4.2.4: Reasons for global mergers, takeovers or joint ventures

reasons why businesses join together

• licensing

  • entering into a licensing contract with another firm to use its brand, IP or produce its product in return for a fee

• franchising

  • long term co-operative relationship

  • franchisor contracts franchisee to run business

• main foreign investment routes for international companies = cross-border M&A

spreading risk and economies of scale

• spreading risk:

  • trying and protecting a firm from consequences of crises by locating in markets where risks are less likely to occur

• economies of scale:

  • growing rapidly in size to reduce costs

entering new markets and trade blocs

• M&A as a shorter route to international growth

• firms tap into growing markets

• may be difficult to gain access

acquiring national and international brand names/patents

• used to become a global player in the international market

• brand recognition and patents help prevents other businesses from copying its products or producing similar products

• purchasing a brand/product = gains quick access

• M&A and joint ventures = effectively gain strong reputation and IP

  • strong brand recognition

  • brand loyalty

  • limits competition

  • doesn’t face issues of launching a new product (high risk, cost and uncertainty)

• important to ensure employee confidence and customer satisfaction post merger

• developing IP internally = time consuming, financial risk

• protection of IP through:

  • patents

  • copyright

  • trademark

• easier to gain access to IP through acquisition or joint venture than establishing it

securing resources or supplies

• secure resources or supplies further back in the supply chain

• backward vertical integration

• reasons:

  • resources used may be rare or hard to get - reliability

  • inputs stay at a suitable quality or price

maintaining or increasing global competitiveness

• bigger markets

• cost savings

• improves pricing power over customers and suppliers

• helps a firm become a dominant global player

• cross-selling product ranges

  • increase overall sales

  • lower internal costs

• geographically diverse collaboration

  • improves tax position

  • improves competitive position for further investment

reducing competition

• often a motive for cross-border M&A

• watched by industry regulators

  • blocked if it acts against public interest

  • conditions attached

making use of local knowledge

• for particular companies lacking knowledge and expertise to enter a foreign market

• reduced risk as a result of existing knowledge

• joint ventures, partnerships, alliances

government or legal requirement

• protect local businesses from foreign businesses entering domestic markets and dominating them

• insistence to enter market in partnership with domestic operators

• ensure benefits are shared with domestic companies

accessing supply chains and distribution networks

• acquisition of operations in different product stages = vertical integration

  • acquisition of supply chain = backward vertical integration

  • acquisition of distribution network = forward vertical integration

• supply chains

  • guarantees supply

  • reduces uncertainty

  • helps maintain quality

  • gets rid of suppliers profit margin

  • maintains higher ethical standards

• distribution networks

  • guarantees outlets for produce

  • reduces risk

  • sell output immediately

  • moves profit margins to manufacturer

  • improves bottom line

sharing costs and risks

• share costs and risks of business ventures

• reduces unfamiliarity

• may reduce potential profits

• reduces costs and risks and losses