Describes reasons for mergers and takeovers, what they are, the advantages and disadvantages of vertical and horizontal integration, financial risks and rewards of integration, hostile and friendly integration, and problems of rapid growth.
Theme 3 Topic 5
Mergers and Takeovers
Mergers and Takeovers
Merger
Where two or more businesses join together and operate as one.
A+B=C
Conducted with the agreement of both businesses – friendly.
Takeover (acquisition)
When one business buys another.
A+B=A
Often hostile.
Reasons for Mergers/Takeovers Reasons Against Mergers/Takeovers
Cuts costs Potentially expensive
Cope better with capacity/weak demand Diseconomies of Scale
Larger market share = increased market Lack of knowledge about other business
power Culture clash
Economies of Scale CMA Regulator might not allow it
Boosts growth = more sales = profit
Synergy
Horizontal and Vertical Integration
Backward Vertical Integration – joining with a business in the previous
stage of production.
Forward Vertical Integration – joining with a business in the next stage of
production.
Horizontal Integration – joining with a business in the same stage of
production.
Advantages to the Company Disadvantages to the Company
Have control over competitor’s Management might not be
source of raw materials. trained in that stage of
Backward Vertical
Cheaper production costs production.
Integration
More control over the supply Keeps you in the same market –
chain any problems in it will affect you
Higher profit margins due to Refurbishing stores or retailers
lower costs could be expensive
Forward Vertical Able to supply only their stock Keeps you in the same market –
Integration if integrate with shop. any problems in it will affect you
Have control over the amount
sold/produced.
Larger market share If it’s too big, could experience
Established business diseconomies of scale
Horizontal Economies of Scale Growth could be too fast
Integration Removes rivals from the Subject to investigation by CMA
market Have to make some staff
Increases capacity. redundant
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