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BUSS4



Mergers and Takeovers
KEY DEFINITIONS
Takeover
- Where one business acquires a controlling interest in another business
- A change of ownership
Merger
- A combination of two previously separate businesses into a new business
Diversification
- Expanding into new markets with new products
- The riskiest growth strategy…

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BUSS4

Make use of surplus cash and high share price
-E.g. businesses with high cash balances can potentially earn a better return by investing in
other firms
Bargain hunting and Asset Stripping
- Can the target be bought at a knock-down price?
- Potential to sell surplus assets and cut…

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- Brand extensions
- New geographic markets opened up
OVERVIEW OF THE TAKEOVER PROCESS
Target identification and choice
Valuation and offer
Due diligence
Integration
Key Evaluation Point
Things can go wrong in each part of the takeover or merger
- Wrong target
- Pay too much
- Don't check…

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Type of takeover
- E.g. cross-border, private equity
Can be a short term problem, but in the long term, one culture will prevail

SUMMARY: DRAWBACKS OF ACQUSITIONS

High cost involved
Problems of valuation
Clash of cultures
Upset customers
Problems of integration (change management)
Resistance from employees
Non-existent synergy
Incompatibility…

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KEY MOTIVATIONS
Focusing on core businesses to streamline costs and improve profit margins
Reduce the risk of diseconomies of scale and diseconomies of scope
- By reducing the range of functions in a business, lower management costs
Raise money from asset sales and return to shareholders
A defensive tactic…

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Organic Growth
- Growth from "within the business"
- E.g. New products, expansion into new markets
Diversification
- Expanding into new markets with new products
- The riskiest growth strategy

KEY THEORIES TO CONSIDER

Ansoff's Matrix
- A model that analyses four growth options
- Product development
- Market…

Page 7

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BUSS4

Does the transaction fit with...
-... The capabilities of the firm?
-... The corporate objectives of the firm?
E.g. a takeover involving a diversification has a good strategic fit for an objective of
spreading risk by investing in a variety of products and markets

KEY STRATEGIC DRIVERS OF M&T…

Page 8

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BUSS4

Personal ambition and financial reward
- Director rewards may be linked to growth
- Big takeovers attract media which may boost ego and reputation
- Takeovers as "vanity projects"
Bandwagon effect/ peer pressure
- Pressure to do takeovers (if competitors are too)
- Concern that firm may be being…

Page 9

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BUSS4

Revenue growth opportunities
Cost saving opportunities
Reduces competition
May enable economies of scale

SUMMARY: DRAWBACKS OF ACQUISITIONS

High cost involved
Problems of valuation
Clash of cultures
Upset customers
Problems of integration (change of management)
Resistance from employees
Non-existent synergy
Incompatibility of management styles, structures and culture
Questionable motives
High…

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