takeovers and mergers

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Takeovers and Mergers BUSS4 Internal and External Growth

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Takeovers and Mergers. BUSS4 Internal and External Growth. Growth Organic growth or internal growth comes from within the business for example opening new branches Inorganic or external growth comes from outside of the business for example buying another company (takeover or merger) - PowerPoint PPT Presentation

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Page 1: Takeovers and Mergers

Takeovers and Mergers

BUSS4 Internal and External Growth

Page 2: Takeovers and Mergers

Growth Organic growth or internal growth comes from within the business

for example opening new branches Inorganic or external growth comes from outside of the business

for example buying another company (takeover or merger) Organic growth can be a safer but much slower method than

takeover The safety is that there will be no clashes of culture Steady growth also avoids to need to add debt to the company’s

balance sheet since finance is most likely to come from retained profit

A reliance on organic growth could lead a firm to miss out on surges of growth within the industry – if the business does not grow as quickly as the industry they may miss out on opportunities

They may fail to meet growth in demand Cadbury saw an increase in consumer interest in organic chocolate It could have taken time and developed its own but instead it

chose to buy a brand that was already known However, there is a low success rate with takeovers and mergers It is possible to grow quickly organically but it is challenging Innocent grew its business from GBP0.4million to GBP130 million

in 8 year entirely organically

Page 3: Takeovers and Mergers
Page 4: Takeovers and Mergers

Mergers and Takovers Every time a company’s shares

are bought or sold on the stock exchange there is a change of ownership

The significant change occurs when a majority of shares are bought by an individual or company

51% of shares gives control To takeover a company the

individual or organisation must buy at least 51% of the shares

A takeover is normally hostile whereby one organisation is bought without its agreement

A merger is when two or more companies come together to make one with agreement

Page 5: Takeovers and Mergers

Why Merge or Takeover? To grow – the fastest way to achieve significant

growth To gain cost synergies – cost savings are often the

main argument for merging Synergies are the benefits of two things coming

together One firm (made up of two firms put together) will have

lower costs than the costs of the two put together Economies of scale may be achieved (bigger company

making more and spreading costs over larger output so unit costs reduce)

Diversification To enter different markets To reduce risk when there are changes in demand

(demand for one product may reduce but you still have the other)

By buying another company you don’t have the product development time

Examples Cadbury entering the organic market with Green &

Black’s Microsoft entering the telecommunications market with

Skype Market Power

If two markets in the same market merge the combined firm will have large market share and more power to increase pricing

Page 6: Takeovers and Mergers

P336 Reasons for takeovers

Page 7: Takeovers and Mergers

Why Merge or Takeover? To grow – the fastest way to achieve significant

growth To gain cost synergies – cost savings are often the

main argument for merging Synergies are the benefits of two things coming

together One firm (made up of two firms put together) will have

lower costs than the costs of the two put together Economies of scale may be achieved (bigger company

making more and spreading costs over larger output so unit costs reduce)

Diversification To enter different markets To reduce risk when there are changes in demand

(demand for one product may reduce but you still have the other)

By buying another company you don’t have the product development time

Examples Cadbury entering the organic market with Green &

Black’s Microsoft entering the telecommunications market with

Skype Market Power

If two markets in the same market merge the combined firm will have large market share and more power to increase pricing

Page 8: Takeovers and Mergers

Types of Integration Farm growing hops

customer

Vertical Backward integration (if the pub were to buy the brewer or the hop farm

Vertical forward integration (if the brewer were to buy the pub or the farm were to buy the brewer and the pub

horizontal integration (if the brewer were to buy another brewer)

BrewerBrewer BrewerBrewer

Pub

Conglomerate integration A company buys an unrelated business

Page 9: Takeovers and Mergers

Vertical Integration examplesL’Oreal buys Body

Shop giving it retail stores

March 2008 Boeing purchased a key supplier to its 787 to help reduce delays in delivery of the planes to BA and Virgin

Page 10: Takeovers and Mergers

Table 47.2 Backward vertical integration P338

Remember to think about the advantages and disadvantages to all the major stakeholders

Page 11: Takeovers and Mergers

Remember to think about the advantages and disadvantages to all the major stakeholders

Page 12: Takeovers and Mergers

P337 A grade application

Page 13: Takeovers and Mergers

Horizontal Integration examples One firm

buying out another in the same industry

Page 14: Takeovers and Mergers

Horizontal Integration advantages For the buyer there are several

advantages Cost cutting through duplication of

salesforce, distribution and marketing overheads, and by improved capacity utilisation

Opportunities for major economies of scale

A reduction in competition should enable prices to be pushed up

The Office of Fair Trading will often ask the Competition Commission to investigate if it thinks that a horizontal merger is a threat to competition

Ryanair has been trying to buy AerLingus for years and may now be asked to reduce its share holding

Page 15: Takeovers and Mergers

Retrenchment Retrenchment is shrinking Firms may get too large and start to see diseconomies of scale They may then sell off parts of their business and start talking about focussing April 2012 Sony sheds 10,000 staff in major reorganisation Sony has been struggling to compete in the television business with Samsung and

LG, while Apple and Samsung have taken significant share in the smartphone market. The job losses are part of a change in strategic direction for Sony which says it will focus its business on three areas - digital imaging, games consoles and mobile devices.

May 2011 Comet to close stores and service centres with loss of 110 jobs Key reasons: rapid decline in consumer confidence leading to lower spending on

high-priced electrical items; migration of spending from high street to online. Comet stores have now ceased trading (2013)

• Thomas Cook sells Indian operation and aims for £35m of cost savings per year• Key reasons: UK’s second-largest tour operator hit in 2011 by a significant reduction

in demand for its long-haul holidays (particularly Egypt). Several profits warnings led to a collapse in confidence with share price falling by over 90% in just a few days. Business has high debts but has agreed a £100m refinancing / lifeline from its bankers in return for agreeing to a significant rationalisation of the group. Thomas Cook’s Indian subsidiary to be sold + 200 more high street travel agencies to be closed. Objective is to reduce annual operating costs by £35m per year.

• More examples http://www.tutor2u.net/blog/index.php/business-studies/comments/researchbuster-retrenchment

Page 16: Takeovers and Mergers

Demergers Many takeovers are not successful Research shows that the majority

of takeovers fail to improve business performance

Managers think they will get economies of scale but they don’t think about the diseconomies of scale due to problems of communication and co-ordination

A demerger is when companies split up

Once a firm has seen that the expected economies of scale are not going to happen it may seek to sell off the business it originally bought

Insert a grade application P339

Page 17: Takeovers and Mergers

Evaluation Leaders may claim that a takeover or merger

will bring cost reductions or create a world leading company

In reality it may be because they just want to lead a bigger company – it may be arrogance and greed (RBS and ABN Amro

One of the reasons that firms find it difficult to successfully merge or takeover is the class of culture

If the cultures of the two firms are very different there may be resistance to change

Another issue is that if a firm wants to diversify it will buy another that it may not know much about

Strategic decision will be based on ignorance Tom Peters (In Search of Excellence) said firms

should ‘stick to the knitting’ meaning that they should stay with what they are good at.