Size of Business

Question 1

Internal (organic) growth

Answer 1

occurs when a firm expands its existing capacity by extending its premises from its own resources

Question 2

External growth

Answer 2

happens when 2 or more businesses integrate via a merger/takeover

Question 3

Merger

Answer 3

where 2 or more firms agree to come together under one board of directors

Question 4

Takeover (or acquisition)

Answer 4

where 1 firms buys the majority of shares to take full control.

Question 5

Overview of the integration process

Answer 5

1 - Target identification & choice
2 - Valuation & offer
3 - Due diligence & completion
4 - Post-acquisition integration

Question 6

3 types of integration:

Answer 6

Vertical integration
Horizontal Integration
Conglomerate Integration

Question 7

Vertical integration

Answer 7

the coming together of firms in the same industry but at different stages of the production process (backwards and forwards integration)

Question 8

Advantages of Vertical Integration

Answer 8

• Removes the uncertainty of dealing with external suppliers and retailers
• Cost savings in technical, distribution and marketing areas
• Builds barriers to entry for new competitors

Question 9

Example of Vertical Integration

Answer 9

L’oreal buying a body shop

Question 10

Horizontal integration

Answer 10

the coming together of firms operating at the same stage of production in the same market

Question 11

Advantages of Horizontal Integration

Answer 11

• Economies of scale – e.g. buying EOS
• Lower Unit Costs
• Reduced Competition
• Increased Market Share

Question 12

Examples of Horizontal Integration

Answer 12

• Adidas buying Reebok
• Mercedes buying Chrysler
• Lloyds buying HBOS
• Co-op buying Somerfield

Question 13

Conglomerate Integration

Answer 13

the coming together of firms in unrelated markets

Question 14

Advantage of Conglomerate Integration

Answer 14

Can share good practice between different areas of the business

Question 15

Example of Conglomerate Integration

Answer 15

Procter and Gamble (household goods) bought Gillete

Question 16

Hostile Takeover

Answer 16

• where a company’s intention is not welcome and the target company may reject the move.
• A limited time to persuade the shareholders to accept the bid.

Question 17

Friendly Takeover

Answer 17

the purchase is welcome and shareholders will accept the bid

Question 18

Process of Friendly Takeover

Answer 18

• Buyer approaches target Board with offer
• Target Board negotiates & agrees price / terms
• Shareholders of both firms approve the deal
• Legal completion of takeover

Question 19

Process of Hostile Takeover

Answer 19

• Buyer approaches target Board with offer
• Target Board rejects offer
• Buyer makes offer direct to target shareholders
• Target Shareholders decide whether to accept

Question 20

Common problems with hostile takeovers

Answer 20

• Senior management in the target often leave en masse = loss of experience & expertise
• Resentment amongst target stakeholders (local community, employees)
• Increased risk that the buyer pays too much for the takeover

Question 21

Mergers and takeover strategies (motives)

Answer 21

• Growth/Market share
• Source of finance: Asset stripping
• Technical expertise
• Brands are expensive to develop
• To exploit patents
• Diversification

Question 22

Growth/Market share

Answer 22

To control the market (gain monopoly power)

Question 23

Source of finance: Asset stripping

Answer 23

To buy a business then breaking them up and selling off the profitable sections

Question 24

Technical expertise

Answer 24

Sony bought smaller software producers to gain skilled workforce when developing the PlayStation

Question 25

Brands are expensive to develop

Answer 25

Nestle’s takeover of Rowntree

Question 26

To exploit patents

Answer 26

in the pharmaceutical and computing industries

Question 27

Advantages of acquisitions

Answer 27

* Quick access to resources & skills the business needs * Overcomes barriers to entry * Helps spread risk (wider range of products and greater geographical spread) * Revenue growth opportunities * Cost saving opportunities * Reduces competition * May enable economies of scale

Question 28

Merger/takeovers general drawbacks

Answer 28

* Can lead to management problems. * Possible conflict between the two teams of managers * Conflicts of culture and business ethics

Question 29

Impact of a merger on the various stakeholders: | Horizontal integration

Answer 29

* Consumers have less choice | * Workers may lose jobs

Question 30

Vertical Forwards integration

Answer 30

* Workers have greater job security as business has secure outlets * More varied career opportunities * Consumers may resent the lack of competition in the retail outlet because of the withdrawal of competitor products.

Question 31

Vertical Backwards integration

Answer 31

* Greater career opportunities for workers * Consumers may obtain improved quality and more innovative products * Control over suppliers may limit competition and choice for consumers

Question 32

Conglomerate

Answer 32

* Greater career opportunities for workers | * More job security because risks are spread across more than one industry

Question 33

Synergy

Answer 33

Means ‘the whole is greater than the sum of parts’

Question 34

Any mergers/takeovers fail to gain true synergy because:

Answer 34

* Firm is too big to manage and control (diseconomies of scale) * Business and management culture may be so different to work effectively and cooperate together

Question 35

Ways to avoid integration problems

Answer 35

* Detailed due diligence – focused on the likely areas of risk (e.g. IT systems, impact on customers etc) * Careful integration planning – a detailed action plan based on pre-takeover due diligence * Act quickly: the first 100 days are often considered vital for the overall success of the takeover or merger * Clear communication about the objectives of the transaction and the honesty about the implications for key stakeholders (particularly employees) * Respect the culture of the target business

Question 36

De-mergers

Answer 36

This could follow a takeover that has not been successful 65% of mergers/takeovers fail to benefit shareholders May be due to: • the expected economies of scale have not happened • DEOS will occur when the merger/takeover involves significant cultural, political, and geographical differences • Or benefits of integration do not occur

Question 37

Retrenchment/downsizing

Answer 37

* This is the process of making a business smaller (negative organic growth). * This means the cutting back of an organisations scale of operations.

Question 38

Causes of Retrenchment:

Answer 38

* Changes in tastes/fashions * Technological developments make products obsolete * Lack of planning for change in economic conditions

Question 39

Joint ventures

Answer 39

form of external growth between two or more firms, where they agree to work together and to create a separate business (e.g. Sony Ericsson)

Question 40

Strategic Alliances

Answer 40

agreements between firms in which each agrees to a set amount of resources to be used to achieve an agreed set of objectives.