Chapter 49- Mergers and Takeovers

Question 1

Merger

Answer 1

occurs when 2 or more businesses join together and operate as one, usually friendly

• One of the main motives for integration is to exploit the synergies that might exist following a merger or takeover – this means that two businesses joined together for an organisation that is more powerful and efficient than two companies operating on their own
• It is a quick and easy way to expand the business
• Mergers take place for defensive reasons – A business might buy another to consolidate its position in the markets – it may also avoid restrictions that prevent it from locating in a country or avoid paying tariffs on goods sold in that country
• Globalisation has encouraged mergers between foreign businesses – this could allow a company to operate and sell worldwide, rather than in particular countries or regions

Question 2

Takeover

Answer 2

• The process of one business buying another, an acquisition,
  usually hostile

-Takeovers among public limited companies can occur because
their shares are traded openly and anyone can buy them

-When a takeover is complete, the company that has been bought
loses its identity and becomes part of the predator company

-Takeovers of public limited companies often result in a sudden increase in their share price – once It is known that a takeover is likely, investors scramble to buy shares, anticipating a quick price rise.

Question 3

Backward vertical integration

Answer 3

Joining a business in the previous stage of production

Question 4

Forward vertical integration

Answer 4

Joining a business in the next stage of production

Question 5

Horizontal integration

Answer 5

• Joining a business in the same stage of production
• Occurs when two firms that are in exactly the same line of business and the same stage of production join together
• The benefits of mergers between such firms include: common knowledge of the markets, less likelihood of failure, similar skills of employees.

Question 6

Synergy

Answer 6

The combining of 2 or more activities or businesses creating a better outcome than the sum of the individual parts

Question 7

Financial risks of inorganic growth

Answer 7

Mergers and takeover are common corporate strategies. They allow businesses to grow quickly and may create benefits for a range of stakeholders – however they can sometimes go wrong and have negative impacts on businesses.

• Regulatory intervention- if the CMA (competition and markets authority) deem the takeover to not act in the consumers interest they can open an investigation which takes time and may disrupt the process
• Resistance from employees- the employees may lose their jobs and so with the build-up to the takeover etc. they may be demotivated
• Integration costs- the actual merging of the businesses is complex and can be expensive

Question 8

Reasons for mergers and takeovers-

Answer 8

• To exploit synergies
• Quick and easy to expand the business
• Buying the business is often cheaper than growing internally
in the long run
• Mergers can be used to eliminate the competition
• Some firms use asset stripping, buy the business use or sell
the assets and then close down the unprofitable parts

Question 9

Financial Rewards-

Answer 9

Despite these financial risks, companies are happy to pursue Takeovers and mergers if the conditions are deemed right. This is probably because the rewards are potentially high.

• Speedy growth – businesses can grow far more quickly through mergers and takeovers than growing internally – this means that the benefits of growth, such as larger market share, more market power etc. can be enjoyed immediately
• Higher salary for managers- as they have to run more depts. etc.
• Increased profitability – if a merger is successful, future revenues will be higher because market share will be higher – in addition, costs will be lower if economies of scale can be exploited

Question 10

Problems of rapid growth

Answer 10

Businesses that use external growth strategies are usually trying to grow rapidly. Unfortunately, there is risk associated with this and some mergers takeovers actually fail – in this case failure probably means that outcomes did not match expectations.

Alienation of customers

• Companies that a growing too fast might lose touch with their customers – too much attention and recourses getting focused on the process of growth.
• As a consequence, the needs of customers can be overlooked

Loss of control

• If growth is too rapid the company might get big too fast
• This can result in a loss of control by the senior executives
• With a bigger organisation come extra layers of management