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In the News04 October 2005 Boots share price rose by over 4.5% on the news but the share price was still a long way off its year high of 692.5p and finally closed 0.5p down on the day at 632.50p. Often an announcement of a merger leads to a degree of optimism from the City and shares rise as a result. The muted response in this case suggests that the City is not bowled over by the plans. Why might this be? One reason for a merger is to gain what are referred to as 'synergies'. Synergy means the whole is greater than the sum of the parts. In the case of Boots and Alliance UniChem, the synergies might be that the combined store presence, skills of the staff, cost savings and ability to develop new products and services and so on would improve the joint company's overall position. Both companies suggested that cost savings would amount to around £100 million. In this case there are deeper problems that may mean that the anticipated synergies will not arise even if they exist. Part of the problem lies in what Boots actually is. What do you associate the brand with? Perfumes and cosmetics? Prescription drugs? Toiletries? Over the counter drugs? How about photography or music or household goods? What about sandwiches and foodstuffs? That is part of their problem; they have a wide range of goods and services but have not any real penetration in any one market. In addition, their traditional customers are being poached by supermarkets that are now covering many of the markets that Boots used to dominate. The result of this competition is that Boots profits fell by 11% last year and the Directors have issued a warning that trading conditions are not going to ease this year. Linking up with Alliance therefore is puzzling some analysts in the City as to what benefits this might bring in the long term. The short term cost savings may give some temporary respite but long term it does not really address the strategic issues that Boots face. In some respects the situation is similar to the one faced by WH Smith. Both need to find a way of positioning themselves in a market which has changed significantly and which they have not really found a way of coping with as yet. In some respects Boots already has too many small stores, which increases overheads and makes them less able to compete with the likes of Tesco and Asda Wal-Mart who have both captured market share from Boots. The merger will effectively mean that Boots will acquire another 900 shops and this will merely exacerbate their current problems. The other curious aspect of the deal from an analyst's perspective is the timing of the announcement. It comes not long after the profits warning issued by Boots and this seems to signal that Boots is available for purchase by another interested party. It could be possible therefore that venture capitalists or retailers like Tesco or US firm Walgreens could come in and make a bid for Boots that would effectively scupper the deal. The Competition Commission will also be looking carefully at the progress of the deal in the months ahead. This story is likely to continue to run therefore - watch this space! Search the In the News archive:You can search the In the News section by using the form above or browse the stories using the links below. |
