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reasons for mergers and takeovers
integration allows businesses to exploit synergies in a merger or takeover
arise from:
economies of scale
potential for asset stripping
reduction of risk through diversification
potential for gains by management
quick and easy way to expand
buying another business is cheaper than growing internally
some businesses want to use available cash
defensive reasons
consolidating position
avoids takeover if large
response to economic changes
merging in a different country allows companies to gain entry into foreign markets
globalisation
gains economies of scale
asset strippers
firms buy a company, sell off profitable parts and close down unprofitable parts
management may want to increase size
growth and size
distinction between mergers and takeovers
merger:
2 or more businesses join together and operate as one
conducted with agreement of both businesses
‘friendly’
new name formed from both old ones
helps cut costs and cope with capacity and demand issues
takeover:
acquisition
one business buys another
public limited companies - openly traded shares allows anyone to buy them (51%)
can result in a sudden increase in share price
investors buy shares
firms can takeover without buying majority shares:
shared ownership widely spread with little communication between shareholders
once a company has bought 3% of another company it must make a declaration to the stock market
bought company loses identity and becomes part of the predator company
private limited company - only bought if majority shareholders invite others to buy shares
horizontal and vertical integration
integration: businesses join together to form one
horizontal integration:
occurs when two firms that are in exactly the same line of business and the same stage of production join together
benefits:
common knowledge
less likelihood of failure
similar employee skills
less disruption
vertical integration:
occurs when firms in different stages of production join together
forward vertical integration - business joins with another that is in the next stage of production
removes profit margin expected by next firm
guarantees outlets for output
backward vertical integration - business joins with another in the previous stage of production
guarantees and controls the supply of raw materials
removes suppliers profit margin
conglomerates
a very large business organisation which owns a number of other businesses
each business operates as a separate entity with its own board of directors
each business is still under the control of the conglomerate
group is usually acquired through mergers and takeovers
advantages:
have a wide range of business interests
spreads risk of enterprise
large and powerful
group revenue and profit can support other businesses
exploit economies of scale
influence the market
disadvantages:
diversification leads to difficulties
may become confusing
financial risks and rewards
financial rewards:
stakeholder benefits - shareholders get immediate premium when taken over, higher future dividends, share price rises, improved job security, better remuneration packages
stronger balance sheet - more assets = increased diversity, improved cash flow
lower costs - exploit economies of scale
lower taxes - can lower tax liabilities
financial risks:
integration costs - complex, expensive, time consuming
overpayment - overestimated financial benefits and underestimated cost of acquisition = inflated acquirer price
bidding wars - businesses attract more than one buyer leading to the acquisition price rising
inorganic growth - advantages
speedy growth - immediately enjoy benefits
strategic benefits - activities complement each other, fills gaps
economies of scale - benefits overnight, cost savings
eliminate competition - fewer operators
inorganic growth - disadvantages
regulatory intervention - attract attention of market regulators which can delay and cause delays if an investigation is launched, can block mergers or apply conditions
drains resources - extremely costly
culture clash - integration can be difficult, resistance to new cultures
alienation of customers - may lose touch with customers, overlook needs, loss of customers
loss of managerial control - additional layers of management delays communication, diseconomies of scale