1. Business Growth and Expansion
Econ 9/13

2. 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?

3. 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

4. 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

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

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

7. 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

8. 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:

9. 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