mergers and takeovers

Question 1

reasons for mergers and takeovers

Answer 1

-combining two businesses to create a better outcome than one individual business
- quick and easy
- cheaper than growing internally
- gain economies of scale
- increase the size of the company

Question 2

merger VS takeover

distinction

Answer 2

A merger involves the mutual decision of two companies to combine and become one entity.

Whereas a takeover is the purchase of a smaller company by a larger one. It doesn’t have to be a mutual decision.

Question 3

horizontal intergration

give 2 advantages of it

Answer 3

when 2 firms are in the same line of business and production join together
* common knowledge of the same market means less likelihood of failure and disagreements
* similar employee skills

Question 4

vertical intergration

Answer 4

firms in different stages of production join together, can be done in 2 ways:

forward intergration: business joins with another which is in the next stage of production

backwards intergration: business joins with another which is in the previous stage of production

Question 5

financial risks of external growth

Answer 5

• could result in job losses which may demotivate employees or cause strikes
• integration costs
• bidding wars for takeover
• growing too quickly

Question 6

problems of rapid growth

Answer 6

• coping with change is hard
• alienation of customers
• loss of control
• communication distorted
• shortages of resources
• overtrading

Question 7

organic growth

Answer 7

business growing gradually using its own resources

Question 8

inorganic growth

Answer 8

2 or more businesses joining together to form one large business

Question 9

methods of organic growth

Answer 9

• new customers
• new products
• new markets
• new business model - developments in tech or social change
• franchising

Question 10

3 advantages of organic growth

Answer 10

• they can go at a slower pace than external so its less risky and less likely to make errors so less diseconomies of scale
• can be cheaper if they use retained profits
• business retains more control

Question 11

4 disadvantages of organic growth

Answer 11

• This is a long term strategy, and it is significantly slower than growing inorganically. This could mean competitors gain more market power by expanding in the meantime, It could also make shareholders unhappy if they want faster growth.
• prevents firms from tapping into resources from other businesses
• might take time to exploit economies of scale hence long periods of higher average costs
• if its dynamic market organic growth wont be suitable because they need to grow rapidly