Unit 2 Flashcards
Definition of mergers
when two companies (often similar in size) decide to form a new company instead of operation separately
what happens in a merger?
they negotiate how relative value will translate into their amount of ownership each party will have in the new company
the stock of both the companies are surrendered, and new stocks are issued
one of the parents usually emerge as the dominant management
Definition of acquisitions (take overs)
the case when one company takes over another and establishes itself as the owner of the new business
what happens in an acquisition
they buyer “swallows” the target company, which may or may not cease to exist
it can be friendly or hostile:
- the of board of directors agree -> friendly
- if they don’t agree it is hostile
poison pill
when existing stakeholders can buy new stock cheaply in a hostile acquisition
ex: netflix in 2012
white knight
when a third company is invited to buy part of the target company to block the attempt the acquisition
ex: Fiat and Chrysler in 2009
reasons for mergers and acquisitions:
- it increases growth capacity quickly (access to other company’s market, resources and etc.)
- Improves economies of sale: lower cost per unit produced
- filling the gap in product offering: bigger product portfolio
- Entering a new market through an existing player: access to their knowledge of the market and customers
- Synergies: move customers for one product to another
- Internal market efficiencies: if companies are similar they can reduce training costs etc.
- accessing technology or skills
- tax reasons: reducing their tax exposure
reasons why mergers and acquisitions fail:
A merger or acquisition is a relationship:
requires time a to understand each other and patience to learn to compromise on competing ideas. It also requires that both organizations see some kind of common future.
The cost of the merger/acquisition
Booming stock market encourages mergers. Companies with cash (and interested in reducing that cash level for tax reasons) may often pay far more than the market value. This then creates pressures for immediate success, which can lead to short term solutions
Doing it for the wrong reasons:
A competitor does a big merger, so other companies feel they must follow or lose competitiveness. BA-Iberia merger was soon followed by Air France-KLM deal. This can bring a lot of advantages (mentioned earlier) but also the risk that its not the right partner
Confusing personal interest with clear strategic vision for the company:
People may also receive big bonuses if the merger/acquisition is completed on time. This is combined with the influence and opinions from the bankers, lawyers and consultants who can earn big fees, and who clearly have incentives to ‘close’ the deal.
Corporate and work Culture
It can be very difficult to integrate two companies with different work cultures. They may have different ideas of where added value comes from, different ethical concepts, different decision-making structures etc. These can be hard or impossible to combine.
Forgetting that all proposed gains are predictions
All future savings calculations are complex predictions. Many of the claimed cost savings don’t materialize (or other costs emerge than nobody predicted). It can be easy to look at the possible economic gains and forget many of the other issues mentioned here.
Definition of Joint Ventures
when two or more parties agree to combine resources to achieve a specific task. this task can be a new project or any other business activity
In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with to. However the venture is its own entity, separate and apart from the participants other business interests
A+B = A+B+c
Reasons for joining joint ventures
One of the principle reasons for joint venture is to access or share knowledge or resources. New product development, or product development in the new markets, can often be achieved quicker and more effectively if a number of companies collaborate
Another reason is to share the risk, particularly if the project is expensive or has a high possibility of not being successful (research projects)
There needs to be greater incentive to collaborate than to compete, and the same two companies who collaborate on one product / service may still compete in other areas. This can lead to organizational schizophrenia
Definition of franchises
A type of license that allows franchisee to have access to a business’s (the franchisor) proprietary knowledge, process and trademarks so they can sell a product or service using business’s name. Franchises usually pays the franchisor initial start-up and annual licensing
In the us, more than 40% of all retails sales come through franchising.
The 3 franchise types
- Product franchises: manufacturer allows franchisee to distribute their goods, using the name and trademark. (Ex: car dealerships, Baskin Robbins)
- Business format franchising : a business model using name and trademark of the company (Ex. McDonalds, Dunkin Donuts)
- Manufacturing franchise (licensing of product) : these types of franchises allow an organization to manufacture a product to sell to the public - used in the food and beverage industry. (ex: coca-cola)
3 possible negatives points about franchise
Flexibility: lack of flexibility on operations, suppliers, training
Company image: business is tied to the image of the franchise company
Franchise fees: costs can be expensive
Service contracts
where one company offers a service or manages everyday operations such as maintenance service in a certain market
Company A may provide technology/knowledge/training so servicing can be carried out in a certain way/to a certain standard. Company B can make profits as clients who use company A’s products will have to go to company B to get those products serviced. It’s a type of licensing where company B is licensed to do certain things for company A.
It means company A don’t have to have many of their own employees/maintenance teams in every region just to carry out routine tasks
Management agreements
Where independent company outsources some of its management functions to others.
in enables the smaller operator to focus on key customers service without being burdened by certain management practices they may not be very good at.
It allows the management operator to participate in a market sector where they haven’t traditionally been present, or to offer a wide product range without massive investment
