Reasons for global mergers, takeovers or Joint ventures

Question 1

Spreading risk and economies of scale

Answer 1

• expanding overseas can insulate a firm from the consequences of a downturn by locating in markets where risks are less likely = this is know as risk bearing EOS (The ability of large firms to spread risks over a large number of investors).
• uncertainty can be reduced by diversifying into different markets.
  –> because businesses operating in different markets spread the risk associated with fluctuating economic conditions = if there is an economic downturn in one market they can still gain sales in another market.
• A business might decide to enter into a joint venture with an established business in another country to share the risk and gain knowledge about the market.
• businesses can also spread risk by entering into a more long term agreement with a merger.

Question 2

entering new markets / trade blocs

Answer 2

• entering a market using a merger or joint venture is a quicker method than using organic growth.
• businesses can enter a joint venture with a local business in a different country, in order to gain access into new markets and to be able to gain knowledge of the local market.
• a merger is also a convenient way of entering a new market, as supply chains and distribution channels are already in place and consumers are familiar with existing brands.
• merging with a business inside a trade bloc means that protectionist measures can be avoided.

Question 3

acquiring national / international brand names / patents

Answer 3

• brands already have an established brand image and customer loyalty.
• this avoids time and expenses involved in creating a new one.
• a business may look to merge with another business in order to acquire a lucrative brand name.
• patent: the legal right given by the gov to a business / individual to make, use or sell an invention and exclude others from doing so.
• a joint venture allows inventors to move their products to market quickly with much less financial risk.

Question 4

securing resources / supplies

Answer 4

• Businesses can strategically merge or create a joint ventures with another business which has access to resources (e.g land and raw materials).
  –> This allows business to quickly gain access to resources which helps to speed up the production process.
• when a business operates on a global scale, its supply chain can be long.
  –> some businesses can take over the supplier to ensure that they will always be able to obtain resources at a reasonable cost.

Question 5

maintaining / increasing global competitiveness

Answer 5

• Businesses can increase their global dominance by merging or joining with another business
• a merger and joint venture can help maintain competitiveness and allow business to benefit from synergy.
  –> synergy: happens when the value of two businesses brought together is higher than the sum of the value of the two individual businesses.
• expanding can allow businesses to gain access to larger markets, benefit from EOS and enjoy significant cost savings.
• due to EOS and cost savings, businesses can reduce prices which can increase sales, leading to a higher market share

Question 6

Reducing competition

Answer 6

• one business may decide to merge with another to reduce the competition in an industry by eliminating a competitor.
• a business may also decide to merge with another to become large enough to compete with a different competitor.
  —> horizontal competition: a company merges with another business in the same industry to gain EOS.
  —> vertical competition: where a business may decide to merge = downstream with customers or upstream with suppliers, this will enable them to get EOS all through the supply chain, lower prices and make them more competitive.

Question 7

Making use of local knowledge

Answer 7

• a business can enter a joint venture with a business in another country to acquire local market knowledge.
• this is because the host nation business will have info on: buyers, suppliers, rivals, paperwork, laws and culture.
• This can help the business to navigate around the market effectively.
• it can also help to reduce business costs for market research, as the host nation business can help them obtain the same information and in more detail.

Question 8

Government or legal requirement

Answer 8

• In some industries, a joint venture under the domestic business is compulsory under the host nations law.
• when businesses work together in a joint venture or merger they must comply with competition law.

Question 9

Accessing supply chains / distribution networks

Answer 9

• when two companies merge together, they will look to find ways to integrate their supply chains and distribution networks.
• this may mean duplicated processes and streamlining where possible.

Question 10

Sharing costs and risks

Answer 10

• businesses may merge to diversify and therefore spread risk.
• If a business owns companies in more than one industry then this will protect against a downturn in profitability in one industry.

Question 11

Advantages of joint ventures and mergers

Answer 11

• EOS gained from costs spread over larger output can lead to increased profit margins.
• Diversifying risk due to having products in several markets so if there is a fall in sales of certain products, the business can still generate revenue front other products.
• opportunity to enter new markets which may be closed to the business.

Question 12

Disadvantages of joint ventures and mergers

Answer 12

• the initial cost of merging can be significantly high and there is no guarantee a business will receive a return on their initial investment if it is not successful.
• DEOS can occur due to communication issues and a lack of control as the business expands.
• A culture clash between the two businesses can affect the quality of the business, leading to poor sales.
• when two businesses join together redundancies can occur, this is likely to affect the morale of the remaining workers.
• ## failure in joint ventures can occur due to the many risks involved and the complexity of integrating operations of two differnt companies.