49 - mergers and takeover

Question 1

backward vertical integration

Answer 1

joining with a business in the previous stage of production

Question 2

forward vertical integration

Answer 2

joining with a business in the next stage of production

Question 3

horizontal integration

Answer 3

the joining of businesses that are in exactly the same line of business

Question 4

integration

Answer 4

the joining together of two businesses as a result of a merger or takeover

Question 5

merger

Answer 5

occurs when two (or more) businesses join together and operate as one

Question 6

synergy

Answer 6

the combining of two or more activities or businesses creating a better outcome than the sum of the individual parts

Question 7

takeover

Answer 7

the process of one business buying another

Question 8

vertical integration

Answer 8

the joining of two businesses at different stages of production

Question 9

advantages of mergers and takeovers

Answer 9

1) exploit synergies that exist following the merger/takeover - two businesses joined together form an organisation that is more powerful and efficient than the two companies operating separately
2) it is quick and easy way to expand the business
3) often cheaper than growing internally
4) in order for firms to consolidate its business position in the market
5) avoid being vulnerable to takeovers
6) spread risks
7) gain entry to foreign markets and trading blocs - reducing import tariff and other protectionism barriers cost
8) increase skills availability
9) gain economies of scale
10) blah blah ladi da

Question 10

mergers

Answer 10

• usually conducted with the agreement of both businesses

- friendly in nature

Question 11

takeovers

Answer 11

• occurs to plc’s because their shares are traded openly on the stock exchange market and anyone can buy them
• one business can acquire another by purchasing 51% of the other business’ shares
• they can either be bought from existing shareholders or stock exchange market
• once a takeover is complete, the business that has been bought loses its identity to the predator business

Question 12

disadvantages of mergers and takeovers

Answer 12

1) if both businesses have debt owed, it will increase significantly the they combine
2) difficulty in management due to the increase of workers
3) may lead to employee dismissal in order to balance out the organisational structure - can lose experienced workers and resistance from employees which will weaken their brand
4) may lead to a decrease in competition which is good for the business but bad for consumers because it will allow the organisation to charge higher prices which will cause consumers to be displeased by the rise in prices

Question 13

problems with rapid growth

Answer 13

• merger/takeover will lead to speedy growth and expansion
  but there are implications related to that:
  1) loss of control: the company might get too big, too fast
  layers of management increase and communication becomes difficult
  costs will increase and diseconomies of scale increases
  2) shortages of skill labour: in order to reduce its chain of command and flatten its organisation structure, a business will have to fire some employees - however this will lead to a loss of skilled employees and an increase in costs associated with wages
  3) losing touch with consumers: attention is all directed to the process of growth, as a consequence, needs of consumers are overlooked
  as well as changing brand name will lead to a decrease in loyalty
  4) drain on resources: megers/takeovers are very costly, by the time the process has been complete, there will be a stretch on financial resources and other resources - if a business cannot meet the demand for those resources this will lead to an impairment of business operations