1.5 IB Business Terms

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Acquisition

When one business buys a controlling stake (over 50%) in another business, which is then absorbed into or run by the buyer. Can be friendly or hostile.

Backwards Vertical Integration

When a business merges with or takes over a company earlier in its supply chain (a supplier), such as a bakery buying a flour mill. Benefits include secure supply, lower costs, and more control over quality.

Conglomerate

A large firm made up of several businesses operating in completely unrelated industries. Spreads risk across markets but can be hard to manage and lose focus (e.g., Virgin Group).

Demerger

When a company splits into two or more separate businesses, often to improve focus, unlock shareholder value, or sell off underperforming divisions.

Forward Vertical Integration

When a business merges with or takes over a company later in its supply chain (a distributor or retailer), such as a clothing manufacturer buying retail stores. Benefits include control over distribution and access to customers.

Franchise

A business model where a franchisor sells the right (license) to a franchisee to use its brand name, products, and business system in return for fees and royalties (e.g., McDonald's, Subway).

Horizontal Integration

When two firms in the same industry and at the same stage of production merge or one takes over the other (e.g., two supermarket chains combining). Benefits include economies of scale and larger market share.

Joint Venture

When two or more businesses agree to set up a new, separate business together, sharing costs, risks, profits, and expertise while the original businesses continue to exist independently.

Merger

When two (usually similar-sized) firms agree to combine into one new business, with shareholders of both firms becoming shareholders in the new company.

Optimal Output Level

The level of output at which a firm achieves the lowest average cost per unit (productive efficiency) or maximizes profit where marginal cost equals marginal revenue ($\text{MC} = \text{MR}$).

Strategic Alliance

A formal agreement between two or more businesses to cooperate and share resources or expertise for mutual benefit while remaining separate companies, with no new business created.

Synergy

When the combined business is worth more or performs better than the two separate businesses would alone ($1 + 1 = 3$), such as through cost savings or shared expertise.

Takeover

When one company gains control of another by buying enough of its shares, often without the target's agreement (a hostile takeover).

Vertical Integration

When a business merges with or takes over another firm at a different stage of the same supply chain, either backwards (suppliers) or forwards (distributors/retailers).