The agreed takeover of Elkjøp by Dixons
Contents (Jump to)
Abstract
Chapter 2 – Literature Review
Chapter 3 – Sources of Data
Chapter 4 – Research Design, and Statistical Analysis
Chapter 5 – Conclusion
Bibliography
Abstract
The roles and responsibilities of the Board of Directors, Chief Operating Officer, or Managing Director, Chief Financial Officer and the remainder of upper management of a listed company, as stated by Jayne Mammatt, Senior Manager at Ernst and Young, “… have become increasingly onerous in recent years” (Ernst & Young, 2006). The key purpose of the Board of Directors is “… to ensure the …” prosperity of a company by “… directing the company’s affairs whilst meeting the appropriate interests of its shareholders …” (BREFI group, 2006). The role of the Board of Directors is to (BREFI group, 2006):

Establish vision, mission and values,
Set strategy and structure,
Delegate to management, and
Exercise accountability to shareholders and be responsible to relevant stakeholders.

The preceding statement bears particular relevance concerning the subject of the acquisition of Elkjøp by Dixons and whether said acquisition will result in a gain in shareholder wealth. The question posed as to the fact that there is evidence that domestic acquisitions do not lead to shareholder wealth gains is borne out in studies conducted by Doukas and Travlos (1988, pp. 1161-1175) and Markides and Ittner (1994, pp. 343-366). Thus, in the case of the acquisition of Elkjøp by Dixons the question to be examined is, if there is any reason to suppose that a cross-border acquisition would be different in terms of leading to shareholder wealth gains?
Dixons is one of the largest retailers of electronic products in the Europe, operating in over 12 countries (DSG International plc, 2006a). The company, Dixons Group plc, is presently known as DSG International (UK Business Park, 1999), however it shall be referred to as Dixons in this examination. The company operates in the following sectors under a number of brand names which the company has acquired or set up operations under its own brand (DSG International plc, 2006b):

Electricals

Currys
Electro World
Elkjøp
Kotsovolos
Partmaster Direct
UniEuro
DSG Insurance Services

Computing

DSG Business Services
Genesis
PC City
PC World
PC World Business
The TechGuys

e-commerce

Dixons.co.uk
Pixmania.com

The company earned £7,072,000,000 during 1005 – 2006 and generated £317,600,000 in profits before tax (DSG International plc, 2006). Elkjøp ASA is the largest wholesale and retail seller of electronic equipment in the Nordic Region with outlets located in Norway, Sweden and Denmark (Business.com, 2006) generating approximately £475 million in sales in 1999 (Dixons Group plc, 2000/02, p. 3). Dixons has been an acquisition minded company, utilizing this technique to expand into new markets as well as broaden its base of operations in the same mode as Wal-Mart which utilizes the buy in approach to enter markets as opposed to setting up new operations from scratch. The foregoing is evidenced by its acquisition of ASDA in the United Kingdom and planned acquisition of Taiwanese retail Trust-Mart in China (Barboza and Barbaro, 2006). In 1999 Dixons acquired the Norwegian electrical retailer Elkjøp for £444 million to establish a significant foothold in the markets of Denmark, Norway and Sweden, as well as a platform for the launch of other branded stores in its portfolio (UK Business Park, 1999). The expansion represents a long standing policy of the company which has acquired (UK Business Park, 1999):

1996, DN Computer Services, a mail order computer company for £9.7 million
1998, Byte, a computer retailing business acquired from Specialist Computer Holdings for £7 million to add its 16 outlets to the chain of 50 PC World stores
1999, a chain of 39 electronic retail stores from Seeboard for £20 million
1998, a stake in with Planet Online to aid in Internet computer sales
1999, an investment in U.S. based Telepost Holdings for £6 million to expand its Internet based business services
1999, acquisition of Elkjøp for £444 million
2000, acquisition of Ei System Computer in Spain for £16 million to add 12 stores to its business line
2000, a 15% stake in Greek electronics retailer P. Kotsovolos for £44 million
2001, the acquisition of the Danish company SuperRadio, a chain of electronics superstores
2001, the acquisition of a 24% stake in the Italian electrical retailer UniEuro for £64 million,
2002, the acquisition of Direct Telephone Services, a mobile phone provider for £31 million
2002, the acquisition of the remaining shares of UniEuro’s 88 stores for an additional £231 million
2004, the acquisition of WHSU, known as Micro Warehouse, to expand its PC World operations
2005, Dixons changed its name to DSG International

The indicated deals point to the management strategy of expansion through acquisition as a long term business plan, of which Elkjøp was another link in that process.
This examination shall seek to examine the statement as to whether the instance of the cross border acquisition of Elkjøp by Dixons has lead to a gain in shareholder wealth in light of the statement that there is a sufficient body of evidence in domestic acquisitions that such transactions do not, in most instances, lead to gains in this area. The foregoing question shall be examined through research conducted into the pre and post merger standings of Dixons, as well as other indicators of shareholder values as represented by stock prices, assets, and revenue growth. As stated by Broxterman and Murad (1999, p. 3) the objective and concern of the Board of Directors and Chief Executive Officer and upper management staff is to “… increase shareholder value”. They state that this is measurable through the following means (Broxterman and Murad (1999, p. 3):

Return on Capital Invested, or EVA (Economic Value Added)

This term has become a popular metric that measures the trend of an improvement or a decline in shareholder value, and in the instance of public companies this is reflected in the stock price. Accordingly, an increase in shareholder value moves stock prices upward, whereas a decline in this metric sends them downward.
Groves (2006) states that in simple terms, a company increases shareholder value through either a reduction in “… its cost base whilst maintaining revenue …” and or through increasing “… its revenue whilst maintaining or reducing its cost base…”. Bierman (2006, pp. 1-2) makes the same argument, stating that “Business corporations attempt to make profits and increase the value of the stockholder’s position”. These theories apply to acquisition activity as well, as these transactions represent a facet of corporate strategy to expand their operations and to increase their profit Rappaport, 1997, pp. 14-29). Such can also result, increased profits, from economies of scale, which is the reduction of duplicate operations that thus lowers costs in administration, warehousing, manufacturing, delivery, supply chains and allied functions. Utilizing the foregoing as a guide, research into these aspects will provide definitive information to equate whether an acquisition has met these conditions as indicated above.

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Dixons’ management strategies have functioned in much the same manner as the fabled John F. Welch, Jr., the former Chairman and Chief Executive Officer of General Electric during their storied years in that “Who knows what they’ll buy or sell next?” (Higgins, 2000, p. 10). This illustration has been utilized because between 1987 and 1988 General Electric’s “… return on shareholders equity increased from 17.6 percent in 1986 to 18.5 percent in 1987 and to 19.4 percent in 1888 …” (Higgins, 2000, p. 9). Furthermore “… the company’s balance sheet and cash flow remained strong during this period …” (Higgins, 2000, p. 9). Despite the foregoing the company’s share price did not reflect this performance as a result of the “… perception of outsiders …” (Higgins, 2000, p. 9). The foresight of Welsh and General Electric was acknowledged nearly a decade later when Noel Tichy, a corporate analyst said “The two greatest corporate leaders of this century are Alfred Sloan of General Motors and Jack Welsh of GE” (Higgins, 2000, p. 10). The preceding represents the spirit of the examination of Dixons, in that their acquisition minded strategy is seemingly challenged in the same manner.
Chapter 2 – Literature Review
In researching the subject as to whether there is any reason to believe that the cross border acquisition, as represented by Dixons of Elkjøp, should or does represent a difference between domestic acquisitions which by and large have proven not to lead to an increase in shareholder wealth, there is evidence to prove such is not necessarily the case. Jarrel and Poulsen (1889, pp. 12-19) support the analysis that domestic acquisitions do not generally lead to shareholder increases in their analysis as reported in “The Returns to Acquiring Firms in Tender Offers: Evidence from Three Decades.”, as does Loder and Martin (1990, pp. 17-33) in “Corporate Acquisitions by Listed Firms: The Experience of a Comprehensive Sample”. Doukas and Travlos (1988, pp. 1161-1175) in “The Effects of Corporate Multinationalism on Shareholders’ Wealth”, Markides and Ittner’s (1994, pp. 343-366) Shareholder Benefits from Corporate International Diversification:” as well as Yeung and Morck (1992, pp. 41-56) in “Internationalization: An Event Study Test” point to evidence that companies in comparison achieved better result from international acquisitions. The preceding authors explain the improved results concerning gains as being a factor of market synergies.
A review of the Annual Reports of Dixons and Elkjøp for the periods between 1999 through 2005-2006 represented a key source of direct information concerning the earnings of the firms which in term could be correlated against the stock prices for said periods. As stated by Higgins (2000, p. 9) in his book “Best Practices in Global Investor Relations: The Creation of Shareholder Value”, the activity registered by stock prices might not accurately reflect the performance of the company, however, the preceding analogy referred to the inception of diversified merger and acquisition strategy in the 1980’s by Jack Welsh of General Electric, whose principle are understood now.
Chapter 3 – Sources of Data
In equating whether Dixons management strategy in the acquisition of Elkjøp has added to shareholder value, the analysis of a number of sources shall be utilized to bring forth data to enable a determination to be reached. Past history as represented in the Annual Reports for both companies represents the most relevant data concerning revenues, profit and related data. Internet sources present the opportunity to examine stock prices from a present day and historical basis to correlate against the revenue result achieved in various years to reach a determination of the preceding in generating shareholder wealth.
The utilization of books and journal articles represent sources that will aid in reviewing theory as well as foundational and theoretical information on shareholder wealth as well as the duties and responsibilities of the Board of Directors and upper management in this regard. Internet sources represent the means to seek information not only on theoretical aspects as mentioned previously, but information on company activities as reported in various newspapers and press releases. The combinations of these sources will permit a balanced view as to equating the examination of the question, thus all shall be utilized.
Chapter 4 – Research Design, and Statistical Analysis
The design of the research is to present the factual accounting and stock share price data as the conclusive means via which to reach a determination as to if the acquisition of Elkjøp by Dixons has or has not resulted in gains to shareholder wealth. This approach has been taken as a result of studies and information as provided by Doukas and Travlos (1988, pp. 1161-1175) and Markides and Ittner (1994, pp. 343-366) on international acquisitions, as well as the internet source of BREFI (2006) that outlined the roll of the Board of Directors, along with Broxterman and Murad’s (1999, p. 3) insights into ‘return on capital invested, or EVA (Economic Value Added).
The summary of financial activity with respect to Dixon’s acquisition of Elkjøp is contained in the following Table:
Table 1 – Dixons Acquisition of Elkjøp
Financial Summary 1998 through 2006
(in £millions)
(Dixons Annual Reports, 1999 through 2005/06)

Category

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

Turnover

3,156.3

3,870.3

4,688.2

4,888.2

5,367.5

6,050.6

6,554.4

7,072.0

Retained Profit

104.2

285.4

489.1

198.9

208.6

283.3

246.0

211.7

Net Current Assets

809.6

816.3

696.5

598.4

626.4

456.0

567.0

344.8

Stock price

100 (VNU, 2006)

150 (CnnMoney, 1999)

234.25 (CNNMoney, 2000)

220

142

136

152

164

Current
Stock
Price (Google, 2006)

217

The foregoing statistical figures have been compiled in keeping with the stated aims and objectives of this examination as well as to present the actual results of operations. This Table effectively indicates that Dixons share prices have increased since its acquisition of Elkjøp, as have revenues.
Chapter 5 – Conclusion
Dixons acquisition of Elkjob represents one of a string of acquisitions performed by the company since 1999. Elkjøp’s revenues during the period 2004/05 were £1,003m (Dixons, 2004/05) with 2005/06 sales registering in excess of 1,500m (contentmanager.net, 2006). Considering that Dixsons paid £444 for Elkjøp in 1999, the earnings clearly indicate that Dixons has received more than its money’s worth in return.
The stock price and revenues figures clearly prove that in this instance Elkjøp’s as well as Dixons shareholders have benefited from this acquisition, as well as the other acquisitions and company actions since 1999. Given that Economic Value Added, as stated by Broxterman and Murad (1999, p. 3) is the key determinant of shareholder vale, Dixons has demonstrated that their concern for shareholder value has been met. The dramatic gains made by the company are a result of its overall approach to management of the firm’s resources, as well as continued expansion and growth. These principles have boded well for Elkjøp’s shareholders, as well as Dixons.
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