Implications of Halfords acquisition of Nationwide Autocenters
In 2010, Halfords decided to buy Nationwide Autocentres which was under ownership of a private equity firm known as Phoenix Equity Partners. Out of this acquisition, Halfords is likely to realize certain advantages and disadvantages of acquiring a private owned firm. These benefits and challenges will be as follows.
Advantages of buying private company over public company
- Limited disclosure is required for a private company
Upon acquisition of Nationwide, Halfords will not be obligated to file essential financial information with the Security and Exchange Commission or other regulatory agencies. Public firms are always under obligation to file certain mandatory financial documents with the federal regulatory agencies (Epstein, 2005). However, Halfords will only have to make limited disclosures regarding operations of the newly acquired Nationwide Autocenters. The nature of information that is required for reporting depends on the state where the business is registered. Basically, what Halfords may be required to disclose when filing annual report for Nationwide is the name of the company, address, current key officers and registered agents (Levy, 2016). This means that Halfords will not be under pressure to undergo compliance bureaucracies and scrutiny that public firms have to meet. The company will focus all this effort on improving performance of the acquired venture.
- Simple and sound management
Unlike public firms that have several layers of management and board of directors, private companies have simple management structures (Barber and Goold, 2007). Halfords is able to change management of Nationwide and freely make critical decisions without facing the red tapes of board of directors or company officers. In fact, Nationwide is solely owned by Phoenix Private Equity and that means that after it is acquired then Halfords will have full responsibility of operational and management activities. It is common practice for companies to replace CEOs, CFOs, or any other top management staff within the first two years of buying a privately owned firm (ICAEW, p.117). Halfords will have full control of the Nationwide because it is the sole owner of the business after buying from Phoenix Equity.
- Financial health and value addition
Private equity firms earn revenues by buying non-performing business units that have potential to perform and then selling them at a profit years after that. Over this period, the equity firms focus on adding value and increasing returns so that the business is profitable and attractive to investors (Plunkett, 2005). In some cases, these acquired businesses were just performing better before being bought off but they were not independent because control was with the parent company. Phoenix Equity Partners bought Nationwide for £49million in 2006 and after four years it sold for £73.2 million and without any debts. Halfords decision to buy Nationwide is plausible because Phoenix Equity Partners has restored it to good financial health and it is presently a profitable venture. Buying private firms like Nationwide is commendable because activities are usually independent of any parent company and all operational structures are in place. Strings of control are solely in the hands of the buyer and the buying company gets a functionally tested company that has full operational model in place.
- geographical coverage
After buying a public company, the operational coverage may be limited to a specific country where the company has jurisdiction. However, acquiring private company gives the buyer share of all the global markets where the sold company has presence (Barber and Goold, 2007). For Halfords case, acquisition of Nationwide increased revenues by 1.6 percent despite the drop in sales in the year 2011. Halfords had the privilege of distributing and selling bicycle and automotive products or services to an additional 240 branches that were previously owned by Nationwide. This advantage could have been barely realized if Halfords had chosen to buy a public firm instead of a private one.
Disadvantages of buying private company over public company
The move by Halfords to acquire Nationwide also presents certain threats. These challenges and threats could paralyze efficiency and performance in short term or long term if not handled appropriately. Two of the main disadvantages of buying private companies over public companies are identified and discussed below.
- Mismatch of organizational cultures
Private firms have their own customized policies, organization cultures, and business models that work in the specific markets where they operate. One factor that impedes efficiency in a newly acquired business is cultural clash (Ashkanasy et al, 2011). This phenomenon is not so common when a public firm is acquired because public organizations use basic standards that apply in almost all public organizations. Upon acquiring Nationwide, Halfords could experience serious cultural mismatches that will kill efficiency across the 240 branches operated by Nationwide. Statistics indicate that almost one-third of mergers fail to actualize in the first five years of formation due to problems of culture clash (Senn, n.d).
- Non-participation in IPO
A private-owned company cannot raise capital through public markets the way registered public companies do (Cendrowski, 2012). This is another challenge that Halfords will have to factor in when buying Nationwide Autocentres. If they need to raise capital while still using the Nationwide brand, they will have to explore other financing options like bank loans. Halfords needs to integrate all the 240 Nationwide branches under its umbrella and this will be a costly activity that could have been funded through IPO if they were taking a public company. However, the company still has advantage because it can use the assets under its disposal as loan collateral.
While Halfords initiative to take Nationwide may present some challenges, the move will also create several long-term benefits. The problems associated with acquiring a private firm can be managed by the buyer and therefore Halfords should go on and buy Nationwide. For instance, if Halfords runs out of funds to finance rebranding activities across the 240 Nationwide branches then it could use its reputation or assets to secure loans from financial institutions. Similarly, the problem of culture clash can be handled by allowing the acquired Nationwide regional employees to work under the same human resources policies they used while working for Nationwide. This will eliminate initial inefficiencies that result if Halfords inducts the new employees into its organizational practices. It is evident that if Halfords successfully acquires Nationwide then it will improve its global market share because its products and services will penetrate the cross-border markets that were previously held by Nationwide. Returns for Halfords will also increase and the brand will have strong presence in the new markets. Additionally, Halfords performance will also get better because the new acquisition will not come with complicated leadership and management structures. The company will adopt the company structures that Phoenix Equity Partners had been using to run the business profitably before the sale.
Ashkanasy, N. M., Wilderom, C., & Peterson, M. F. (2011). The handbook of organizational culture and climate. Thousand Oaks, SAGE Publications.
Barber, F. & Goold, M. (2007). The strategic secret of private equity. Retrieved from https://hbr.org/2007/09/the-strategic-secret-of-private-equity
Cendrowski, H. (2012). Private equity: history, governance, and operations. Hoboken, N.J., Wiley.
Epstein, L. (2005). Reading financial reports for dummies. Hoboken, NJ, Wiley Pub.
Gilligan, J. & Wright, M. (2008). Private equity demystified: an explanatory guide. ICAEW, 1- 92. Retrieved https://workspace.imperial.ac.uk/entrepreneurship/Public/Privateequity1.pdf
Levy, S. M. (2016). Regulation of securities: SEC answer book. New York, NW, Wolters Kluwer
Plunkett, J. W. (2005). Plunkett’s retail industry almanac 2006: the only comprehensive guide to the retail industry. Houston, Tex, Plunkett Research.
Senn, L. n.d. Cultural clash in mergers and acquisitions. Heidrick and Struggles, 1-7. http://knowledge.senndelaney.com/docs/thought_papers/pdf/SennDelaney_cultureclash_ UK.pdf