3.2.2 Mergers and Takeovers

Question 1

What is a takeover?

Answer 1

• Occurs when one company purchases another company, often against its will
• The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations

Question 2

What is a merger?

Answer 2

• Occurs when two or more companies combine to form a new company
• Both firms mutually agree on the terms & new entitiy is a blend of both

The original companies cease to exist and their assets and liabilities are transferred to the newly created entity

Question 3

What are the reasons as to why mergers and takeovers occur?

Answer 3

• Strategic fit/ growth & expansion
• Economies of scale
• Synergies
• Elimination of competition
• Shareholder value
• Access to new market and customers

Question 4

Why may a business use strategic fit as a reason to merge or take over another business?

Answer 4

• A company may acquire another company to expand into new markets, diversify its product offerings or gain access to new technology

Question 5

Why may a business use economies of scale as a reason to merge or take over another business?

Answer 5

• Growth creates economies of scale by allowing companies to reduce costs and increase efficiency through consolidation of operations

Question 6

Why may a business use synergies as a reason to merge or take over another business?

Answer 6

• Synergies are the benefits that result from the combination of two or more companies such as increased revenue, cost savings or improve product offerings
• Companies that work better together than apart

Question 7

Why may a business use elimintation of competition as a reason to merge or take over another business?

Answer 7

• Takeovers are often used to eliminate competition, & the acquiring ocmpany increases its market share

Question 8

Why may a business use shareholder value as a reason to merge or take over another business?

Answer 8

• Mergers and Takeovers can also be used to create value for shareholders
• By combining companies, shareholders can benefit from increased profits, dividends & stock prices

Question 9

What are the two types of integration?

Answer 9

Horizontal Intergration:
- Occurs when a company acquires or merges with another company at the same stage of production-often a competitor

Verticle Integration:
- Happens when a company merges or takesover another firm at a different stage of the supply chain
-It can be either forwards or backwards

Question 10

What is forward verticle integration & backward verticle integration?

Answer 10

Forward Verticle Integration:
- Involves a merger or a takeover with a firm further forward in the supply chain
- e.g. a dairy farmer merges w an ice cream manufacture

Backward Verticle Integration:
- Involves a merger/takeover with a firm further backwards in the supply chain

Question 11

What are the advantages & disadvantages of horizontal integration (inorganic growth)?

Answer 11

Advantages:
- The rapid increase of market share
- Reduces competition
- Reductions in cost per unit due to economies of scale
- Firm may gain new knowlege or expertise

Disadvantages:
- Diseconomies of scale may occur as costs increase
- There can be a culture clash between the two firms that have merged

Question 12

What are the advantages and disadvantages of vertical integration (inorganic growth)?

Answer 12

Advantages:
- Reduces cost of production as middleman profits are eliminated
- More control over quality & delivery times JIT-priority over other suppliers
- Increases market power
- Adds additional profit as the profits from the next stage of production are assimilated

Disadvantages
- Can be culture clash of two firms that have merged
- Possibility of little expertise in running the new firm results in inefficiencies
- Price paid for new firm may take a long time to recoup

Question 13

What are the financial risks of mergers/takeovers?

Answer 13

Overpayment:
- Acquiring company may overpay for the target firm, leading to finanical strain & a lack of return on invesment
Integration costs:
- Merging two companies can be expensive & complex legal feels etc.
Debts:
- Acquiring companies may take on debt to finance the merger which can increase the financial risk & reduce flexibility
Cultural differences:
Mergers can result in clashes of company cultures leading to decreases in productivity & loss of valuable employees

Question 14

What are the financial rewards of mergers/takeovers?

Answer 14

Increased market share:
By acquiring another company an increase in market share may lead to increased sales revenue & 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 prescence in a new market may result in a higher customer base & sales revenue

Question 15

What are the problems of rapid growth?

Answer 15

• The business has to effectively respond to the challenges of rapid growth to maximise the potential growth opportunity:
• Strain on cashflow - The merger/takeover may require investment in new equipment or staff to support growth which may cause financial strain if the revenue growth does not keep up with the expenses
• Increased management complexities- may require new equipment or staff to support growth which may cause financial strain
• Quality control issues- may deteriorate as exisitng systems are strained
• Customer service issues
• Culture clash
• Diseconomies of scale- may increase cost per unit