Mergers and Takeovers
Merger: Where two firms join and operate together – Lloyds TSB.
Takeovers: Where one firm purchase another. A firm must declare to the stock market after it has acquired 3% of a firm to inform shareholders, this may lead to volatility in the preys share price. Rapid buying by the predator firm may cause dramatic spikes in share prices due to investor speculation.
- Reasons for Mergers and Takeovers:
- Synergy – the whole is greater than any two parts – economies of scale, Asset stripping, reduction of risk through diversification or the potential for gains by management
- Quick and Easier for business expansion
- Cheaper to takeover a firm than grow internally
- Usage of idle cash
- Maybe for defensive reasons – consolidate a firm place in the market / reduce exposure of themselves being taken over.
- Response to economic changes – mergers before the adoption of the euro in 1999
- Penetrate foreign markets / access to trade blocs
- Exploit larger Economies of Scale
- Asset stripping – Private equity firms have been accused of doing this
- Meet business objectives of growth.
Horizontal Integration: Where firms in the same industry and production stage join to form one, either a merger/takeover.
Vertical Integration: Takeover/merger of firms in different stages of the production process.
Conglomerate integration: Takeover/merger of firms in different sectors.
Financial Risks and Rewards:
- Regulatory Intervention
- Resistance from Employees
- Integration Costs
- Bidding wars
- Speedy Growth
- Higher remuneration for senior staff
- Rewards to previous owners
- Increased profitability
Problems of rapid Growth:
- Drain on resources
- Coping with change – merging two different cultures
- Alienation of Customers
- Loss of Control
- Shortage of resources