3.2.2 Mergers and Takeovers

Merger

A legal deal to bring two businesses together under one board of directors.

Takeover

Also known as an acquisition. A legal deal where one larger business purchases a smaller one. If the deal is unwanted by the management or the board of directors then this is a “hostile take-over”.

Strategic reasons for mergers and takeovers

Strategic reasons focus on long-term goals, such as access to new markets, improved distribution networks and improved brand awareness.

Tactical reasons for mergers and takeovers

Tactical reasons focus on achieving specific, short-term objectives such as increased market share, access to technology, staff or intellectual property.

Friendly takeover

A ‘white knight’ takeover is where a business buys a target company that is close to being taken over by a ‘black knight’. White knights offer better terms to keep core operations running, rather than just closing operations, asset stripping and taking over brand names.

Hostile takeover

Also known as a ‘black knight’ takeover- when a company attempts to takeover another business against the wishes of management. 

The three sectors in business

Primary is raw material extraction e.g. farming. Secondary is manufacturing and construction e.g. car making. Tertiary is providing services to consumers e.g. retail.

Horizontal integration/growth

Businesses operating in the same sector (e.g. tertiary) merge or a business takes over another business in the same sector.

Conglomerate growth

Vertical integration/growth

When a business in one sector merges with or takes over a business in another sector or part of the supply chain. 

Vertical backwards growth

Vertical forwards growth

Financial risks of mergers and takeovers.

Original purchase cost. Cost of changing into a new business e.g. adapting style. Redundancies of duplicate staff e.g. two marketing managers etc. Cost if it all goes wrong e.g. not being able to sell the business for the same price as it was bought.

Financial benefits of mergers and takeovers

Increased revenue (access new markets, diversify product range etc).

Economies of scale (larger company = lower average cost per unit).

Problems of rapid growth

Merged businesses may outgrow their premises in the short-term so not enough space.

Morale and productivity could drop with increased workload. Staff turnover could increase- losing knowledge. Hiring etc costs money. Management may be under pressure so they could be acting reactively rather than proactively.

Quality of products and services could drop, increasing customer complaints.

Problems with mergers and acquisitions

Clash of cultures. Possible communication problems. Unreliable merger partners. Diseconomies of scale. Lack of understanding of local markets leading to wrong promotional messaging. 75% of all mergers fail.