3.2.2 - Merges and Takeovers

Question 1

What is a merger

Answer 1

• A merger is a legal deal to bring two businesses together under one board of directors
• The businesses are usually the same size and the name is normally changed (although not always)

Question 2

What is a takeover

Answer 2

• Take-over is also known as an acquisition
• This is a legal deal where one larger business purchases a smaller one
• If the deal is unwanted by the management or board of directors then this is a “hostile take-over”

Question 3

What are the reasons for merges and takeovers

Answer 3

• Tactical :

1. Attempt to ensure increased market share
2. Access to technology, staff or intellectual property

• Strategic :

1. Access to new markets
2. Improved distribution networks 3. Improved brand awareness

Question 4

What is a takeover - friendly

Answer 4

• Friendly; A business may be struggling with cash flow problems and invite a takeover from a stronger business – known as a “white knight” as they come in to rescue the struggling business
• Morrisons took over a struggling Safeway read the story here

Question 5

What is a takeover - hostile

Answer 5

• Hostile; The board of directors will try an resist the takeover, but if another business gets 51% shares they can takeover management and control

Question 6

What are the 3 sectors in a business

Answer 6

• Primary Sector
• Secondary Sector
• Tertiary Sector

Question 7

What is a primary sector

Answer 7

Primary Sector businesses that are
involved in digging, fishing, mining to remove products from the planet at source E.g. a Farm or quarry

Question 8

What is a secondary sector

Answer 8

Secondary sector business that are involved
in manufacturing raw materials into other products e.g. Clothes factory, cheese maker

Question 9

What is a tertiary sector

Answer 9

Tertiary sector are businesses that sell
goods to the customers e.g.
Shops, Banks, insurance companies

Question 10

What is a horizontal integration

Answer 10

Businesses operating in the same sector (e.g. tertiary) merge or takeover another business in the same sector

Question 11

What is a vertical Integration

Answer 11

Vertical integration is when one business in one sector takes over or mergers with a business in another sector or part of the supply chain

Question 12

What are the financial risks of merges and takeover

Answer 12

• Original purchase cost
• Cost of change into a new business
• Redundancies of duplicate staff e.g. two marketing managers, two finance managers etc.

Question 13

What are the financial rewards of merges and takeovers

Answer 13

• Increased revenue (see example below)
• Economies of scale

Question 14

What are the problems of rapid growth in the short term

Answer 14

• The businesses that have merged may outgrow their premises in the short-term. There may not be enough space for everyone to work efficiently.
• Morale may drop if staff cannot cope with the extra work so productivity can decrease.
• There may be a shortage of cash to meet expansion costs.
• Taking on more and more work to generate more income places additional pressure on the premises and staff

Question 15

What are the problems of rapid growth with management pressure

Answer 15

• Management may be under pressure, operating reactively rather than proactively.
• The quality of the products and services could drop, causing an increase in customer complaints.
• The business may even lose customers to their competitors.
• Staff turnover may increase due to heavy workloads. Vital knowledge could be lost as staff leave. Hiring and training new staff takes time and money.

Question 16

What are the problems with mergers and acquisitions

Answer 16

• Clash of cultures
• Possible communication problems
• Possible move away from core competencies of original business may cause issues of control
• Unreliable merger partners
• Diseconomies of scale
• Lack of understanding of local markets leading to wrong promotional message
• 75% of all mergers fail