Business Growth and Expansion Econ 9/13

Warm Up If two companies want to merge (or if one company wants to buy another company), the government (specifically the Department of Justice) has to allow the merger/acquisition to occur. Why do you think this is? Imagine there are two different possible mergers up for approval: McDonalds and Burger King, and American Airlines and United Airlines. Which of those two mergers do you think the government is more likely to approve? Why?

Growth Through Reinvestment Estimating and reinvesting cash flows First Quarter Income Statement: Sales of goods and services: Less: Cost of goods sold Wages Interest payments Depreciation $1000 400 250 50 100 Earnings before taxes: Less: Taxes (40%) $200 80 Net Income: Plus: Non-cash charges $120 $100 Cash Flow: $220 Net income: subtract all expenses (incl taxes) from revenue Depreciation: non-cash charge of general wear and tear on capital goods

Growth Through Mergers Mergers: 2+ companies become new one Acquisitions: company takes over another one History: Standard Oil, Carnegie Steel No competition, raise prices, lower quality 1890: Sherman Antitrust Act: illegal to form trusts that block free trade

Reasons for Merging 1. To become bigger 2. Efficiency: Example: 3. Need to acquire new product lines Example: AT&T and cable companies

Reasons for Merging 4. Eliminate rivals Example: Royal Caribbean and Celebrity Cruise Lines 5. Lose corporate identity: Example:

Types of Mergers Horizontal merger: two or more firms that produce the same product Example: Chase Nat’l Bank and Bank of Manhattan Vertical merger: firms involved in different steps of manufacturing Example: a car company acquiring a tire company

Conglomerates Conglomerate: Firm with at least 4 businesses creating unrelated products Diversification: don’t put your eggs all in one basket Isolated economic events won’t affect all products Declining in the US but popular in Asian countries Ex:

Multinationals Multinationals: Manufacturing or service operations in different countries Subject to laws and taxes from each country Ability to move resources, capital, etc across borders Can generate jobs where needed, improve nation’s economy