3.2.2 Mergers and takeovers

Question 1

Inorganic growth

Answer 1

growth which occurs as a result of taking over or merging with another business

Question 2

Integration

Answer 2

when two business join together

Question 3

Vertical forwards

Answer 3

joining with a business further up in the supply chain

Question 4

vertical backwards

Answer 4

joining with a business operating earlier in the supply chain

Question 5

Horizontal

Answer 5

joining with a business at the same stage of the supply chain

Question 6

conglomerate

Answer 6

where one business has no clear connection to the business joining it

Question 7

Takeover

Answer 7

When one larger business buys the majority of the shares (controlling interest) in another and therefore achieves full management control

Question 8

Benefits of backward vertical integration to the company

Answer 8

• secures supplies - timing and quality
• absorbing the suppliers profit margins should lower the cost of supplies
• absorbing the suppliers profit margins
• closer links to suppliers aid new product development

Question 9

Benefits of backward vertical integration to the workforce

Answer 9

• having a secure customer for suppliers may increase job security
• larger scale of the combined businesses may lead to enhanced benefits such as pension or career opportunities

Question 10

Benefits of backward vertical integration to the consumer

Answer 10

• better coordination between company and supplier may lead to more innovative new product ideas
• ownership of the whole supply process may make the business more conscious of product quality

Question 11

Drawbacks of backward vertical integration to the company

Answer 11

• supplier may not always offer the best option

- having bought supplier, staff may become complacent, lack of productivity and quality may fall

Question 12

Drawbacks of backward vertical integration to the workforce

Answer 12

• becoming part of large firm may affect sense of team morale
• job losses to cut duplicate roles

Question 13

Drawbacks of backward vertical integration to the consumer

Answer 13

• may reduce the variety of goods available

- supplier complacency may lead to rising costs, passed on to customers as higher prices

Question 14

Benefits of forward vertical integration to the company

Answer 14

• guaranteed outlet for the businesses products
• control of competition in own retail outlets
• firm put in direct contact with consumers

Question 15

Benefits of forward vertical integration to the workforce

Answer 15

• increased control over the market may increase job security
• can control how the products looks and displayed

Question 16

Benefits of forward vertical integration to the consumers

Answer 16

• can provide customers with expert staff and perfect displays
• prices may fall if a large retail margin is absorbed by the supplier

Question 17

Drawbacks of forward vertical integration to the company

Answer 17

-consumers may resent the loss of choice with one firms products dominating the retail store

Question 18

Drawbacks of forward vertical integration to the workforce

Answer 18

-owner may dictate exactly what products to stock and how to display them, which would be demotivating

Question 19

Drawbacks of forward vertical integration to the consumer

Answer 19

• increased power within the market could lead to higher prices
• if the outlet only supplies the parent company’s products, consumer choice will be limited

Question 20

Benefits of horizontal integration

Answer 20

-likely to provide clear economies of scale

Question 21

drawbacks of horizontal integration

Answer 21

• can lead to diseconomies of scale

- could have culture clash

Question 22

Benefits of conglomerate integration

Answer 22

-diversifies the business - spreading risk into different markets

Question 23

Drawbacks of conglomerate integration

Answer 23

• potential failure to understand the target company as it will be in an unfamiliar market
• may distract management from original business due to unfamiliarity and slowness to integrate

Question 24

Drawbacks of takeovers

Answer 24

• high cost involved
• upset customers and suppliers
• problems of integration (change management)
• resistance from employees
• non-existent cost savings
• incompatibility of management styles, structures and culture
• questionable motives
• high failure rate

Question 25

Financial risks

Answer 25

- integration costs - bidding wars - resistance from employees and redundancies - regulatory intervention

Question 26

Financial rewards

Answer 26

- speedy growth and larger market share - lower costs resulting from economies of scale - increased profitability - high remuneration from senior staff - bonuses - rewards to previous owners and shareholders

Question 27

Problems of rapid growth

Answer 27

- drain on resources (huge cost and over trading - loss of control or coordination (diseconomies of scale) - poor investment decisions - coping with change (culture clashes) - alienation of customers - shortages of resources (lack of skilled labour might drive prices up)

Question 28

How can a business avoid the problems of rapid growth? | -drain on resources (huge cost) and overtrading

Answer 28

-securing access to a source of finance

Question 29

How can a business avoid the problems of rapid growth? | -loss of control or coordination (diseconomies of scale)

Answer 29

good planning and leadership

Question 30

How can a business avoid the problems of rapid growth? | -poor investment decisions

Answer 30

use of investment appraisal techniques - quantitive and qualitative information

Question 31

How can a business avoid the problems of rapid growth? | -coping with change (cultural clashes)

Answer 31

kotter change management process, get staff to but in through giving control of change to employees

Question 32

How can a business avoid the problems of rapid growth? | -alienation of customers

Answer 32

employ customer relationship management systems, keep customers informed

Question 33

How can a business avoid the problems of rapid growth? | -shortage of resources

Answer 33

work with staff to maintain productivity and implement effective recruitment and selection processes