Section 2: Business Growth and Expansion In 1998, Kroger Co. purchased Fred Meyer Co. for $12.8 billion, operating 2,200 stores in 31 states, boasting $41 billion in annual sales. What’s become of Kroger…? KR - The Kroger Co. - Google Finance KR - The Kroger Co. - Google Finance Section 2 Learning Objective: Analyze the impact of mergers on the economy

How does a business grow? Reinvesting it’s profits Reinvesting it’s profits Merger-combining two or more business ventures into one single firm (conglomerate) Merger-combining two or more business ventures into one single firm (conglomerate)

Growth Through Reinvestment Businesses may use portion of revenue to invest in: Businesses may use portion of revenue to invest in: Factories Factories Machinery Machinery New technology New technology

Income Statement Report showing business’ sales, expenses, and profits for a specific amount of time

Estimating Cash Flows First: Record total sales First: Record total sales Second: Find net income by subtracting all expenses, including taxes, from revenue Second: Find net income by subtracting all expenses, including taxes, from revenue Expenses: inventory, wages/salaries, interest payments, and depreciation (any non-cash charge the firm takes for general wear & tear on capital goods) Expenses: inventory, wages/salaries, interest payments, and depreciation (any non-cash charge the firm takes for general wear & tear on capital goods) Why is depreciation considered a non-cash charge? Why is depreciation considered a non-cash charge?

Cash Flow The sum of net income and non-cash charges, is the bottom line, or real measure of profits for the business. The sum of net income and non-cash charges, is the bottom line, or real measure of profits for the business.

Reinvesting Cash Flow The owners decide how the cash flow will be allocated: The owners decide how the cash flow will be allocated: Paid back to owners for taking the risk Paid back to owners for taking the risk Paid towards new capital equipment Paid towards new capital equipment Paid to employees (profit sharing) Paid to employees (profit sharing) Can be used to produce additional goods Can be used to produce additional goods

Growth Through Mergers One company gives up its separate legal identity One company gives up its separate legal identity For public recognition purposes, the name of the new company may reflect the identities of the merged company For public recognition purposes, the name of the new company may reflect the identities of the merged company Ex? Ex?

Reasons for Merging A company wants to grow faster A company wants to grow faster Efficiency: No need for two presidents, two treasurers AND the new company can have more retail outlets without increasing management costs Efficiency: No need for two presidents, two treasurers AND the new company can have more retail outlets without increasing management costs Need to acquire a new product line Need to acquire a new product line Such as Pepsico… Such as Pepsico…

Reasons for Merging Remember the AOL/Time-Warner merger? Remember the AOL/Time-Warner merger? ses/index.html ses/index.html ses/index.html ses/index.html Sometimes firms merge to catch up to or eliminate the competition Sometimes firms merge to catch up to or eliminate the competition Sometimes firms merge to lose their identity Sometimes firms merge to lose their identity

Types of Mergers Horizontal Merger: 2 or more firms that produce the same kind of product join forces Horizontal Merger: 2 or more firms that produce the same kind of product join forces + =

Types of Mergers Vertical Merger: Firms that are involved in different steps of manufacturing or marketing. Vertical Merger: Firms that are involved in different steps of manufacturing or marketing. Take place when companies believe that it is important to protect themselves against the loss of suppliers Take place when companies believe that it is important to protect themselves against the loss of suppliers 

Conglomerates A firm with at least 4 businesses, each making unrelated products, none of which is responsible for a majority of its sales. A firm with at least 4 businesses, each making unrelated products, none of which is responsible for a majority of its sales. Diversification: Don’t put all your eggs in one basket… Diversification: Don’t put all your eggs in one basket…

Multinationals A corporation that has manufacturing or service operations in a number of different countries A corporation that has manufacturing or service operations in a number of different countries Subject to the laws and must pay taxes in each country where it is located Subject to the laws and must pay taxes in each country where it is located

Multinationals They have the ability to move resources, goods, services, and financial capital across national borders They have the ability to move resources, goods, services, and financial capital across national borders Usually welcome because they transfer new technology and generate new jobs into the area where jobs are needed. Usually welcome because they transfer new technology and generate new jobs into the area where jobs are needed. Help the nation’s economy…? Help the nation’s economy…?

Multinationals Known to abuse power by: Known to abuse power by: Paying low wages to workers Paying low wages to workers Exporting scarce resources Exporting scarce resources Adversely interfering with development of local businesses Adversely interfering with development of local businesses section.php?id=194 section.php?id=194 section.php?id=194 section.php?id=194