Mergers and Takeovers (3.2.2) Flashcards
What is the type of growth that uses Mergers and Acquisitions?
Inorganic (External) Growth
What is a merger?
When two companies combine resources to form a new company and gain a competitive advantage
What is a takeover?
When one company purchases another company, often against its will. Hostile takeover. The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations
What are the reasons why companies may choose to pursue mergers and takeovers?
- Strategic fit- expand to new markets, diversify its product offerings and gain new tech
2.Economies of Scale- Growth creates E of S by allowing companies to reduce costs and increase efficiency
3.Synergies- Benefits that result from combination of two companies such as increased rev, cost savings, or improved product offerings
4.Elimination of competition- Takeovers are often used to eliminate competition and increase market share - Shareholder value- Mergers + takeovers can also be used to create value for shareholders. By combining companies shareholders benefit from increased profits, dividends and stock prices
What are dividends?
A sum of money paid each year by a company to its shareholders from its profits
Which is riskier Inorganic or Organic growth?
Inorganic is riskier than Organic Growth but the potential rewards are greater
Does Inorganic or Organic Growth use the 4 different types of Integration?
Inorganic (External) Growth
What are the four types of Integration?
-Horizontal Integration
-Backwards Vertical Integration
-Forwards Vertical Integration
-Conglomerate Integration
What are the advantages of vertical integration?
-Reduces cost of production as middleman profits eliminated
-Lower costs make the firm more competitive
-Greater control over the supply chain reduces risk of access to raw materials
-Quality of raw materials controlled
-Increase profits and brand visibility
What are the disadvantages of vertical integration?
-Diseconomies of scale if costs increase
-Culture Clash between two firms merged
-Possibly little expertise in running new firm results in inefficiencies
-Price paid for new firm might take a long time to recoup
What is a culture clash?
A conflict that arises between workers as a result of different working norms or value systems
What are the advantages of horizontal integration?
-Rapid increase of market share
-Reductions in cost per unit due to economies of scale
-Reduces competition
-Existing knowledge of industry so more likely to be successful
-Gains knowledge or expertise
What are the disadvantages of horizontal integration?
-Diseconomies of scale may occur as costs increase
-Can be culture clash between two firms who merged
What are the financial rewards of Inorganic Growth?
-Increased market share= increased sales revenue and profitability
-Synergy- Mergers could result in cost savings through elimination of duplicate functions and increased efficiency
-Diversification- Selling a wider variety of goods + services reduces risks with selling a single product
-Access to new markets- If company you acquire has strong presence in new market may result in a higher customer base and higher sales revenue
-Increased Value- Mergers increase overall value of combined company for shareholders
What are the financial risks of Inorganic Growth?
-Overpayment-If company pays too much for company may not be able to recoup
-Integration challenged- Integrating two companies can be complex and costly
-Cultural Differences-Mergers can result in clashes of company cultures leading to decreased productivity and loss of valuable employees
-Regulatory Hurdles-May face opposition from regulators or other stakeholders
-Debt- May take on debt to finance merger which can increase financial risk and reduce flexibility
What are potential problems of a business rapidly growing?
- Strain on Cash flow
- Increased management complexities
- Quality control issues
- Customer service issues
- Culture clash
- Diseconomies of scale
