MERGERS AND TAKEOVERS

MERGERS takes place when two firms actually agree to form a new company, e.g.: merger between the UK BP and USA oil company Amoco in 1998 – formed BP Amoco e.g.: Daimler Benz and Chrysler (1998), Hewlett-Packard and Compaq (2001) Nokia and Siemens (2006)

TAKEOVERS aka acquisitions, aggressive nature of growth occurs when a company buys a controlling interest in another company i.e. buying enough shares in the target business to hold a majority stake in order to entice shareholders of the raget company to sell their shares, the price offered by the buying company is likely to be well above stock market value of the shares eg: Heineken established in 1864 came to dominate Dutch brewing industry by taking over many of its competitors

VERTICAL INTEGRATION takes place between businesses that are at different stages of production (primary, secondary, tertiary) classified as forward or backward integration forward vert. integration – company sets up subsidiaries that distribute or market products to the end market backward vertical integration – involves purchase of suppliers in order to reduce dependency

HORIZONTAL INTEGRATION most common type of integration occurs when there is amalgamation of firms that operate in the same industry does not represent growth in industry, but larger market share

LATERAL INTEGRATION amalgamation between firms that have similar operations but do not directly compete with each other

CONGLOMERATE MERGERS AND TAKEOVER amalgamation of two businesses that are in completely distinct markets

ADVANTAGES Greater market share: likely to have greater market power and a large customer base. Economies of scale: larger scale operations help to lower the unit cost of production. Synergy: access to each other’s resources, hence combined resources will boost productivity and profits. Survival: amalgamation is a fast defensive strategy/method of growth that puts the firm in a stronger position to protect the survival of a business in response to rivals, which could threaten their competitive position. Diversification: allow businesses to diversify their product mix and benefit from a larger customer base and reduced risks.

DISADVANTAGES Loss of control: original owners or management group will lose some degree of control as the new team of Board of Directors will need to be restructured. Culture clash: people and processes will need to adapt to the desired corporate culture. May entail changes to the firm’s core values and mission statement. Likely to be difficulties for employees to adapt to new management styles and new methods of working. Conflict: potential disagreements and arguments that can either delay or end the merger. Often conflict regarding the purchase price or the conditions attached to a merger or takeover.

DISADVANTAGES Redundancies: as a result of no need for two separate boards of directors, jobs may be duplicated, excess supply of labor. Stressful and potentially expensive. Other aspects of people management: people’s anxieties of the unknown, changes to work practices, organization restructuring and possibly changes to pay structure. Diseconomies of scale: large scale operations may suffer from increased bureaucracy and slower channels of communication, leading to less effective decision-making and production. Regulatory problems: governments may be concerned about the possibility of creating a monopoly. Alternatively, the government may require the amalgamated company to sell or split some of its operations.