Executive Summary
The report is intended to educate the CEO and Board of Directors of McDonald’s on a possible merger with Burger King. The report starts by showing the four criteria for a successful merger by Martin which are providing smart growth capital, managerial support, transference of valuable skills, sharing of valuable capabilities. The reason for the selection of Burger King is the similarity (cost leadership and generic differentiation strategies) in both chains yet the leverage of variance in the menu by its acquisition. Other than this, the more dominance that McDonald’s will enjoy with the addition of 15000 stores of Burger King with 35000 stores of McDonald’s is also a factor. Value Chain Analysis is conducted to show the similarity in the procurement and logistics and marketing and sales values of both firms. Other than this, the financial position of both firms before and after the merger has shown that Gross Margin has increased as a result of the merger, Debt to Asset ratio has declined. The competitive advantage of both firms lies in its cost reduction and low pricing strategy which will enhance with this merger. The strength of McDonald’s is shown in its strong financial position. Even though the revenue of McDonald’s is declining, the profit is increasing. The financial position of Burger King as compared to McDonald’s is way lower; however, it is good enough in its context. The company is profiting from its differentiation strategy. The industry analysis of the fast-food industry regarding Burger King and McDonald’s has shown high rivalry, the high threat for entrants, and a higher threat of substitutes and high bargaining power of the supplier. The low bargaining power of the supplier is the only positive industry factor. It shows that the proposed merger will benefit both companies. The recommendation of acquisition of all franchises of Burger King is suggested for long-term success and horizontal expansion of McDonald’s.
CRITERIA FOR A SUCCESSFUL MERGER
Martin’s Four Criteria for a Successful Merger
With the use of Martin’s four criteria for a successful merger, McDonald’s can make use of it to better merge with Burger King. As mentioned by Martin, McDonald’s needs to become a better investor for creating value. The new merger needs to provide capital smartly to the newly acquired firm to get the resources more efficiently. Other than capital support, managerial support should also be provided to the burger king by McDonald. For success, McDonald needs to work on the competitive advantage in the acquired firm, and not only to improve financial control. The transfer of valuable skills like functional skills can be initiated through the redeployment of the personnel. Furthermore, the valuable skills should be shared across the board [1].
The reason for Selecting Burger King
Burger King and McDonald’s are two publicly traded companies who both reside in the fast-food industry. The fast-food industry is dependent on the low pricing strategy to keep its customers intact. McDonald’s is the largest fast-food chain in the US with Burger King as the second largest fast-food chain in the US. McDonald’s can buy Burger King to horizontally expand and create its dominance in the fast-food industry. Both companies have the majority of the market share in the fast-food industry, and the merger of both will change the concentration ratio of the industry, making it a more concentrated industry.
Cost Leader or Differentiator
McDonald’s generic strategy shows its main approach which is used in the development of competitive advantage. The intensive growth strategy of McDonald’s is used for the support of maintaining the expansion and business development of the company. The company is following the cost leadership generic strategy to stay competitive. As the low-cost provider, the company is offering products cheaper as compared to Arby’s. The company utilizes the differentiation strategy on a broader perspective as a secondary generic strategy. It is reflective of the efforts of McDonald’s to distinguish itself from its competitors. It is applied with the use of McCafe Products [2].
Burger King’s Success in being the largest fast-food chain in the world is linked to the effectiveness of its generic strategy used for the competitive advantage of the company. The generic strategy of Burger King complements its competitive advantage which is dependent on the pricing, cost and product features of the products. As like McDonald’s, it also uses two generic strategies: cost leadership and differentiation. The company uses low cost and low pricing for the maintaining of its customer base. It is used for continuing the competitive advantage by using economies of scale. Like McDonald’s, the Burger King also used differentiation as supporting generic strategy which is represented by the slogans like “Be Your Way.”
VALUE CHAIN ANALYSIS AND PLATFORM ANALYSIS
Through the use of the value chain analysis, McDonald’s can make use of the better understating in order identify the capabilities and activities of Burger King which are better aligned with McDonald’s and also the ones who would need more effort. The value chain analysis and comparison will assist in this cause. On the other hand, the value chain analysis of Burger King would help McDonald’s understand the areas through which Burger King creates value. It will also help McDonald’s in analyzing the activities which it can extend or outsource. The sources of the cost benefits will help in assessing the factors which drive the costs. Therefore, the value chain analysis of Burger King would help McDonald’s in identifying the cost drivers for its activities and evaluation of opportunities for the aim of cost reduction.
Unified value chain Perspective
Value Chain analysis is the analytical framework which aids in the identification of business activities that helps in the creation of value and building of competitive advantage. Both Burger King and McDonald’s have historically been very similar companies. However, the differences have started to rise with time. The Value Chain analysis of McDonald’s and Burger King is shown below.
The core competency of Burger King is its broiled burgers, which are offered in all of its restaurants around the world. No other competitor broils its burgers. It offers as the main point of differentiation for Burger King. The main value chain of Burger King is based on its marketing and sales. Their efforts invested in getting educated about their consumer’s needs and want to be witnessed through its product quality. With time Burger King has limited its product portfolio but increased its quality which has worked for them. , on the other hand, is more focused on the development of variety in the menu. The money of Burger King is not tied up in new product development. McDonald’s has, on the other hand, done entirely in a different way. The larger size of McDonald’s gives it the liberty to not feel any losses from failed product developments, however, continued loss will affect its reputation and consequently its market share. McDonalds and Burger King both our company-owned and franchised restaurants. Burger King geographically owns 55% of its chains in the US and Canada, 25% in Europe, and 11% in Latin America, and 9% in the Asia Pacific [3]. McDonald’s can make use of these market shares to further its dominance in the fast-food industry. The service and marketing and sales of McDonalds can also complement Burger King marketing and sales and its services.
FINANCIAL POSITION
McDonald’s
The revenue of McDonald’s has declined from 2015 onwards till now. In the year 2015, McDonald’s generated revenues of 25.4 billion dollars, which declined to 24.6 billion dollars in 2014, and reached 22.8 billion dollars in the year 2017. But the gross profit of the company has increased in this time span from 9.7 billion dollars in 2015 to 10.6 billion dollars in 2017. The net income of the company has also increased from 4.5 billion dollars to 5.2 billion dollars [4].
Burger King
In comparison to McDonald’s, the net sales of Burger King have increased in the last three years. In the year 2015, Burger King generated revenues of 4.05 billion dollars, which increased to 4.14billion dollars in 2016 and reached 4.57 billion dollars in the last year. Regarding net income, the company made huge increments in the last three years, from 511.7 million dollars in 2015 to 1.2 billion dollars in 2017.
Financial Perspective of Merger
From the financial perspective, a merger can be very beneficial for McDonald’s considering that its sales have declined in the past three years and that of Burger King has increased. The merger can benefit McDonald’s regarding an increase in its sales. In addition to this, both the companies can benefit from this regarding having a large market share in the industry.
Financial Ratios Comparison
The ratios selected for the comparison between the two companies include current ratio, debt to total assets, and gross profit margin. The ratios are calculated for the year 2017.
| Ratios | McDonald’s | Burger King |
| Current Ratio | 1.84 | 1.057 |
| Debt to Asset | 1.096 | 0.783 |
| Gross Margin | 47% | 59.5% |
By analyzing the financial ratios, it can be seen that currently regarding profitability Burger King has a strong position in the market in comparison to McDonald’s. The debt to asset ratio of McDonald’s is very high, showing that the company is highly on debt. The current ratio shows the liquidity of the company, and it can be seen that the ability of McDonald’s to convert its assets into cash is better than that of Burger King.
Merger Effect on Financial Ratios
In result of the merger, the gross margin of McDonald’s would increase as the current gross margin of Burger King is greater. Secondly, its debt to assets ratio would also decline, which is a plus point for McDonald’s. But, regarding liquidity, it would decrease after the merger as currently; Burger King is not very liquid.
| Ratios | After Merger |
| Current Ratio | 1.45 |
| Debt to Asset | 0.94 |
| Gross Margin | 53.25% |
COMPETITIVE ADVANTAGE ANALYSIS
The merger, as shown above, will yield better cost-effectiveness and better variety on the menu and access to the market. The 15,000 stores of Burger King, when added to the 35,000 stores of McDonald’s, will further the dominance of this fast-food chain. The broiled burger added to the McDonalds chain will add not only variety but also more quality food. The logistics and procurement of Burger King will aid in getting the lowest prices and cost reductions as well.
INDUSTRY ANALYSIS
Five Forces Analysis:
The fast-food industry is a very competitive industry. The Suppliers are one of the important five forces of this industry. For the suppliers, the bargaining power is quite low as there are many suppliers available in the market which includes the soft drink industry. The soft drink companies like Pepsi, Coca-Cola, Cott Cop., Sr. Pepper Snapple Group, and National Beverage Co., has low demand as compared to the high supply. The other force is the buyers. Buyer’s competitive power is high as there is not much differentiation in the products of the fast-food chains and thus buyers have the liberty to choose from other food chains. The third force is the Substitutes, which are also the highest threat for both Burger King and McDonald’s as the switching cost is low. The burger concepts are million and not only in the fast-food industry also in other industries like fast-casual and gourmet restaurants. The fourth force is the Competitors. The rivalry of the competitors in this sector is high because of the co-establishment of the various chains in one geographic place. It leads to price-extensive competition and by locations, quality of food, menu variety, health concerns, and service. The fifth force is the threat of Entrants. It is high for the fast-food industry with high saturated industry and facing the challenges like obesity and malnutrition [6].
RECOMMENDATIONS FOR PROPOSED MERGER
The analysis of both firms yields the recommendation of the merger through the complete acquisition of Burger King Franchises all over the world. The transition should be made as smooth as possible by working on synergies and care for its valuable assets including people. The proposed merger will further the dominance of both fast-food chains against the high rivalry between competitors and new entrants. It shows that the financial impact of the merger would be positive overall with a better cost reduction strategy and leverage for differentiation through the addition of Burger King’s broiled burgers.
Work Cited
[1] Martin, Roger L. “M&A: The One Thing You Need to Get Right.” HBR.ORG. HBR.ORG, 2016. Web. 17 July 2018. https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right.
[2] Hill, Charles W L, Gareth R Jones and Melissa A Schilling. Strategic Management: Theory & Cases: An Integrated Approach. 11. Cengage Learning, 2014.
[3] Burger King. “Burger King 10K 2013.” SEC. SEC, 2013. Web. 17 July 2018. https://www.sec.gov/Archives/edgar/data/1547282/000119312514061827/d648966d10k.htm.
[4] Nasdaq. “MCD Company Financials.” Nasdaq. Nasdaq, 2018. Web. 17 July 2018. https://www.nasdaq.com/symbol/mcd/financials?query=income-statement >.
[5] Sec.gov. “Restaurant Brands International Inc.” SEC. SEC, 2017. Web. 17 July 2018. https://www.sec.gov/Archives/edgar/data/1618756/000161875618000007/qsr_20171231x10k.htm.
[6] Roy, Daniel. Strategic Foresight and Porter’s Five Forces. GRIN Verlag, 2011.
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