Change in Ownership

Note taking for the Objectives and Strategy Topic

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  • Created on: 19-06-08 15:26
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Emma Rudd
Objectives and Strategy - Change in Ownership
Internal and External Growth
External growth occurs when one firm decides to expand by joining together with
another, this may occur either by takeover or a merger. A takeover occurs when one
firm gains control of another by acquiring a controlling interest in its shares. A merger
occurs when one firm joins together with another one to form a new combined
enterprise. Mergers and acquisitions are both forms of integration.
If one business wants to take over another it must buy up to 51% of the other firms
shares so that it has the majority vote. It may buy these shares either by using cash or
by offering its own shares in return. The attacking company will make an offer to the
shareholders of the victim company. The directors of the targeted company will decide
whether or not they think the bid is fair and whether or not to recommend to their own
shareholders that they should accept it; if they reject the offer the takeover becomes
a `hostile bid'.
If there are not enough shareholders willing to accept the offer the attacking company
may decide to increase the amount it offers for each share. There is however, a strict
timetable that the attacking company has to follow so it cannot keep increasing its
offer indefinitely.
In a merger the two (or more) firms agree to form a new enterprise; shares in each of
the individual companies are exchanged for shares in the new business.
Types of Integration
There are 3 types of integration
1. Horizontal
2. Vertical
3. Conglomerate
Horizontal integration occurs when one firm joins with another at the same stage of the
same production process. For example Ford taking over Volvo, they are both car
The possible reasons for this type of integration include
Greater market share; by combining together the 2 firms will have a greater
share of the market and as a result they are likely to have more power over other
members of the supply chain, such as suppliers and distributors.
Economies of scale; larger-scale production may bring a reduction in unit costs
due to financial, production or purchasing economies.
The opportunity to enter a different segment of the market and thereby spread
risks to some extent.
Vertical integration occurs when one firm joins with another at a different stage of the
same production process. Forward integration occurs when one firm joins with another
business at a later stage in the same production process. For example a manufacturer
joining with a retail outlet.
Backward vertical integration occurs when one firm joins with another business at an
earlier stage in the same production process for example a manufacturer joining with a
Firms may take vertical integration in order to

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Emma Rudd
Gain control over supplies. This may be important to a firm to ensure it can
maintain its suppliers (e.g. in time of shortages) or if it is essential to maintain the
quality of its supplies. By gaining control of its inputs a firm may also be able to
deny competitors the supplies they want.
Guarantee access to the market.…read more

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to which they believe there will be gains such as economies of scale or synergy; the
bigger the perceived value gains the more they are likely to pay.
When deciding what a firm is worth there is inevitably a degree of risk. The risk involved
will depend partly on whether it is a hostile or a welcome bid. If the bid is welcomed by
the directors of the target company they will be willing to share information with the
bidder.…read more

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Emma Rudd
only way to enter the market because of foreign government may insist that local
businesses are involved.
Alternatively, a business may set up its own factory abroad and produce for itself. This
is likely to involve high levels of investment and so sill only be undertaken by firms if
they are sure that demand will be sustained and profitable.
Management Buy Outs
A management buy out occurs when the managers of a business take it over by buying a
controlling interest in shares.…read more

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5…read more


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