3.2.2 Mergers and takeovers Flashcards
Inorganic growth
growth which occurs as a result of taking over or merging with another business
Integration
when two business join together
Vertical forwards
joining with a business further up in the supply chain
vertical backwards
joining with a business operating earlier in the supply chain
Horizontal
joining with a business at the same stage of the supply chain
conglomerate
where one business has no clear connection to the business joining it
Takeover
When one larger business buys the majority of the shares (controlling interest) in another and therefore achieves full management control
Benefits of backward vertical integration to the company
- secures supplies - timing and quality
- absorbing the suppliers profit margins should lower the cost of supplies
- absorbing the suppliers profit margins
- closer links to suppliers aid new product development
Benefits of backward vertical integration to the workforce
- having a secure customer for suppliers may increase job security
- larger scale of the combined businesses may lead to enhanced benefits such as pension or career opportunities
Benefits of backward vertical integration to the consumer
- better coordination between company and supplier may lead to more innovative new product ideas
- ownership of the whole supply process may make the business more conscious of product quality
Drawbacks of backward vertical integration to the company
- supplier may not always offer the best option
- having bought supplier, staff may become complacent, lack of productivity and quality may fall
Drawbacks of backward vertical integration to the workforce
- becoming part of large firm may affect sense of team morale
- job losses to cut duplicate roles
Drawbacks of backward vertical integration to the consumer
- may reduce the variety of goods available
- supplier complacency may lead to rising costs, passed on to customers as higher prices
Benefits of forward vertical integration to the company
- guaranteed outlet for the businesses products
- control of competition in own retail outlets
- firm put in direct contact with consumers
Benefits of forward vertical integration to the workforce
- increased control over the market may increase job security
- can control how the products looks and displayed
Benefits of forward vertical integration to the consumers
- can provide customers with expert staff and perfect displays
- prices may fall if a large retail margin is absorbed by the supplier
Drawbacks of forward vertical integration to the company
-consumers may resent the loss of choice with one firms products dominating the retail store
Drawbacks of forward vertical integration to the workforce
-owner may dictate exactly what products to stock and how to display them, which would be demotivating
Drawbacks of forward vertical integration to the consumer
- increased power within the market could lead to higher prices
- if the outlet only supplies the parent company’s products, consumer choice will be limited
Benefits of horizontal integration
-likely to provide clear economies of scale
drawbacks of horizontal integration
- can lead to diseconomies of scale
- could have culture clash
Benefits of conglomerate integration
-diversifies the business - spreading risk into different markets
Drawbacks of conglomerate integration
- potential failure to understand the target company as it will be in an unfamiliar market
- may distract management from original business due to unfamiliarity and slowness to integrate
Drawbacks of takeovers
- high cost involved
- upset customers and suppliers
- problems of integration (change management)
- resistance from employees
- non-existent cost savings
- incompatibility of management styles, structures and culture
- questionable motives
- high failure rate
Financial risks
- integration costs
- bidding wars
- resistance from employees and redundancies
- regulatory intervention
Financial rewards
- speedy growth and larger market share
- lower costs resulting from economies of scale
- increased profitability
- high remuneration from senior staff - bonuses
- rewards to previous owners and shareholders
Problems of rapid growth
- drain on resources (huge cost and over trading
- loss of control or coordination (diseconomies of scale)
- poor investment decisions
- coping with change (culture clashes)
- alienation of customers
- shortages of resources (lack of skilled labour might drive prices up)
How can a business avoid the problems of rapid growth?
-drain on resources (huge cost) and overtrading
-securing access to a source of finance
How can a business avoid the problems of rapid growth?
-loss of control or coordination (diseconomies of scale)
good planning and leadership
How can a business avoid the problems of rapid growth?
-poor investment decisions
use of investment appraisal techniques - quantitive and qualitative information
How can a business avoid the problems of rapid growth?
-coping with change (cultural clashes)
kotter change management process, get staff to but in through giving control of change to employees
How can a business avoid the problems of rapid growth?
-alienation of customers
employ customer relationship management systems, keep customers informed
How can a business avoid the problems of rapid growth?
-shortage of resources
work with staff to maintain productivity and implement effective recruitment and selection processes
