill ;Jones, 2004:299).
The SENS (sharenet provides financial information and service for investors on the JSE) made an announcement dated 1 December 2013, effective 2 December 2013 that Bidvest (on behalf of a consortium made up of Bidvest and Community Investment Holdings or CIH) made a cash offer to the shareholders of Adcock to acquire up to 34.5% of the issued ordinary shares in Adcock, during which time Bidvest already owned approximately 4% of the issued ordinary shares in Adcock. Adcock shareholders accepting the offer would receive a cash amount of R70 per Adcock ordinary share. This investment by the Bidvest-CIH consortium was valued at approximately R4 billion and was funded using the consortium’s own cash resources.
The reason for Bidvest making a direct offer to Adcock shareholders was that the Board of Adcock was supporting an alternative bid by a Chilean company called CFR Pharmaceuticals (CFR). Mokhele (2013) stated that the Adcock Board believed that an Adcock-CFR combination would be in the best interests of shareholders. This statement was contrary to the belief of Adcock’s major shareholder, the Public Investment Corporation (PIC). Whilst the Adcock Board was intent on their strategic support of the CFR bid, the PIC a 20% shareholder in Adcock at the time, strongly disapproved of this decision and acted on their non-support of the CFR bid by supporting Bidvest and voting against the CFR offer.
The direct offer to shareholders by Bidvest was successful and on 31 January 2014, a SENS announcement was released on the Johannesburg Stock Exchange stating the successful acquisition, by the Bidvest-CIH consortium of approximately 39 million Adcock ordinary shares, equating to approximately 34.5% of the issued share capital in Adcock. This acquisition was done through a hostile takeover due to Adcock Ingram’s management not supporting for an acquisition by Bidvest, instead preferring and supporting an offer by CFR Pharmaceuticals. CIH had a 10% shareholding in the consortium, and therefore their net shareholding as a result of the successful transaction was 3.45%, leaving Bidvest with the majority 31.05% shareholding. Having utilized its own cash resources to acquire approximately 39 million shares at R70 a share, Bidvest had invested approximately R2.4 billion (approximately 35 100 000 ordinary Adcock shares at R70 a share). As of 20 May 2014, the Adcock share price was R60.44 and dropped to R53.75 on 23 June 2014.
As it stands, Bidvest’s R2.4 billion investment is yielding negative returns and if this situation persists and the share price does not increase to above R70 a share, Bidvest will never realize returns from this substantial investment. At the prevailing share price of R53.75 a share (as at 23 June 2014), Bidvest’s investment in Adcock was valued at approximately R1.8 billion. As at 30 June 2014, Bidvest suffered an impairment of R1 056 059 as a result of its investment in Adock.
The market for corporate control is described by various activities such as mergers and acquisitions, private equity, venture financing, etc. This case study focuses on corporate control strategies used by Bidvest bid for Adcock Ingrams specifically related to mergers and acquisitions (M&A).Reason for M&A being 1) economies of scale theory: mergers and acquisitions among enterprises will lead to lower marginal costs and the improvement of the competition; 2) synergistic effect: The synergies gained from the merger would lower the cost and increase the efficiency of resource allocation; 3) Di- versification Management Theory. It evaluates value creation as a result of an acquisition, in particular a hostile takeover, vertical integration strategies (which allow a firm to gain control over distributors, suppliers, and/or competitors) specifically Horizontal integration strategy (which refers to a strategy of seeking ownership of or increased control over a firm’s competitors) and assesses whether the supposed or expected growth and profitability is in fact realized.
The role of the Board of Directors in hostile takeovers is probably one of the most important factors in this transaction because boards make the recommendation to shareholders on the preferred bid. Whilst the final decision to either vote for or against a particular offer remains the shareholders’ responsibility, one cannot discount or ignore the strong influence of board recommendations in the shareholder decision making process.
The Bidvest acquisition of Adcock is further intriguing as it entails the acquisition of one publically listed company by another. Because of potential share price volatility in some markets, there is value in understanding some of the literature that exists in relation to the acquisition of publically listed entities.
The analysis in evaluating the corporate strategy used by Bidvest is analyzed.