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3.2.2 Mergers and takeovers

A) Reasons for mergers and takeovers:

Tactical reasons:

  • Increase market share – By taking over or merging with a business it reduces competition and therefore increases market share. This is due to the sales of both businesses being combined.
  • Access to technology – A business may merge or takeover a business in order to access a certain technology. For example, a petrol car company may take over a driverless car company.
  • Access to staff – A business may takeover or merge with a business in order to gain access to specialist staff.
  • Access to intellectual property – Takeovers and mergers may happen in order to gain access to patents which maybe they want to incorporate in their products.

Strategic reasons:

  • Access to new markets – Domestic businesses may join foreign businesses in order to gain access to that market.
  • Improved distribution networks – Vertical backwards or forwards integration may take place in order to improve the existing distribution networks.
  • Improved brands – A businesses may merge or takeover another business in order to improve their brand if the business they’re joining is well known.

 

B) Distinction between merger and takeovers

Mergers are when two businesses agree to join forces in order to make a third company whereas a takeover is when a business buys more than 50% of another business’s shares.

 

C) Horizontal and vertical integration

Horizontal integration – When a business joins another business in the same stage of production as them.

Vertical forwards integration – When a business joins another business that is a stage further forward in production than them.

Vertical backwards integration – When a business joins another business that is a stage further back in production than them.

 

D) Financial risks and rewards

Financial risks:

  • Original Purchase cost – The cost to the business of taking over the other business.
  • Costs of adjusting the new business e.g. redundancies – The cost involved with merging with another business.

Financial rewards:

  • Immediate increased revenue – This is due to the sales of both businesses now being combined.
  • Economies of scales leading to lower costs – This is caused by an increase in the size of the business caused by the merger or takeover.

 

E) Problems of rapid growth:

  • Diseconomies of scale – This can lead to an increase in the businesses average costs.
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