Size of Business

Examples of Horizontal Integration

- Adidas buying Reebok - Mercedes buying Chrysler - Lloyds buying HBOS - Co-op buying Somerfield

Process of Friendly Takeover

- Buyer approaches target Board with offer - Target Board negotiates & agrees price / terms - Shareholders of both firms approve the deal - Legal completion of takeover

Process of Hostile Takeover

- Buyer approaches target Board with offer - Target Board rejects offer - Buyer makes offer direct to target shareholders - Target Shareholders decide whether to accept

Advantages of Horizontal Integration

- Economies of scale - e.g. buying EOS - Lower Unit Costs - Reduced Competition - Increased Market Share

Mergers and takeover strategies (motives)

- Growth/Market share - Source of finance: Asset stripping - Technical expertise - Brands are expensive to develop - To exploit patents - Diversification

Advantages of Vertical Integration

- Removes the uncertainty of dealing with external suppliers and retailers - Cost savings in technical, distribution and marketing areas - Builds barriers to entry for new competitors

Hostile Takeover

- where a company's intention is not welcome and the target company may reject the move. - A limited time to persuade the shareholders to accept the bid.

Overview of the integration process

1 - Target identification & choice 2 - Valuation & offer 3 - Due diligence & completion 4 - Post-acquisition integration

Advantage of Conglomerate Integration

Can share good practice between different areas of the business

Example of Vertical Integration

L'oreal buying a body shop

Synergy

Means 'the whole is greater than the sum of parts'

Brands are expensive to develop

Nestle's takeover of Rowntree

Example of Conglomerate Integration

Procter and Gamble (household goods) bought Gillete

Technical expertise

Sony bought smaller software producers to gain skilled workforce when developing the PlayStation

De-mergers

This could follow a takeover that has not been successful 65% of mergers/takeovers fail to benefit shareholders May be due to: • the expected economies of scale have not happened • DEOS will occur when the merger/takeover involves significant cultural, political, and geographical differences • Or benefits of integration do not occur

Source of finance: Asset stripping

To buy a business then breaking them up and selling off the profitable sections

Growth/Market share

To control the market (gain monopoly power)

3 types of integration:

Vertical integration Horizontal Integration Conglomerate Integration

Strategic Alliances

agreements between firms in which each agrees to a set amount of resources to be used to achieve an agreed set of objectives.

Joint ventures

form of external growth between two or more firms, where they agree to work together and to create a separate business (e.g. Sony Ericsson)

External growth

happens when 2 or more businesses integrate via a merger/takeover

To exploit patents

in the pharmaceutical and computing industries

Internal (organic) growth

occurs when a firm expands its existing capacity by extending its premises from its own resources

Vertical integration

the coming together of firms in the same industry but at different stages of the production process (backwards and forwards integration)

Conglomerate Integration

the coming together of firms in unrelated markets

Horizontal integration

the coming together of firms operating at the same stage of production in the same market

Friendly Takeover

the purchase is welcome and shareholders will accept the bid

Takeover (or acquisition)

where 1 firms buys the majority of shares to take full control.

Merger

where 2 or more firms agree to come together under one board of directors

Merger/takeovers general drawbacks

• Can lead to management problems. • Possible conflict between the two teams of managers • Conflicts of culture and business ethics

Causes of Retrenchment:

• Changes in tastes/fashions • Technological developments make products obsolete • Lack of planning for change in economic conditions

Impact of a merger on the various stakeholders: Horizontal integration

• Consumers have less choice • Workers may lose jobs

Ways to avoid integration problems

• Detailed due diligence - focused on the likely areas of risk (e.g. IT systems, impact on customers etc) • Careful integration planning - a detailed action plan based on pre-takeover due diligence • Act quickly: the first 100 days are often considered vital for the overall success of the takeover or merger • Clear communication about the objectives of the transaction and the honesty about the implications for key stakeholders (particularly employees) • Respect the culture of the target business

Any mergers/takeovers fail to gain true synergy because:

• Firm is too big to manage and control (diseconomies of scale) • Business and management culture may be so different to work effectively and cooperate together

Vertical Backwards integration

• Greater career opportunities for workers • Consumers may obtain improved quality and more innovative products • Control over suppliers may limit competition and choice for consumers

Conglomerate

• Greater career opportunities for workers • More job security because risks are spread across more than one industry

Advantages of acquisitions

• Quick access to resources &; skills the business needs • Overcomes barriers to entry • Helps spread risk (wider range of products and greater geographical spread) • Revenue growth opportunities • Cost saving opportunities • Reduces competition • May enable economies of scale

Common problems with hostile takeovers

• Senior management in the target often leave en masse = loss of experience & expertise • Resentment amongst target stakeholders (local community, employees) • Increased risk that the buyer pays too much for the takeover

Retrenchment/downsizing

• This is the process of making a business smaller (negative organic growth). • This means the cutting back of an organisations scale of operations.

Vertical Forwards integration

• Workers have greater job security as business has secure outlets • More varied career opportunities • Consumers may resent the lack of competition in the retail outlet because of the withdrawal of competitor products.