Unit 1.16 - Mergers

Report
BUSINESS AND
MANAGEMENT
MODULE 1
BUSINESS
ORGANIZATIONS &
ENVIRONMENT
Internal Growth
 Changing
price
 Advertising & promotion
 Producing better products
 Expanding sales locations
 Changing financial policies
 Increasing capital investment
 Improving training
 Removing dividend payments
Benefits to Organic Growth
 Better
control and coordination
 Relatively inexpensive
 Maintains corporate culture
– Case – A.S. Watson
Limitations to Organic Growth
 Diseconomies
of scale
 Overtrading
 Restructuring
costs
 Dilution of ownership
– Case – Halifax
Bank of Scotland
External Growth
Carried out by seeking external finance, or
by merger and acquisition
 These approaches tend to rely on bringing
external finance into the business in order
to fund expansion, and therefore can lead
to a deteriorating position
 Merging with another company is a mutual
arrangement whereby two companies join
together.
 Typically one company will issue shares in
exchange for shares in another company.

Types of Mergers & External
Growth
 Joint
Ventures
 Strategic alliances
 Mergers and takeovers
 Franchising
Multinationals
 Most
of the world’s largest
companies are multinationals
– General Electric
– Vodafone Group Plc
– Ford Motor Company
– British petroleum Company Plc
– General Motors
– Royal Dutch/Shell Group
Joint Ventures
Two or more countries decide to split
costs, risks, rewards and control of a
business project
 A new legal entity is born
 Usually a 50/50 split
 Both companies will enjoy numerous
benefits


Sony Ericsson is a good example of a joint
venture
– Exercise – Sony Ericsson
Advantages of Joint Ventures
 Synergy
 Spreading
of costs and risks
 Entry in foreign markets
 Relatively cheap
 Competitive advantages
 Exploitation of local knowledge
 High success rate
Mergers & Acquisitions
Refers to the amalgamation of two or
more businesses to form one large single
company
 Economies or scale and larger market are
the primary advantages
 Merger

– A new company is formed
– Mutual agreement

Acquisition
– Controlling interest of one company is bought
by another company
– Acquiring enough shares to hold a majority
stake
What Makes a Good Take Over
Target?
 Growth
in evident, but insufficient
funds for internal growth is lacking
 Company is a rival to potential
growth
 Recognized brand name
 Vulnerable – drop in profits or share
price is lowered
 Share price paid is often greater than
the current market price
Types of Integration

Vertical
– Businesses are at different stages in
production
– A coffee manufacturer takes over coffee shops

Horizontal
– Businesses are at the same level of
production; often times direct competitors

Lateral
– Businesses have similar operations but do not
directly compete with each other

Conglomerate
– Two businesses are completely different from
each other
– Usually the result is a large diversified
company
Hostile Takeover
A
company being taken over that
tries to resist
 The Board of Directors tries to
persuade shareholders that their
interests would be served by keeping
the current Board
 Ultimately the shareholders decide
Mini Case Studies
Case: Oxford GlycoScience
Source: Jones, Hall, Raffo, Business
Studies 3rd Edition, Unit 89, page
652.
Disadvantages to Mergers
 Loss
of Control
 Culture clash
 Conflict
 Redundancies
 Diseconomies of scale
 Regulatory problems
Success of a Merger
 Depends
on several factors:
– Level of planning
 Clear
rationale of the benefits must be
communicated to shareholders
– Aptitude of senior management
 Conflict
and disagreements can easily lead
to demise of the proposed integration
– Regulatory problems
 Preventing
a business from having too much
monopoly power
– Case Study - Disney
De-mergers
 Companies
split due to the fact that
the merger was not successful
– Cadbury Schweppes in 2007
 Offload
unprofitable businesses
 Avoid rising unit costs
 Raise cash to sustain operations
 Help management with a clearer
focus
Mini Case Studies
Case: Google

similar documents