Reasons for global mergers or joint ventures 4.2.4 Flashcards
What’s a merger?
An agreement between 2 companies from different companies to join forces permanently.
What’s a joint venture?
A separate business entirely created by two or more parties acting as a collective.
Spreading risk and joint venture:
Moving production or sales into another country can be very complex and risky for a single business to go it alone.
Often a business might decide to enter into a joint venture to share the risk, perhaps with a business already trading in that country- which can help them navigate the paperwork and cultural differences.
Spreading Risk and mergers:
Risk can also be reduced by entering into a more long term arrangement with a merger.
What are the advantages of Joint ventures?
- Access to knowledge and resources such as capital, staff and technology.
- Access to new opportunities such as new markets or greater distribution reach.
- Shared exposure to risks, financial responsibility and workload.
- Gaining access to expertise without the need to hire more staff.
What are the disadvantages of Joint ventures?
- A large number of joint ventures fail because of the many risks involved and the complexity of integrating operations and the work culture of two different companies.
- Coping with differing cultures, management styles, and working relationships that are in each company.
- Making poor tactical decisions caused by a misunderstanding of each company’s role.
What are the advantages of mergers?
- A reduction in unit costs through EOS which can translate into greater profit margins.
- The spreading of risks where products are different, meaning profits can be maintained even if some products are not performing as well as others.
- A reduction in competition if a rival is taken over, giving the business more market power and the potential to increase product prices without losing demand.
- New skills and competences which can translate into innovation and ultimately more profit.
What are the disadvantages of mergers?
- The cost of buying up another business can be measured in billions of pounds. Often such takeovers are financed by debt, leading to risky levels of gearing.
- Diseconomies of scale can lead to higher unit costs.
- Clashes of cultures between different businesses can occur, reducing the effectiveness of the integration and potentially affecting quality and productivity and ultimately profits.
- Redundancy of workers, particularly managers, may affect the overall motivation of the new business, ultimately driving down profits.
What are the reasons for a global merger or joint venture?
- Spreading the risk
- Entering new market/trade bloc
- Acquiring national/international brand names/patents
- Securing resources/supplies
- Maintaining/increasing global competitiveness.
What is brand Name Acquisition?
A business may look to merge with another business in order to acquire a lucrative brand name.
What is a patent acquisition?
- A joint venture allows inventors to move their products to market quickly with much less financial risk.
- Inventors can team up with manufacturing companies who will help them; design, build, and make the prototypes necessary to help get the product to market.
- The joint venture could be with an overseas manufacturer who will make the product for a reduced price in exchange for overseas marketing rights.
Spreading the risk
By operating in a number of countries, a business reduces the risk associated with one individual country. This is because all countries will be at different stages of the business cycle. If one country is in recession, impacting sales revenue, another might be undergoing economic growth, countering this. Profits in one geographical area can sustain business elsewhere to overcome short-term downturns in the economy.
Setup costs are shared by the joint venture or the newly merged company, as well as expertise which again lowers the risk in different global markets. Mergers help increase growth quickly for a business, which may be particularly important in emerging economies, where size may help to ensure success.
Entering new market/trade bloc
Saturated markets and heavy competition in the domestic market mean fewer opportunities for businesses. Therefore, this leads to them wanting to undertake market development in particular with developing countries which can provide them with future opportunities for new sources of revenue.
This can be achieved in three ways; Organic growth through starting from scratch, through a merger or takeover or through a joint venture.
Gaining access to trade blocs can allow a business to develop a presence that creates an opening to a large geographical area with free movement of capital and few or no import taxes.
Acquiring national/international brand names/patents
Marketing economies of scale allow the business to lower unit costs. Branding is expensive and so a global brand effectively reduces the need to have a local variation of the brand (glocalisation). By using global advertising and social media campaigns the business is getting more advertising at a lower unit cost.
Joint ventures and mergers can often help an MNC protect global revenue through the use of national law as well as being able to acquire technical expertise that can be used in other markets.
Securing resources/supplies
Supply chain management is enhanced if a business operates in the country where it secures its resources or supplies. Many MNCs have grown as a result of the natural resources that they sell. To do this effectively they have had to produce in the country where the resource originates. This reduces costs because the business does not have to deal with an intermediate that would cut profit margins as they would require payments.
Where a business is accessing resources that are obtained unethically, a business may need to take over the supplier in order to maintain the business’s reputation and customer loyalty.
