Business Studies 19.4

Business Growth External growth – occurs when a business grows by merging woth or taking over another business. A merger is the combining of two or more firms into a single business following an agreement by the firms management team and shareholders. A takeover occurs when one company acquires complete control of another by purchasing more than 50% of its shares.

How Companies Can Work Together Acquisition: acquired company becomes subsidiary of purchasing company Most permanent Eliminates governance and economic fairness issues Forms of acquisitions Merger Stock acquisition Asset acquisition

How Companies Can Work Together Merger: two companies legally become one All assets and liabilities being merged out of existence become assets and liabilities of surviving company Stock acquisition: acquired company becomes subsidiary of acquiring company Asset acquisition: assets but not liabilities become assets of acquiring firm

A Conglomerate Merger A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. Benefits of a conglomerate merger is that the business is able to spread risk by operating in several different markets.

A Brief History of Mergers and Acquisitions M&A transactions date back to 19 th century Horizontal acquisitions: acquiring competitors in the same industry to gain greater market share. Then systematically reducing costs of acquired company by integrating its operations into acquirer's company Vertical acquisitions: acquiring companies in own supply chain In order to guarantee access to the market. Gain control over raw materials. Airline company buying an oil company that supplies them with fuel for their planes. Enormous trusts, or business holding companies

The Politics and Economics of Acquisitions Key political elements of a transaction 1.Which entity will survive or be parent company 2.What will new company’s board of directors look like 3.Who will manage company day-to-day

The Politics and Economics of an Acquisition Smaller company will typically become subsidiary of larger company Smaller company may have token representation on Board of Directors of parent Management of smaller company will typically either remain at subsidiary or exit

Stakeholders and Integration Not all stakeholders benefit from the process of integration. Usually employees are laid off because there are to many employees for a job. Shareholders usually benefit because the stock prices goes up. Customers usually are happy because since there is a larger company they should have more resources to bring the price of the product down.

How Companies Can Work Together Strategic alliance (or teaming agreement): parties work together on a single project for a finite period of time Do not exchange equity Do not create permanent entity to mark relationship Written memorandum of understanding (MOU): memorializes strategic alliance and sets forth how parties plan to work together

How Companies Can Work Together Joint venture: parties work together for lengthy or indeterminate period of time Form new, third entity Divide ownership and control of new entity, determine who will contribute what resources Advantage: two entities can remain focused on their core businesses while letting joint venture pursue the new opportunity Downside: governance (communication) issues and economic fairness issues create friction and eventual disbandment. Potential loss of control of product quality.

Homework #4-10 Page 225 Exxon Mobil and Sony Case Studies DUE FRIDAY JULY 25 TH Quiz on Friday on Chapter 19