3.2.2. Mergers And Takeovers

Question 1

Reasons for mergers and takeovers

Answer 1

1.Growth

2.Cost- synergies( benefit of two things coming together that couldn’t exist when separate ie. Econ of scale resulting from merger of 2 businesses and can red. it’s UC)

3.Diversification-ways to spread risk, reducing its reliance on one market or product in case of issues.

4. Market power- increase power over customers, raising prices to boost margins whilst benefiting from increased power over suppliers.

Question 2

Distinction between mergers and takeovers

Answer 2

Merger- two businesses of roughly sane size agree to come together to create brand new single business, where owners will share ownership of new firm.

Takeover- one business buys over 50% of another business shares, effectively gaining control.

Question 3

Types of integration

Answer 3

-Backward vertical integration (with supplier)- two companies at different stages of same supply chain. Ie. Company but supplier, retailer buys distributor.

-Horizontal integration( merging with competitor)-merges or buys with rival in same industry at same stage of supply stage. Econ of scale, red in costs as result of eliminated of duplicated roles and one less competitor allowing prices to be increased and PM. Similar to market penetration

-Conglomerate integration(merging with unrelated business)- main reason is new business no longer reliant on just one product or market. Spread risk for new business, if one product suffers, the firms other one is unlikely to be affected.

-Forward vertical integration(with customer)-Guarantees outlet for business products, but customers may dislike loss of choice as one firms products dominates these outlets.

Question 4

Financial risks and rewards

Answer 4

Most takeovers funded by debt so burrowing to grow makes sense as long as rewards from growth outweigh cost of burrowing.
If ROI from takeover>interest rate on loans required then deal makes sense.
However in the long term, if interest rates increase the equation could flip.

Question 5

Problems of rapid growth

Answer 5

-With new management structures staff may find themselves working for new boss, against change.
-Prefer it’s old ways