takeovers, and managing
relevanT To acca QualificaTion paper p3
1 Market growth, for example, by taking over a competitor. This could produce synergy through economies of scale and efficiency gains, and can decrease the threat from competitors. Both of these should help to increase shareholder wealth. There is, in theory, relatively little risk as the company is staying on its home territory which it knows well, but see the information about the Morrison’s – Safeway merger on page 6. 2 Market development and product development. Takeovers and mergers can give rapid access to new markets and to new product lines. There is some greater risk present because new areas are ...view middle of the document...
Both are forms of vertical integration and both can have advantages: ¤ assurance of supply of vital components or of distribution channels
Takeovers and mergers can give rapid access To new markeTs and To new producT lines. however, There is some greaTer risk presenT because new areas are being explored.
Synergy is defined by Goold and Campbell as ‘links between business units that result in additional value creation’. Takeovers and mergers are often promoted as methods of increasing shareholder wealth, but in what circumstances is that likely to occur? How will the necessary synergy arise? We can start by looking at growth possibilities as set out in Ansoff’s matrix. Current markets New markets
¤ Market growth ¤ Efficiency gains ¤ Consolidation
¤ Market development
¤ Product development
¤ Diversification – related – unrelated
sTudenT accounTanT issue 07/2010
Studying Paper P3? performance objectives 7, 8 and 9 are relevant to this exam
mergers business units
¤ saving costs through better coordination ¤ increased differentiation of the product or service because components and delivery can be closely controlled ¤ confidentiality of manufacturing processes (fewer outside orders) ¤ simple increased profit – we know our suppliers make a profit selling to us so if we take them over we should get their profit too. However, there can be very significant disadvantages arising from vertical integration: ¤ Avoiding the discipline of the market, meaning that both parties become too comfortable with their in-house, dedicated relationship. Quality, innovation and cost control can all suffer if you know that whatever you make will be bought by another group company without the tiresome business of competing with other suppliers. ¤ Taking on additional fixed costs (raising operating gearing). Third party suppliers only contribute variable costs. ¤ Being tied-in to what turns out to be an inferior partner. What if another supplier has a technical breakthrough and you are saddled with your in-house supplier of old-fashioned components. ¤ Damaging the other business. Even though vertical integration is a form of related diversification, the other business is different. A component manufacturer and distributor have expertise and know-how that an assembly company does not have, and value can be easily destroyed. Despite these potential dangers, it should be seen that both backward and forward integration can offer the possibility of wealth increases for shareholders. However, if should be said that vertical integration is not currently fashionable. In fast-moving technological, economic and competitive environments, flexibility, speed of reaction (ideally pro-activity rather than reactivity) are vital and these qualities are often better met by sub-contracting not just the supply of components and the sale of goods, but of many other business processes such as IT, accounting and...