Theme 3 Topic 5 - Mergers and Takeovers Flashcards
Define Merger
Where two or more businesses join together and operate as one
Define Takeover
Where one business buys another
What are three reasons for takeovers/mergers?
Larger market share leading to increased market power, Economies of Scale, Synergy
What are three reasons against takeovers/mergers?
Potentially expensive, Culture clash, Diseconomies of scale
Define Backward Vertical Integration
Joining with a business in the previous stage of production
What are two advantages of backward vertical integration?
Have more control over the supply chain, Cheaper production costs
What are two disadvantages of backward vertical integration?
Management might not be trained in that stage of production, Keeps you in the same market so any problems in it will effect you
Define Forward Vertical Integration
Joining with a business in the next stage of production
What are two advantages of forward vertical integration?
Higher profit margins due to lower costs, Able to supply only their stock if integrated with shop
What are two disadvantages of forward vertical integration?
Refurbishing stores or retailers could be expensive, Keeps you in the same market so any problems in it will effect you
Define Horizontal Integration
Joining with businesses in the same stage of production
What are two advantages of horizontal integration?
Removes rivals from the market, Increases capacity
What are two disadvantages of horizontal integration?
Diseconomies of scale, Have to make some staff redundant (e.g. don’t need two managers)
What are three financial risks of mergers/takeovers?
Integration costs, Regulatory intervention by the CMA, Overpaying for target company
What are three financial rewards of mergers/takeovers?
Cost synergies, Revenue synergies, Increased profitability
Define Hostile Takeover
The victim tries to resist the bid
What does the board of directors try to do to resist a takeover?
Coordinate resistance by trying to persuade shareholders that there interests would be best protected under the control of the existing board of directors
Define Friendly Takeover
A takeover can be invited if the business is struggling e.g. cash flow issues
What might a struggling business want from a friendly takeover?
The current business activity to continue, but under the control of another stronger company
What financial problems come from mergers/takeovers?
Mergers and takeovers can cost a huge amount of money which can significantly damage cash flow
How can culture clashes come from mergers/takeovers?
When a business buys another the two different cultures are difficult to integrate into one successful business
How can resistance be caused by mergers/takeovers?
Management and staff resistance is likely if one firm tries to impose its culture on another
How can mergers/takeovers cause customers to become alienated?
Customers may become confused with the new business name and format if companies growing too quickly lose touch with their customers
How might diseconomies of scale result from mergers/takeovers?
Problems may occur e.g. communication difficulties between the divisions or a tall hierarchy created by growth
