Mergers and takeovers

Question 1

Define INTERNAL GROWTH

Answer 1

Internal growth is when a business expands its own operations rather than relying on mergers or takeovers.

Question 2

Define EXTERNAL GROWTH

Answer 2

External growth is when a business expands through mergers and takeovers rather than through its own operations.

Question 3

Define a MERGER

Answer 3

A merger is when two or more businesses agree to become integrated to form one business under joint ownership.

Question 4

Define a TAKEOVER

Answer 4

A takeover is when one business gains control over another and becomes the owner. This could be achieved through buying 51% of the total shares. The takeover can be hostile, in which the management of the smaller company do not want to be bought out.

Question 5

What are the two different types of merger/takeover?

Answer 5

Horizontal and vertical

Question 6

Define HORIZONTAL INTEGRATION

Answer 6

Horizontal integration is when two businesses at the same stage within a process integrate.

Question 7

Define VERTICAL INTEGRATION

Answer 7

Vertical integration is when two businesses at different stages within a process integrate.

Question 8

What are the two further types of vertical integration?

Answer 8

1. Forward vertical - where a business joins with another at the next stage of the process, e.g. a manufacturer joining with a retailer.
2. Backwards vertical - where a business joins with another at an earlier stage of the process, e.g. a manufacturer joining with a raw materials supplier.

Question 9

Define a CONGLOMERATE

Answer 9

A conglomerate is formed when two unrelated businesses integrate.

Question 10

Define a JOINT VENTURE

Answer 10

A joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task.

Question 11

What are possible reasons for external growth?

Answer 11

• Synergy, the idea that two firms joined together are likely to be able to achieve more than the two firms operating separately.
• Helps when negotiating better suppliers and terms.
• Helps to secure a wider range of outlets for customers.
• Benefits gained from shared distribution networks.
• Increased foothold in the market, including high market share.
  Benefits gained from shared expertise.
• Intellectual property or technology
• Increased brand recognition
• Helps to achieve corporate objectives

Question 12

What are the financial risks involved with mergers and takeovers?

Answer 12

• Legal and regulatory procedures - the government may intervene if two large businesses decide to merge.
• Costs of integrating the internal operations (changing culture, training, relocation, possible redundancies).
• Financing of the merger/takeover (e.g. equity or debt and related costs)
• Research prior to pursuing acquisition, which may be expensive
• Impact on share value

Question 13

What are the financial rewards involved with mergers and takeovers?

Answer 13

• Potential for larger revenues through cross selling and sharing distribution channels
• Potential for economies of scale and cost synergies (through elimination of duplication) decreasing individual unit costs.
• Increased market share

Question 14

What happens when a business grows too fast?

Answer 14

• Overtrading
• Cultural clashes
• Taking on debt
• Conflicting messages to stakeholders
• Uncertainty in the workforce
• Loss of control
• Strain on resources
• Possible diseconomies of scale