Global Industries A2 Economics and Business Unit 3 By Mrs Hilton for Takeovers and mergers is an examiner favourite

Lesson Objectives To be able to compare global strategy and global localisation To be able to discuss the role of takeovers and mergers in international business To be able to answer past paper questions based on the topic areas

Starter If you had a successful business that traded in the UK and you wanted to trade in Africa – what options would you have given that you know very little about the African market? Hopefully students should identify that the easiest way is to buy an exisiting small business in Africa that trades in a similar product and use this as a way into this emerging market.

Key terms Mergers: when two businesses mutually agree to join forces. Sometimes you may see M&A which means mergers and acquisitions. Takeovers (acquisition): when one business is taken over by another by buying the majority share. If the owners do not want to be taken over by that company it is called a “hostile takeover” Organic – when a business grown internally through buying another factory or increasing premises and staff Inorganic – when a business grows externally through a merger

Advantages of merging Synergy. The combined company is worth more than the sum of its parts. This includes cost reductions by removing duplicate departments. Economies of scale. Better deals because of increased order size, bulk-buying discounts etc. Increased revenue and market share. Increased size of the combined company increases market power and ability to set higher prices. Cross-selling. This is when the two companies involved in the deal sell each others products and services, increasing sales. Diversification. This helps smooth the earnings results of a company, which over the long term, is rewarded by a higher share price. Acquiring unique capabilities and resources. Sometimes it’s simply impossible for a company to create the technology, resource etc it needs to sustain its growth. It can be a lot simpler to just buy it. International Expansion. Acquiring a local competitor helps to get over culture issues, government policy, regulation and other issues related to international expansion.

Advantages of merging for international business Access to technology, skills, patents, brands names Access to new trading blocs Access to western markets Easy way to expand scope and size of market share Can increase profitability and sales Rapid inorganic growth into expanding markets

Moving into new trading blocs Adidas the German company bought Reebok in 2005 to help them take on Nike: Listen to story The merger gained the business new markets in Asia The merger made Adidas the second largest sportswear manufacturer after Nike in the US bbc article

Gaining a presence in 54 countries On Friday 17th March 2006 L'Oreal bought the Body shop Brand for £652 million The French firm L’Oreal said Body Shop would enhance its business because of its "sizeable and complimentary brand" across 54 countries, which delivered revenues of £419m last year L’Oreal is a manufacturer and Body Shop is a franchised retailer. Guardian article on the merger

Problems with mergers and acquisitions Clash of cultures (see merger Fails) Possible communication problems Possible move away from core competencies of original business may cause issues of control Unreliable merger partners Diseconomies of scale Overtrading Lack of understanding of local markets leading to wrong promotional message 75% of all mergers fail

Merger fail – Daimler Chrysler Daimler and Chrysler When German Daimler (the makers of Mercedes-Benz) merged with American company Chrysler in the late 1990s, it was called a “merger of equals.” A few years later it was being called a “fiasco.”  The two company cultures had the two divisions at war as soon as they merged. Differences between the companies included their level of formality, philosophy on issues such as pay and expenses, and operating styles. The German culture became dominant and employee satisfaction levels at Chrysler dropped off. By 2000, major losses were projected and, a year later, layoffs began. In 2007, Daimler sold Chrysler to Cerberus Capital Management for $6 billion.

Merger Fail- AOL Time Warner In  January of 2000, Time Warner stock sold for $71.88. By 2008 you could buy a share of Time Warner for less than $15. A failed $350 billion merger with AOL. Culture clash was widely blamed for the failure of the joint venture. Said Richard Parsons, president of Time Warner: “I remember saying at a vital board meeting where we approved this, that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different… It was beyond certainly my abilities to figure out how to blend the old media and the new media culture.”

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Sample question 2 [8]

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Sample question 3 [8]

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