the role of mergers & acquisitions 3.3.5 HARRIET BENNETT

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  • the role of mergers & acquisitions (inorganic growth) 3.3.5
    • Ways of diversifying
      • Investing in a distribution system in the target market, possibly by setting up retail outlets
      • Setting up production in the target market, building factories or collaborating in a joint venture
      • Expansion by mergers & takeovers that will build up a portfolio of businesses. they may be similar or different from the parent company
    • Integration
      • Horizontal integration means buying or merging with competitors to achieve a larger market share.
      • Vertical integration means a business may buy one of its suppliers or a distribution network. a fully integrated business would take care of all aspects of production from sourcing raw materials to selling to final customers
    • Business expansion
      • entering new markets
        • entering new markets can be difficult & have many problems. so taking over an existing business reduces uncertainty (horizontal integration)
        • Supply chains & distribution networks are already in place (vertical integration)
        • Consumers are familiar with existing brands
        • This all saves times & expense
      • increased turnover & profitability
        • For most global industries the driving force is profit
        • increased market share means more sales, greater revenue & hopefully more profit
        • some businesses may have difficulty in keeping pace with global competition. they may merge with (or be taken over by) others that are successful
        • expansion in a new market can be a defensive measure in order to increase or maintain competitive-ness
      • economies of scale
        • falling average costs can lead to reduced prices & a competitive advantage or higher profits
        • these can be re-invested for more growth, which can be important in competitive global markets
        • when 2 companies come together, there is often duplication of resources. they may no longer need 2 head offices or 2 distribution depots & these can be rationalised
        • by disposing of surplus resources savings can be made
      • synergy
        • synergy can be gained when 2 businesses join together
        • Combining forces can produce a better product or business
    • Reducing risk
      • balancing investments across a range of countries
        • when a business wants to diversify into new markets, the simplest way may be to acquire businesses that are already established in the target markets
        • Growth in an emerging market van balance a decline in a mature or saturated market
        • investments across a range of different countries can spread risk
        • inorganic growth helps to increase the product range without having to develop new products
      • acquiring brand names & patents
        • brands can be very important for a global company
        • they already have loyal customers & market presence
        • new patents & processes can be acquired which can be transferred into existing products

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