ch7 Flashcards
How is Backward Vertical Integration defined?
Joining with a business in the previous stage of production.
How is Horizontal Integration defined?
The joining of businesses that are in exactly the same line of business.
How is Forward Vertical Integration defined
Joining with a business in the next stage of production.
How is Integration defined?
The joining of two businesses as a result of a merger or takeover.
How is Merger defined?
Occurs when two or more businesses join together and operate as one.
How is Takeover defined?
The process of one business buying another.
How is Vertical Integration defined?
The joining of two businesses at different stages of production.
What are the reason for Mergers and Takeovers?
Synergies
Faster than Organic
Cheaper than Organic
Excess cash reserves
Defensive reasons
Economic Charges
Access to Foreign Markets
Economies of Scale
Asset Stripping
What is a Merger?
2 or more businesses join together to operate as one larger business.
Mergers are usually agreed by both parties
Business will usually take on a new name, sometimes formed from the previous ones
Mainly because businesses see synergies that will allow for cost savings or increased innovation.
What is a Takeover?
Otherwise known as an “acquisition”, occurs when one company buys another.
A company acquires another by owning at least 50.1% of the shares in issue.
Sometimes they are purchased through the stock market, or sometimes directly from the existing owner.
The reasons for takeovers, will mostly be the same as for merging.
Depending on the dispersion of shares, control can be acquired with a lot less than 50% of shares.
What is Horizontal integration?
Occurs when 2 firms, at the same stage of production, join together.
The benefits are:
- Common knowledge of market
- Shared client lists
- Harmonisation of non productive departments - HR, accounting etc.
- Similar skills sets for employees
- Less disruption
What is Vertical integration?
Occurs when 2 firms, at different stages in the production chain join together.
Forward integration is where a business joins with one in the next stage of production.
Backward integration when the partner is in the previous stage.
Businesses benefit from increased profit margins and lower material costs.
If forward integration is with a retail firm, guarantees outlet for products.
How is Inorganic Growth defined?
a business growth strategy that involves two (or more) businesses joining together to form one much larger one
What are the Financial Rewards of Mergers and Takeovers?
Speedy Growth –> benefit from large market share, lower costs resulting from economies of scale, more market power and higher profitability.
Higher remuneration to senior staff
Rewards to previous owners
Increased profitability
What are the Financial Risks of Mergers and Takeovers?
Regulatory intervention –> may attract the attention of the Competition and Markets Authority (CMA), causes delays and they have the power to recommend that the merger be blocked or to go ahead under certain conditions
Resistance from employees –> can result in job loss also there might be disrupting such as strikes
Integration costs –> technical changes, system changes, severance pay for dismissed workers, training etc.
Bidding wars –> can be more expensive than mergers
