3.2.2 mergers and takeovers

Question 1

what is a merger

Answer 1

when two businesses agree to combine and make a new business

Question 2

what is integration

Answer 2

the combination of firms

Question 3

what is a takeover

Answer 3

when one company buys another by aquiring over 50%of the business, usually without the other business wanting it to happen

Question 4

reasons for mergers and takeovers

Answer 4

both a merger and takeover allow businesses to grow externallyand expand their business. this can be to:
-gain EOS
-eliminate competition
-access new markets
-synergies (benefits such as increased revenue or decreased costs)
-diversification

Question 5

how can ansoff matrix be used when talking about mergers and takeovers

Answer 5

mergers and takovers can be used to access new markets and diversify a business
it can also be used when entering exisiting products into new markets when taking over a new business.

Question 6

are mergers and takeovers organic or inorganic

Answer 6

inorganic

Question 7

vertical integration

Answer 7

when a business mergers/ takesover another business at a different level in the supply chain.

Question 8

horizontal integration

Answer 8

when a business merges or takeoves another business at the same level in a supply.

Question 9

advantages of vertical integration

Answer 9

-Reduces the cost of production as middleman profits are eliminated
-Lower costs make the firm more competitive
-Greater control over the supply chain reduces risk as access to raw materials is more certain
-The quality of raw materials can be controlled
-Forward integration adds additional profit as the profits from the next stage of production are assimilated
-Forward integration can increase brand visibility

Question 10

disadvantages of vertical integration

Answer 10

Diseconomies of scale occur as costs increase e.g. unnecessary duplication of management roles
-There can be a culture clash between the two firms that have merged
-Possibly little expertise in running the new firm results in inefficiencies
-The price paid for the new firm may take a long time to recoup

Question 11

advantages of horizontal integration

Answer 11

-The rapid increase of market share
-Reductions in the cost per unit due to economies of scale
-Reduces competition
-Existing knowledge of the industry means –the merger is more likely to be successful
-The firm may gain new knowledge or expertise

Question 12

disadvantages of horizontal integration

Answer 12

-Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles
-there can be a culture clash between the two firms that have merged

Question 13

financial risks of mergers or takeovers

Answer 13

-debt, the process may be very expensive
-business will have higher tax
-cultural differences can affect productivity
-integration challenges can be complex and costly

Question 14

financial rewards of mergers and takeovers

Answer 14

Increased Market Share: By acquiring another company an increase in market share may lead to increased sales revenue and profitability
-Synergy: Mergers may result in cost savings through the elimination of duplicate functions and increased efficiency, leading to increased profitability
-Diversification: Selling a wider variety of goods/services reduces the risks associated with selling a single product
-Access to New Markets: Acquiring a company with a strong presence in a new market may result in a higher customer base and sales revenue
-Increased Value: Mergers may increase the overall value of the combined company for shareholders

Question 15

problems of rapid growth

Answer 15

-customer service issues
-culture clash
-DEOS
-quality control issues
-management issues