Merges and takeovers

• Merger = 2 or more businesses join together to form a new business
• Takeover = when one company makes a successful bid to assume control of or acquire another
• reasons for merger/Takeover =

  Increase market share.

  • Acquire new skills.
  • Access economies of scale.
  • Secure better distribution.
• Horizontal integration = the combination of two business operating in the same industry and at the same stage of the supply chain
• vertical integration = Involves acquiring a business in the same industry but at a different stage of the supply chain.
• financial risks of Mergers/Takeovers = Rises price of the product/service, potential overpaying and liquidity risk
• financial rewards for mergers/takeover = increased profits, economies of scale and reduces competition
• Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain

  • E.g. A dairy farmer merges with an ice cream manufacturer
• Backward vertical integration involves a merger/takeover with a firm further backwards in the supply chain

  • E.g. An ice cream retailer takes over an ice cream manufacturer
• Vertical growth advantages:

  • Reduces the cost of production as middleman profits are eliminated
  • Lower costs make the firm more competitive
  • Greater control over the supply chain reduces risk as access to raw materials is more certain
  • The quality of raw materials can be controlled
  • adds additional profit as the profits from the next stage of production are assimilated
  • increase brand visibility
• Vertical growth disadvantages:

  • Diseconomies of scale occur as costs increase
  • There can be a culture clashbetween the two firms that have merged
  • Possibly little expertise in running the new firm results in inefficiencies
  • The price paid for the new firm may take a long time to recoup
• Horizontal growth Advantages:

  • The rapid increase of market share
  • Reductions in the cost per unit due to economies of scale
  • Reduces competition
  • Existing knowledge of the industry means the merger is more likely to be successful
  • The firm may gain new knowledge or expertise
• Horizontal growth Disadvantages:

  • Diseconomies of scale may occur as costs increase e.g. unnecessary duplication of management roles
  • There can be a culture clashbetween the two firms that have merged
• Problems caused by massive growth:

  • Strain on cash-flow
  • increased management complexities
  • quality control issues
  • customer service issues
  • culture clash
  • Diseconomies of scale