Reasons for global mergers, takeovers or joint ventures

Question 1

Spreading risk and economies of scale

Answer 1

Spreading risks:
Locating in markets where risks such as economic downturns are less likely to occur, at least at the same time as in the home market
Also, the impact will likely not be as drastic on the business’ overall profitability

Economies of scale:
One of the main motives for mergers and acquisitions is to grow rapidly to a size where costs can be reduced significantly by exploiting economies of scale

Question 2

Entering new markets/ trade blocs

Answer 2

Instead of growing organically, businesses often choose to take a shorter route to international growth through mergers and acquisitions.

This is especially true for firms in established industries who may find that the only to grow is through merging with or acquiring firms in other markets.

Question 3

Acquiring national/ international brand names/ patents

Answer 3

Acquiring, merging or having a join venture with a business/ product with a strong brand name is an effective way to gain a strong reputation or to get access to intellectual property. It can provide a range of benefits:
Strong brand recognition
Brand loyalty
Limits competition of the product
They will not face the high risk, cost and uncertainty of launching a new product
Intellectual property can be expensive and buying it in an acquisition or through a join-venture agreement helps to avoid the financial risks and difficulties

Question 4

Securing resources or supplies

Answer 4

Firms may choose to merge with or acquire another firm to secure resources or supplies (backward vertical integration). They may especially need to do this because:
The resources used in the production of the product or service are rare or difficult to obtain and they need to ensure reliable sourcing

It needs to ensure that the inputs are a suitable quality or price

Question 5

Maintaining or increasing global competitiveness

Answer 5

Merging with or buying another firm can provide larger markets and provide opportunities to make cost savings, by exploiting ecos.

This could make the business much more competitive in terms of its pricing power over customers and suppliers.

Question 6

Reducing competition

Answer 6

An important motive for some cross-border mergers and acquisitions is to reduce competition in the market.

Buying out competitors means less competition and with this a business might start to dominate the market.

They will be able to increase prices and gain higher profit margins and there will be less pressure to invest in product innovation.

Question 7

Making use of local knowledge

Answer 7

One approach to reduce the risk of setting up operations in a foreign market is to form a partnership with a company inside the new country.

They will already have knowledge of the market/ also helps to avoid R&D costs

Question 8

Government or legal requirement

Answer 8

Governments in some countries are concerned that foreign businesses will enter domestic markets and dominate them

As this could threaten the survival of local businesses, governments insist that overseas firms entering the country do so through a partnership with domestic organisations.

This ensures that benefits such as income, exports and employment are shared with domestic economies, while also protecting domestic businesses.

Question 9

Accessing supply chains and distribution networks

Answer 9

Supply chains:
Taking over a business that operates in the supply chain allows the business to be in complete control of the supply chain, which reduces levels of uncertainty and helps to maintain quality in supplies.

Another motive is to get rid of the profit margin taken by suppliers

Distribution networks:
Buying distribution networks allows manufacturers to reduce risk and operate more confidently as they know they can sell output immediately using distribution channels that they own.

The ownership of distribution channels also moves the profit margins to the manufacturer

Question 10

Sharing costs/ risks

Answer 10

Developing foreign markets is vey risky due to their unfamiliar nature. This means a business is more likely to speculate in new markets if it can share the costs and risks with another.

This might reduce the potential profits that a new venture might bring.