Mergers and Takeovers Extra Notes for Economic Environment of Business

Mergers When two companies join to form one new firm, it can be: voluntary, also known as a ‘merger’ or forced, when it is known as a ‘takeover’

Mergers Merger activity is an example of ‘integration’ taking place within industries. This can be: vertical integration, where firms at different stages in the production chain merge and horizontal integration, where competing firms in the same industry merge

Why Integrate? Firms are sometimes keen to merge when: they can make savings from being bigger this is known as gaining ‘economies of scale’ they can compete with larger firms or eliminate competition they can spread production over a larger range of products or services

Economies of Scale There are several types of economy of scale: technical economies, when producing the good by using expensive machinery intensively managerial economies, by employing specialist managers financial economies, by borrowing at lower rates of interest

Economies of Scale commercial economies, by buying materials in bulk marketing economies, spreading the cost of advertising and promotion research and development economies, from developing better products

Economies of Scale There are sometimes problems that can affect integrated firms. These are known as ‘diseconomies of scale’ firms are too big to operate effectively decisions take too long to make poor communication occurs