3.2.2 Mergers & Takeovers

• What is integration?

  Integration in the form of mergers or takeovers results in rapid business growth and is referred to as inorganic growth
• What is a merger?

  • occurs when two or more companies combine to form a new company
  • The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
• What is a takeover?

  When one company purchases another company, often against its will

  • Acquiring company buys a controlling stake in the target company's shares and gains control of its operations 
• Reason for merger/takeover - Strategic Fit

  • Expanding into new markets, diversify its product offerings, or gain access to new technology 
• Reasons for Merger/Takeover - EOS

  • Growth creates economies of scale by allowing companies to reduce costs and increase efficiency through the consolidation of operations
• Reason for merger/takeover - Synergies

  • Synergies are the benefits that result from the combination of two or more companies, such as increased revenue, cost savings, or improved product offerings
• Reason for merger/takeover - Elimination of competition

  • The acquiring company increases market share = eliminates competition.
• Reason for merger/takeover - Shareholder value

  • Creates value for shareholders.
  • combining companies = shareholders benefit from increased profits, dividends and stock prices
• Two ways of inorganic grrowth

  • Vertical Integration
  • Horizontal Integration
• What is forward vertical integration

  • A merger or takeover with a firm further forward in the supply chain.
• What is backward vertical integration

  • Involves a merger/takeover with a firm further backwards in the supply chain.
• Advantages of vertical integration

  • Reduces cost of production as middleman profits are eliminated
  • Lower costs = more competitive
  • Greater control over supply chain = reduces risk - access to raw materials is more certain
  • Quality of raw materials can be controlled
  • Adds additional profit as profits from next stage of production are assimilated.
  • increase brand visibility
• Disadvantages of vertical integration

  • Diseconomies of scale occur as costs increase.
  • culture clash 
  • Possibly little expertise in running new firm = inefficiencies
  • The price paid for new firm may take long time to recoup
• Advantages of horizontal integration

  • Rapid increase of market share
  • Reductions in cost per unit due to economies of scale
  • Reduces competition
  • Existing knowledge of industry = merger successful.
  • May gain new knowledge or expertise
• Disadvantages of horizontal integration

  • Diseconomies of scale as costs increase.
  • culture clash 
• Financial risks of inorganic growth

  • Overpayment
  • If acquiring company pays too much for target company = may not be able to recoup investment through increased revenue or cost savings
• Financial risks of inorganic growth

  • Integration challenges
  •  can be complex and costly (with potential disruptions to operations and loss of key personnel)
• Financial risks of inorganic growth

  • Cultural differences
  • leading to decreased productivity and loss of valuable employees
• Financial risks of inorganic growth

  • Regulatory hurdles
  •  may face opposition from regulators or other stakeholders
• Financial risks of inorganic growth

  • Debt
  • May take on debt to finance the merger = increases financial risk and reduce flexibility
• Financial rewards of inorganic growth

  • Increased market share
  •  lead to increased sales revenue and profitability
• Financial rewards of inorganic growth

  • Synergy
  • cost savings through elimination of duplicate functions & increased efficiency = increased profitability.
• Financial rewards of inorganic growth

  • Diversification
  •  Selling wider variety of goods & services reduces risks associated with selling single product.
• Financial rewards of inorganic growth

  • Access to new markets
  • Acquiring company with strong presence in new market = higher customer base and sales revenue.
• Financial rewards of inorganic growth

  • Increased value
  •  may increase the overall value of the combined company for shareholders
• Problems caused by rapid growth

  • Strain on cash flow
  • Increased management complexities
  • Quality control issues
  • Customer service issues
  • Culture clash
  • Diseconomies of scale
• Raid growth = strain on cash flow

  • merger/takeover may require investment in new equipment or staff to support growth = cause financial strain if revenue growth does not keep up with the expenses
• • Both product quality and the quality of customer service may deteriorate as existing systems are strained
• • Diseconomies of scale may increase cost per unit & are commonly caused by cultural & communication diseconomies when two firms merge
• • Managers may be overloaded with new responsibilities and this may decrease their motivation, productivity and output