Theme 3 Topic 5 - Mergers and Takeovers

Question 1

Define Merger

Answer 1

Where two or more businesses join together and operate as one

Question 2

Define Takeover

Answer 2

Where one business buys another

Question 3

What are three reasons for takeovers/mergers?

Answer 3

Larger market share leading to increased market power, Economies of Scale, Synergy

Question 4

What are three reasons against takeovers/mergers?

Answer 4

Potentially expensive, Culture clash, Diseconomies of scale

Question 5

Define Backward Vertical Integration

Answer 5

Joining with a business in the previous stage of production

Question 6

What are two advantages of backward vertical integration?

Answer 6

Have more control over the supply chain, Cheaper production costs

Question 7

What are two disadvantages of backward vertical integration?

Answer 7

Management might not be trained in that stage of production, Keeps you in the same market so any problems in it will effect you

Question 8

Define Forward Vertical Integration

Answer 8

Joining with a business in the next stage of production

Question 9

What are two advantages of forward vertical integration?

Answer 9

Higher profit margins due to lower costs, Able to supply only their stock if integrated with shop

Question 10

What are two disadvantages of forward vertical integration?

Answer 10

Refurbishing stores or retailers could be expensive, Keeps you in the same market so any problems in it will effect you

Question 11

Define Horizontal Integration

Answer 11

Joining with businesses in the same stage of production

Question 12

What are two advantages of horizontal integration?

Answer 12

Removes rivals from the market, Increases capacity

Question 13

What are two disadvantages of horizontal integration?

Answer 13

Diseconomies of scale, Have to make some staff redundant (e.g. don’t need two managers)

Question 14

What are three financial risks of mergers/takeovers?

Answer 14

Integration costs, Regulatory intervention by the CMA, Overpaying for target company

Question 15

What are three financial rewards of mergers/takeovers?

Answer 15

Cost synergies, Revenue synergies, Increased profitability

Question 16

Define Hostile Takeover

Answer 16

The victim tries to resist the bid

Question 17

What does the board of directors try to do to resist a takeover?

Answer 17

Coordinate resistance by trying to persuade shareholders that there interests would be best protected under the control of the existing board of directors

Question 18

Define Friendly Takeover

Answer 18

A takeover can be invited if the business is struggling e.g. cash flow issues

Question 19

What might a struggling business want from a friendly takeover?

Answer 19

The current business activity to continue, but under the control of another stronger company

Question 20

What financial problems come from mergers/takeovers?

Answer 20

Mergers and takeovers can cost a huge amount of money which can significantly damage cash flow

Question 21

How can culture clashes come from mergers/takeovers?

Answer 21

When a business buys another the two different cultures are difficult to integrate into one successful business

Question 22

How can resistance be caused by mergers/takeovers?

Answer 22

Management and staff resistance is likely if one firm tries to impose its culture on another

Question 23

How can mergers/takeovers cause customers to become alienated?

Answer 23

Customers may become confused with the new business name and format if companies growing too quickly lose touch with their customers

Question 24

How might diseconomies of scale result from mergers/takeovers?

Answer 24

Problems may occur e.g. communication difficulties between the divisions or a tall hierarchy created by growth