Takeda's big pay out in acquisition fees 

Takeda, Japan’s largest drug maker, is in the middle of a huge cross-border takeover of an Irish drug making firm called Shire. The takeover is costing £46 billion!

Merger and Acquisition (M&A) activity occurs in business regularly due to the potential opportunities that can be gained. Referring to the research area antecedents which is the merger motives, M&A’s occur due to:

•  Superior management
• Third party motives
• Managerial motives
• Synergy’s

However, it is not as simple as having a motive, completing an M&A then suddenly, your business is improved. M&A’s are very complicated and a lot of the time they don’t even pay off as well as hoped. M&A’s can either be friendly or hostile. Friendly is when there is a joint agreement made between the two companies and hostile is when the target firm doesn’t want to be acquired. In this case it is a friendly acquisition with no tender offer being made which means Takeda did not go straight to the shareholders of Shire. The target firm’s management can recommend to shareholders to either accept or reject offers but shareholders have the final decision.

The difference between mergers and acquisitions is that mergers occur between two companies of a similar size and they complete a friendly reorganisation of assets to create a new organisation. An acquisition is when one company buys 50% or more of ownership of the target company. Takeda are completing a horizontal takeover which is when the companies are both operating in the same industry and both at similar production stages in business. Takeda and Shire are both drug making companies. A vertical takeover is when the companies are in the same industry but aren’t in the same operating stages. Lastly, a conglomerate takeover is when the companies are operating in different business areas.

Takeda targeted shire due to the opportunity to expand into an international business and diversify. A cross-bored acquisition is a way of being able to make your business international and the target firm is already operating in a different country. Cross-border acquisitions often happen due to this reason. Theoretically, justification of M&A’s should really be to increase shareholder wealth. In an acquisition, shareholders of the acquiring firm should see an increase in their wealth with the assumed objective of public companies being shareholder wealth maximisation. Shareholders will only be on board with deals if in the end it will benefit them.

Generating profit from acquisitions can be difficult especially with the added aspects of paying fees to get the deal through. So not only are you paying for the company but added costs need to be accounted for. Overvaluing targets and bad organisational fit on top of fees means that the business needs to aggressively cut costs to save money and be as efficient as can be and sweat their assets to be lean and generate as much profit as possible. Takeda are paying a massive sum of nearly $1 billion in fees! Imagine if you didn’t have fees to pay Takeda would already have $1 billion extra which could be used better elsewhere. It’s a ‘cash cow’ for bankers and lawyers according to the Financial Times. Financial advisers, bankers, lawyers and others are being paid a lot of money to help the deal.

M&A activity is financed through either cash or stock or a mix with them being having their own pros and cons. Takeda are paying £46 billion in a mixture of cash and stock.

Cash advantages
- Simpler process and more clear-cut
- Acquirers shareholders are ale to obtain the exact same amount of control over their firm 

Cash disadvantages:
-Depending on the target firms' shareholders personal financial situation, a big cash pay-out could mean they pay capital gains tax
If the cash being used has been raised through debt, then it will increase gearing. Subsequently, if they already have a big amount of debt this may be bad news affecting their capital structure.

Share advantages:
-The shareholders of the target firm can chose whether to sell their share or maintain it meaning they can postpone their capital gains tax if it isn't the right time for them 
-They also have an interest in the company post deal
-No big cash outflow 

Share disadvantages:
-Issuing a lot of new shares will dilute the existing shares owned 
-You have no cash to invest with and spend elsewhere 

Takeda have opted for cash and stock allowing the benefits of both to be used. Especially, with it being such a large deal a mix may be better. With Takeda and Shire being two drug making companies it means that once Takeda has acquired Shire their market power will increase in that industry. It seems like a positive acquisition for Takeda allowing them to benefit from thing like economies of scale. They can share information, research and development, management styles and profit. 

A major obstacle that acquiring firms must surpass is regulatory bodies. The city panel, also known as the city code, was created in a self-regulatory way with knowledgeable city institutions running it. It gives the main rules and has some strong legal power. They represent the financial market with the ability to shun, remove share voting rights, and apply legal action under market abuse legislation and to enforce public reprimands. They have a strong purpose which is to ultimately protect shareholders and ensure treatment is fair and equal. As you can see, they do have a lot of power as well as Competition and Markets Authority (CMA). Not all M&A are welcome, and these regulatory bodies could stop them from occurring. This is why Takeda have paid so much in fees to get the deal through, it is a big worry and challenge for businesses to make sure regulatory bodies don’t affect the deal.