Business Mergers and Acquisitions Quiz

Business Growth

• Business growth categorized as organic or external (inorganic)
• Organic growth: growing customer base, new products, increasing sales. A slower process, but enables tighter control over the business. Lower risk strategy but competitors may grow faster. Success depends on using resources (finance and management skills) effectively and on the market and economic conditions.
• External growth: Mergers or acquisitions (takeovers). Aims to grow quickly. PLCs are more vulnerable to takeovers. Mergers: agreement where two firms combine to become a single entity. Usually both firms are roughly equal in size. Takeovers: one firm buys another, could be friendly or hostile.

Types of Organic Growth

• New Product Development: investing in research and development of new products. Attracts new customers and increases sales.
• Market Development: expanding into new markets with existing goods. Medium risk strategy. Increases sales quickly but firms require knowledge of the new market.
• Expanding Distribution: Ensuring product availability across wider markets (e.g., e-commerce). Business growth through wider availability.

Types of Integration

• Vertical Integration: Taking over or merging with another business at different stages in the production process within the same industry (forward or backward).
  • Forward: business buys a customer.
  • Backward: business buys a supplier.
• Horizontal Integration: Merging or taking over a rival competitor within the same industry (e.g., competitors within the same industry).
• Conglomerate Integration: Diversifying into new markets unrelated to the current area of expertise. A business expanding into completely different markets.

Takeovers

• Takeovers are often used for quick growth. Can increase market share quickly.
• Advantages of takeovers: Economies of scale, reduced competition, access to new markets, new management team, broader customer base, increased market share, financial benefit by asset stripping.
• Disadvantages of takeovers: Expensive strategy, loss of focus on main areas of expertise, risk of cultural clashes, duplication of resources, customer dissatisfaction, diseconomies of scale, no guarantee of success (e.g., Rover takeover by BMW).

Mergers

• Mergers are agreements that combine two firms into one entity.
• Advantages: Economies of scale, reduced competition, greater market power, potentially stronger position in the market.
• Examples: Glaxo Wellcome and Smith Kline Beecham in 2000 to form GlaxoSmithKline.

Franchising

• A franchise is a legal right to use the brand, products, and business style of an existing business. Franchiser grants a license. Franchisee buys the rights.
• Benefits for Franchisees: established business format, less risk, tried & tested products, training, established supplier network, cheaper borrowing rates.
• Benefits for Franchiser: rapid growth, risk shared by franchisee, economies of scale, higher profits.
• Drawbacks for Franchisees: expensive initial license, annual royalty fees, limited opportunities, expensive compulsory supplier contracts.
• Drawbacks for Franchiser: Loss of direct control, damage to brand image if franchisee performs poorly, expensive court costs in case of disputes, risk of diseconomies from rapid growth.

Rationalisation

• Deliberate downsizing of a business to improve operational control. Usually done as a last resort when overtrading leads to problems.
• Methods: closing unprofitable branches, relocating production facilities, removing less profitable product ranges, replacing inefficient paper records.
• Issues: job losses, negative stakeholder response, trade union action, potential loss of market share, employee insecurity.

Outsourcing

• Companies reduce costs by transferring jobs or activities to a third-party for a significant period.
• Advantages: lower staffing costs, frees up management time, gains expertise in core areas, specialists can do tasks more efficiently/cheaper.
• Disadvantages: outsourced work needs managing, negative publicity if jobs are lost, trust with other companies handling sensitive data.

Evaluating Takeovers

• Shareholders, concerned about the deals giving 'synergy', that is, the combined value of the two companies is greater than their separate value
• Cost savings (from removing duplicated resources) and resistance to change.
• Addressing potential cultural differences and issues with the financial offer.
• Due diligence to assess a company's assets, liabilities, and overall viability to ensure the deal is sensible.

Other Issues with Takeovers

• Senior managers fearing power shifts and possible redundancies.
• Workers morale may decrease due to job losses.

Reasons for Mergers and Takeovers

• Reasons why companies merge or take over another: access to new markets, especially overseas, increased market share, diversification, gaining new products and technology, economies of scale, cost savings, removal of underperforming teams, higher returns for shareholders.

Factors Influencing Rationalisation Decisions

• External economic conditions, ability to relocate (domestically or internationally) to save costs, government financial support, external economies of scale, skilled labor availability