Mergers and takeovers 3.2.2

Question 1

What is a ‘merger’?

Answer 1

A legal deal to bring two businesses together under one board of directors.

Question 2

What is a ‘takeover’?

Answer 2

A legal deal where one larger business purchases a smaller one.

Question 3

What are the two reasons for mergers and takeovers?

Answer 3

• Tactical
• Strategic

Question 4

What is meant by ‘tactical decision’?

Answer 4

• The shorter-term steps are taken to help achieve the strategy.
• Attempt to ensure increased market share.
• Access to technology, staff or intellectual property.

Question 5

What is meant by ‘strategic decision’?

Answer 5

• The longer-term decisions made in order to meet the objectives of the business.
• Access to new markets.
• Improved distribution networks.
• Improved brand awareness.

Question 6

What is a ‘friendly takeover’?

Answer 6

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.

Question 7

What is a ‘hostile takeover’?

Answer 7

The board of directors will try and resist the takeover, but if another business gets 51% shares they can take over management and control.

Question 8

What are the three sectors in business?

Answer 8

• Primary
• Secondary
• Tertiary

Question 9

What is the ‘primary sector’?

Answer 9

Businesses that are involved in digging, fishing, mining to remove products from the planet at source. e.g. farm, quarry.

Question 10

What is the ‘secondary sector’?

Answer 10

Businesses that are involved in manufacturing raw materials into other products. e.g. clothes.

Question 11

What is the ‘tertiary sector’?

Answer 11

Businesses that sell goods to the customers e.g. shops

Question 12

What is ‘horizontal integration’?

Answer 12

Businesses operating in the same sector merge or take over another business in the same sector.

Question 13

What is ‘vertical integration’?

Answer 13

When one business in one sector takes over or merges with a business in another sector.

Question 14

What are the financial risks of mergers and takeovers?

Answer 14

• Original purchase cost.
• Cost of change into a new business.
• Redundancies of duplicate staff.
• Diseconomies of scale

Question 15

What are the financial rewards of mergers and takeovers?

Answer 15

• Increased revenue.
• Economies of scale.

Question 16

What are the short term problems of rapid growth?

Answer 16

• The business may outgrow its premises.
• Staff may not be able to cope with the extra work - decreased productivity and morale.
• Shortage of cash to meet expansion costs.
• More work to generate more income places additional pressure on staff.

Question 17

Why might management pressure be a problem of rapid growth?

Answer 17

• Management may be operating reactively rather than proactively.
• Quality of the products and services could drop - increasing customer complaints.
• Lose customers to competitors.
• Heavy workloads may lead to staff turnover vital knowledge is lost and takes time and money to train new staff.

Question 18

What are the problems with merges and acquisitions?

Answer 18

• Clash of cultures.
• Communication problems.
• A possible move away from the core competencies of the original business may cause issues of control.
• Unreliable merger partners.
• Diseconomies of scale.

Lack of understanding of local markets leading to wrong promotional message.