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3.2.2 Mergers and Takeovers - Coggle Diagram
3.2.2 Mergers and Takeovers
Key Terms
Merger: occurs when two or more businesses join together and operate as one.
Takeover: the process of one business buying another.
Synergy: the combining of two or more activities or businesses creating a better outcome than the sum of the individual parts. 2+2=5.
Organic growth - When a business expands its own product portfolio or its number of retail stores
External growth - When a business expands by purchasing or taking over other businesses
Motives
Strategic
Focused on improving and developing the business
Closely linked to competitive advantage
To exploit synergies
Quick and easy way to expand
Mergers may take place for defensive reasons (e.g. to consolidate place as market leader)
Merging with a business in a different country is one way in which a business can gain entry to foreign markets
Financial
Focused on making best use of financial resources for shareholders
Concerned with improved financial performance
Buying a business is often cheaper than growing a business
Some businesses have cash available that they want to use
A business may want to gain economies of scale
Managerial
Focused on the self-interest of managers
Not necessarily in the best interest of shareholders
Management may want to increase the size of the company because growth may be their main objective
Integration
Horizontal integration: this occurs when two firms that are in exactly the same line of business and the same stage of production join together.
Forward vertical integration: where a firm joins with another that is in the next stage of production.
Backward vertical integration: where a firm joins with another that is in the previous stage of production.
Conglomerate integration:
the combination of firms that are in unrelated industries.
Impacts of Growth on a Business
Increased demand for goods and services which affects the decisions made within each business function.
Increased motivation for the management through a sense of achievement which improves employee retention.
Increased market share, sales revenue, and profit.
Investment (for growth) increases the need to secure capital. -The business’ need for labour may increase, which affects workforce planning.
There can be an increased focus on marketing and promotion to ensure the generation of increased demand.
Retrenchment - when a business reduces the scale of a specific business area or element within the business operation
Impacts
Retrenchment affects human resources as workforce planning, redundancy and redeployment will need to be considered
Retrenchment affects operations as it can offer economies of scale through addressing diseconomies of scale which may have arisen, and this reduced unit cost.
Retrenchment affects marketing as promotional campaigns are likely to be refocused on the refined business offer which may include selling from a smaller product portfolio
Retrenchment affects finance as the business will need to ensure it is able to fund the short-term increase in the cost of redundancy payments
Diversification
Geographic diversification leads to economic and political risk in countries
