3.2.2 Mergers And Takeovers

Question 1

4 reasons for growth?

Answer 1

1. Increased market share/ brand recognition
2. Increased market power over customers and suppliers
3. Achieve EOS
4. Profitability (how efficiently u make profit)

Question 2

What is a merger

Answer 2

2 or more companies combine to form a new company

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

Question 3

What is a takeover

Answer 3

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

Question 4

5 reasons for pursuing a merger/takeover?

Answer 4

1. Strategic fit e.g helps break into new market (ansoff)
2. EoS
3. Synergies (of skills, revenue, cash flow)
4. Elimination of competition by eating their market share
5. Gives shareholders more returns on their dividends by combining

Question 5

What are the two types of intervention?

Answer 5

Forward/backward vertical integration
Horizontal integration

Question 6

What is meant by forward vertical integration?

Answer 6

Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain
E.g. A dairy farmer merges with an ice cream manufacturer

Question 7

What is meant by backward vertical integration?

Answer 7

Backward vertical integration involves a merger/takeover with a firm further backwards in the supply chain
E.g. An ice cream retailer takes over an ice cream manufacturer

Question 8

What is horizontal integration?

Answer 8

A merger/takeover of a firm at the same stage of the production process e.g ice cream manufacturer buys another ice cream manufacturer

Question 9

What are advantages to vertical integration (5)

Answer 9

1. Reduce production cost = competitiveness
2. Control over supply chain reduces risk
3. Quality of raw materials can be controlled
4. Profit synergies
5. Forward = inc brand visibility

Question 10

What are disadvantages to vertical integration (4)

Answer 10

1. DeoS (e.g duplicated manager roles)
2. Culture clash
3. Little expertise in running the new business = inefficiencies
4. Long time to get return on investment

Question 11

What are advantages to horizontal integration (5)

Answer 11

1. Rapid market share inc
2. EoS
3. Less competition
4. Existing knowledge = more success
5. Ability to gain new knowledge

Question 12

What are disadvantages to horizontal integration (2)

Answer 12

1. DeoS (duplicates)
2. Culture clash

Question 13

What’s conglomerate integration?

Answer 13

2 unrelated businesses coming together

Question 14

5 risks of inorganic growth?

Answer 14

1. Overpaying n not being able to recoup costs
2. Integration challenges (complex + disruptive)
3. Cultural differences (decrease productivity)
4. Regulatory hurdles (CMA, or shareholders don’t like)
5. Debt to finance the merger

Question 15

5 reward of inorganic growth?

Answer 15

1. Inc market share
2. Synergies (cost savings, better balance sheet, cash flow)
3. Risk bearing eos by diversifying
4. Access new markets
5. Inc value if company (more dividends)

Question 16

6 problems of inorganic/rapid growth?

Answer 16

1. Strain on cash flow (initial investment)
2. Increased management complexities (comms, xtra pressure)
3. Quality control issues
4. Customer service issues
5. Culture clash
6. DeoS