Unit 1.16 - Mergers
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Transcript Unit 1.16 - Mergers
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