Burberry Group PLC Financial Acquisitions

Financial Acquisitions of Burberry Group PLC

Introduction

In finance, acquisition and mergers are transactions in which ownership of a particular business is transferred to another business entity and the operating units; in corporate finance, when a company purchases most shares of another business entity, usually more than 50 percent of the claims. Specific considerations have to take place for a company to acquire another company, which generally lies in its advantages. The reason for acquisitions includes seeking synergies, economies of scale, operating costs, and new niche offerings.

Burberry Group PLC is a British fashion house dealing with the design of luxurious ready-to-wear products. Some of the Company’s unique products include leather jackets, trench coats, footwear, eyewear, and other fashion accessories. The Company is considered well-performing due to its net revenue of 2.63 billion as of 2020 (Statista, 2021). The Company is also listed on the London stock exchange, and in 2015 it ranked 73rd globally in Interbrand commodities, and it has stores in 59 countries. Burberry Group Plc’s main reason for acquiring other stores is to unify the brand globally and increase its market capitalization to increase exposure to luxurious markets. Burberry Group PLC can acquire Padfield Company, a British company dealing with luxury leather goods.

The rationale for choosing the target company

Several factors ought to be determined when choosing the right Company for acquisition. The rationales of selecting a particular company have to be carefully considered. The first rationale to consider is the market capability of the Company to acquire (Rabier, 2017, pp.2666-2681). Access to new markets is a primary reason for acquisition; thus, Burberry Group PLC should assess if it will take over Padfield market share and if the market was big enough and worthy to take on. Blueberry deals with leather products, so acquiring Padfield Company might be to acquire the Company’s products and services which is a rationale for the acquisition. Another factor to consider in the acquisition is the capabilities and diversifications of the Company to acquire (Gartenberg and Yiu, 2021). The capacities range from resources, infrastructure, and innovations. Burberry needs to consider the range of capabilities it will acquire from acquiring Padfield to improve its operations from the joint efforts. The cost of acquiring the Company is a fundamental rationale of acquisitions. Burberry management has to consider if the acquisition price is in line with the Company’s strategic objectives. If the Company can afford the acquisition and later generate much value for Burberry, the Company must get into the acquisition.

The synergistic gain of the acquisition for the Company

The acquisition might provide a synergistic gain for a company entering into it, and it is one of the advantages of purchase. In its definition, synergy is the idea that the combined value of two companies is more significant than rather when the companies operate as separate units. Synergies can be grouped into financial and operational synergies. The operational synergies include combined strengths. When Burberry PLC acquires Padfield Company, it will develop the skills to produce quality leather products, which will improve the quality of leather accessories made by Burberry. Burberry will also gain increased pricing power from the reduced competition levels and the increased market share from the acquisition. The Company will also experience more significant economies of scale due to the increased cost advantages that result from the scale of operations that decreases the unit of output and increase sales (Kim et al., 2014, pp.122-132). Burberry PLC will improve its financial capabilities with a steady flow of income and access to more lending advantages on the financial synergies. The Company can also gain tax benefits due to taking advantage of the tax legislation and utilizing the net losses for a shell turnover.

Proposed deal value and finance of the acquisition

The deal value outlines the set of terms that will enable the acquisition and the transfer of the business to be smooth. Both parties at Burberry and Padfield have to agree on conducting the transaction. The proposed deal value is based on three options; the first is a stock purchase when the buying company purchases most of the stock from the stakeholders. The target company should negotiate the deals and warranties concerning this option’s business assets and liabilities. The next option for purchasing is the sale of assets; Blueberry will purchase the assets but assume the penalties stated in the deal value agreement. The proposed deal between Burberry and Padfield is that the acquired operations will remain at Padfield. Burberry will also take over the equipment and inventory. Finally, the Padfield parts not listed in the acquisitions will continue under Padfield but operate under different entities. The purchase will be valued at 25million euros to take over the Company’s expertise and the employees.

The potential implications of such acquisition on firm performance

Acquisitions might have specific implications on firm performance, which are positive. From the acquisition, Burberry can acquire the human resource at Padfield who are well experienced in producing leather products, thus improving the quality of products made. The valuation of stock prices can also increase because of the combined assets and reduced costs, prompting investors to purchase more stocks. Burberry will also achieve more market growth due to taking over markets previously operated by Padfield. Burberry’s acquisition of Padfield will enable the Company’s financial and operational development.

Challenges and risk assessment of the acquisition

It is essential to note the challenges and risks of acquisition. The first risk in the acquisition is overpaying for the acquired Company, leading to destroyed shareholder value. Poor valuation of the acquisition deal can cause the overpayment problem (Renneboog and Vansteenkiste, 2019, pp.650-699). Another risk that might occur is overestimating the synergies of the acquisition’s acquired advantages (Araguas, 2021). Overestimation will lead to disappointments in the acquisitions if others fail to materialize. Integrating operations is a huge challenge during the acquisition process, especially inclining the previous functions of Padfield to Burberry’s operations.