Mergers and Takeovers

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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
KEY STRATEGIC DRIVERS OF M&A ACTIVITY
Rapid technological change
Need for scale to remain competitive
Need to be able to supply customers globally
Low demand growth in mature economies
Access to wider distribution networks
Invest in faster-growing emerging markets
TAKEOVERS: 3 MAIN MOTIVES
Strategic Motives
- Improve and develop the business
- Closely linked to competitive advantage
- E.g. economies of scale
Financial Motives
- Make best use of financial resources for shareholders
- Improve financial performance
- E.g. higher profits
Managerial Motives
- Self-interest of managers
- Not necessarily in the best interest of shareholders
- E.g. want to lead a bigger business
EXAMPLES OF SUCCESSFUL DEALS
L'Oréal and The Body Shop
- More shops, higher profits
Google and YouTube
- Rapid growth and advertising revenue
Tata and Jaguar Land Rover
- £1bn profits in 2011
Santander & Abbey, Alliance & Leicester, Bradford & Bingley
- Higher profits and market leadership in UK
Taylor Woodrow and George Wimpey
- Economies of scale for two leading house builders merged together
KEY FINANCIAL MOTIVES FOR M&A
http://beta.tutor2u.net/economics/blog/unit-3-micro-business-growth-takeovers-and-mergers
http://beta.tutor2u.net/business/blog/revision-presentation-motives-for-takeovers-and-mergers

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Make use of surplus cash and high share price
-E.g.…read more

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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 what you are buying
- Poor integration planning
EXAMPLES OF DEALS THAT FAILED
News Corp and Myspace
- Bought for £580m
- Sold for $25m
ITV and Friends Reunited
- Bought for £175m
- Sold…read more

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Type of takeover
- E.g.…read more

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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 to avoid the attention of the competition authorities who might be
investigating possible monopoly power in a market
EXAMPLES OF DE-MERGERS
The US pharmaceutical company Pfizer sold their infant nutrition business to Nestle
Demerger of…read more

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Organic Growth
- Growth from "within the business"
- E.g.…read more

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Does the transaction fit with...
-... The capabilities of the firm?
-... The corporate objectives of the firm?
E.g.…read more

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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 left behind
- Over-confidence
- Pressure from advisers and media (e.g.…read more

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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 failure rate
Diseconomies of scale
http://beta.tutor2u.net/economics/blog/unit-3-micro-business-growth-takeovers-and-mergers
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