Copyright © 2002 by Harcourt, Inc. All rights reserved. Topic 29 : Mergers and Takeovers By Zhu Wenzhong

Copyright © 2002 by Harcourt, Inc. All rights reserved. Explain the difference between mergers and takeovers Explain the difference between mergers and takeovers State the motives for merger or integration State the motives for merger or integration Explain horizontal integration, forward vertical integration, backward vertical integration, lateral integration and diversification by giving some examples Explain horizontal integration, forward vertical integration, backward vertical integration, lateral integration and diversification by giving some examples State hostile and friendly takeovers State hostile and friendly takeovers Explain the difference between merger and joint venture Explain the difference between merger and joint venture LEARNING GOALS

Copyright © 2002 by Harcourt, Inc. All rights reserved. Mergers and takeovers Merger: Two or more businesses join together and operate as one organization with shared management. Two or more businesses join together and operate as one organization with shared management. © PhotoDisc

Copyright © 2002 by Harcourt, Inc. All rights reserved. Mergers and takeovers Takeover: One business acquires or controls another in management through buying over 51% of the shares. One business acquires or controls another in management through buying over 51% of the shares. © PhotoDisc

Copyright © 2002 by Harcourt, Inc. All rights reserved. Motives of mergers and takeovers Quick way of expansion Quick way of expansion Cheaper than internal growth Cheaper than internal growth Costs saving by cross selling Costs saving by cross selling Cash available Cash available Economy of scale Economy of scale Consolidating market position Consolidating market position Control Control Globalization Globalization Diversification Diversification … © PhotoDisc

Copyright © 2002 by Harcourt, Inc. All rights reserved. Types of merger or integration Figure Figure © PhotoDisc Backward vertical Previous stage of production Types of integration Forward vertical Next stage of production Lateral (similar) Diversification (different) Horizontal The same stage of Production or the same line

Copyright © 2002 by Harcourt, Inc. All rights reserved. Types of mergers and integration Two or more firms which are exactly in the same line of business and the same stage of production join together. Two or more firms which are exactly in the same line of business and the same stage of production join together. Horizontal integration

Copyright © 2002 by Harcourt, Inc. All rights reserved. Types of mergers and integration Two or more firms in the different stage of production join together. Two or more firms in the different stage of production join together. Backward integration(merging with raw materials or component firms Backward integration(merging with raw materials or component firms Forward integration (distribution firms) Forward integration (distribution firms) Horizontal integration Vertical integration

Copyright © 2002 by Harcourt, Inc. All rights reserved. Types of mergers and integration Two or more firms with related goods which do not completely compete with each other join together. Two or more firms with related goods which do not completely compete with each other join together. Horizontal integration Lateral integration Vertical integration

Copyright © 2002 by Harcourt, Inc. All rights reserved. Types of mergers and integration Two or more firms in completely different lines of business join together. Two or more firms in completely different lines of business join together. Also called conglomerate merger Also called conglomerate merger Horizontal integration Diversification Vertical integration Lateral integration

Copyright © 2002 by Harcourt, Inc. All rights reserved. Hostile and friendly takeovers Hostile takeover : The targeted company tries to resist the bid. The targeted firm may take some measures to resist, such as asking another firm’ s bid, forming management team, or announcing new dividend plans, etc. Friendly takeover : The targeted company is willing to be acquired or invite the bid. Reasons may include the firm has met with problems or it thinks it is better under the control of another.

Copyright © 2002 by Harcourt, Inc. All rights reserved. Joint venture Two or more companies share the costs, responsibility and profits of a business venture or investment. Two or more companies share the costs, responsibility and profits of a business venture or investment. Advantages: enjoying growth of turnover with losing identify, way of eliminating direct competition, etc. Advantages: enjoying growth of turnover with losing identify, way of eliminating direct competition, etc. Disadvantages: possible control struggle if 50:50 ones, cultural conflicts or disagreement in management, etc. Disadvantages: possible control struggle if 50:50 ones, cultural conflicts or disagreement in management, etc. © PhotoDisc