1. Growth of firms The long run for a single firm is entered when it uses more fixed and variable factors to increase its scale of production. The long run average cost curve (LRAC) A typical long run cost curve is ‘U’ shaped because of the impact of economies and diseconomies of scale.economies diseconomies

2. Growth Firms grow in order to achieve their objectives, including increasing sales, maximising profits or increasing market share. Firms grow in two ways; by internal expansion and through integration. Internal expansion To grow organically, a firm will need to retain sufficient profits to enable it to purchase new assets, including new technology. Over time, the total value of a firm’s assets will rise, which provides collateral to enable it to borrow to fund further expansion. The importance of branding One of the most common strategies for internal growth is to build the firm’s brand, which provides the firm with many advantages. Once a brand is established, less advertising is required to launch new products. Internal growth often provides a low risk alternative to integration, although the results are often slow to arrive.

3. External expansion The second route to achieve growth is to integrate with other firms. Firms integrate through mergers, where there is a mutual agreement, or through acquisitions, where one firm purchases shares in another firm, with or without agreement. There are several types of integration, including: Vertical integration Vertical integration occurs when firms merge at different stages of production. There are two types of vertical integration, backwards and forwards. Backwards Backward vertical integration occurs when a firm merges with another firm which is nearer to the source of the product, such as a car producer buying a steel manufacturer. Forwards Forwards vertical integration occurs when a firm merges to move nearer to the consumer, such as a car producer buying a chain of car showrooms. Horizontal integration Horizontal integration occurs when firms merge at the same stage of production, such as a merger between two car producers, or two car showrooms. Horizontal integration is also referred to as lateral integration.

5. Conglomerate integration Conglomerate, or diversified, integration, occurs when firms operating in completely different markets, merge - such as a car producer merging with a travel agency. In this case, firms tend to retain their original names, and are owned by a ‘holding’ company.

6. Takeovers and Mergers

8. The fastest route for growth is through external growth – through mergers or contested take-overs. Looking at the history of business acquisitions over recent decades, it is possible to identify a wide range of reasons why they have been made: * Speed of access to new product or market areas * Increase market share * Access economies of scale (perhaps by combining production capacity) * Secure better distribution / find new channels for selling products * Acquire intangible assets (brands, patents, trademarks) * Overcome barriers to entry to target markets * To eliminate competition * Spread risks by diversifying * To take advantage of market deregulation

9. There are various forms of integration Horizontal integration: Horizontal integration occurs when two businesses in the same industry at the same stage of production become one – for example a merger between two car manufacturers or drinks suppliers. Recent examples of horizontal integration include: * Nike and Umbro * Tata buying Jaguar Land Rover from Ford Motors * Iberia and BA merger * Virgin Active buying Esporta Gyms * Costa Coffee (Whitbread) buying Coffee Nation

10. Vertical integration: Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain. Examples of vertical integration might include the following: * Film distributors owning cinemas * Brewers owning and operating pubs * Tour operators / Charter Airlines / Travel Agents * Crude oil exploration all the way through to refined product sale * Record labels, record stations * Sportswear manufacturers and retailers * Drinks manufacturers integrating with bottling plants * Hewlett Packard purchasing Autonomy, a UK based software firm (Aug 2011)

14. Benefits of Mergers A merger occurs when two firms join together to form one. The new firm will have an increased market share, which helps the firm gain economies of scale and become more profitable. The merger will also reduce competition and could lead to higher prices for consumers. The main benefit of mergers to the public are: 1.Economies of scale. This occurs when a larger firm with increased output can reduce average costs. Lower average costs enable lower prices for consumers.

15. Different economies of scale include: Technical economies; if the firm has significant fixed costs then the new larger firm would have lower average costs, Bulk buying – A bigger firm can get a discount for buying large quantities of raw materials Financial – better rate of interest for large company Organisational – one head office rather than two is more efficient A merger can enable a firm to increase in size and gain from many of these factors. Note, a vertical merger would have less potential economies of scale than a horizontal merger e.g. a vertical merger could not benefit from technical economies of scale. However, in a vertical merger, there could still be financial and risk-bearing economies.vertical merger Some industries will have more economies of scale than others. For example, a car manufacturer has high fixed costs and so gives more economies of scale than two clothing retailers. More on economies of scaleeconomies of scale 2. International competition. Mergers can help firms deal with the threat of multinationals and compete on an international scale. This is increasingly important in an era of global markets.

16. 3. Mergers may allow greater investment in R&D This is because the new firm will have more profit which can be used to finance risky investment. This can lead to a better quality of goods for consumers. This is important for industries such as pharmaceuticals which require a lot of investment. It is estimated 90% of research by drug companies never comes to the market. There is a high chance of failure. A merger, creating a bigger firm, gives more scope to tolerate failure, encouraging more innovation. 4. Greater efficiency. Redundancies can be merited if they can be employed more efficiently. It may lead to temporary job losses, but overall productivity should rise. 5. Protect an industry from closing. Mergers may be beneficial in a declining industry where firms are struggling to stay afloat. For example, the UK government allowed a merger between Lloyds TSB and HBOS when the banking industry was in crisis. 6. Diversification. In a conglomerate merger, two firms in different industries merge. Here the benefit could be sharing knowledge which might be applicable to the different industry. For example, AOL and Time-Warner merger hoped to gain benefit from both the new internet industry and an old media firm.

17. Recent examples of horizontal integration in different markets and industries can be found here: Dec 2015: Domino's buys largest German pizza chain in $86m deal Dec 2015: US chemical giants DuPont and Dow Chemical Co agree to merge in deal valuing combined company at £86bn, with plans to split into three. Nov 2015: Pfizer's $150bn purchase of of Dublin-based Allergan (the manufacturer of Botox products) Nov 2015: Marriott agrees $12bn merger with Sheraton hotels owner to create one of world’s biggest hotel chains Nov 2015: AB InBev's £71bn bid for SABMiller Nov 2015: AstraZeneca agrees $2.7bn deal for US biotech firm ZS Pharma 2015: Horizontal mergers in the betting industry: Ladbrokes and Gala Coral, Betfair and Paddy Power and GVC and Bwin.party

18. Other examples of mergers 2017 – Amazon merger with Whole Foods. Amazon has knowledge and expertise in online shopping. Whole Foods is a major food retailer. It is hoped the merger will enable Whole Foods to benefit from Amazon’s existing infrastructure and online delivery. 2000 Glaxo Wellcome Plc and SmithKline Beecham Plc – became GlaxoSmithKline. Hoped larger firm more powerful in developing R&D. 2014 Facebook – WhatsApp – 2016 Microsoft acquired LinkedIn ($26.2 billion)

20. Evaluating Mergers and Takeovers Many takeovers and mergers fail to achieve their aims - according to recent research from KPMG, 90% of mergers and acquisitions fail, compared with around 40% - 50% of marriages! 1.Debt: Huge financial costs of funding takeovers including the burden of deals that have relied heavily on loan finance 2.Integrating systems – companies might have very different technology systems that are expensive or impossible to marry. EBay bought Skype for $2.6 billion in 2005, only to sell the company four years later for $1.9 billion – they were unable to integrate their technological systems successfully 3.Share price: The need to raise fresh equity through a rights issue to fund a deal which can have a negative impact on a company's share price. Over the three to five years after the deal on average, the share price of the acquiring company tends to drop 4.Clash of cultures: Many mergers fail to enhance shareholder value because of clashes of corporate cultures, priorities and personalities and a failure to find the all-important "synergy gains“ - Cultural incompatibility is common in the case of cross-border acquisitions

21. 5. Loss of human capital: The business may suffer a loss of personnel & customers post acquisition i.e. people who do not wish to buy goods and services from an enlarged company. 6. Paying too much: With the benefit of hindsight we see the 'winners curse' - i.e. companies paying over the odds to take control of a business and ending up with little real gain in the medium term. A good example would be the doomed takeover of ABM-AMRO by Royal Bank of Scotland in 2007. 7. Job Losses: Integration often leads to sizeable job losses - Google, which acquired Motorola Mobility (a manufacturer of mobile phones) for $12.5bn announced that it will make 20% of Motorola's workforce redundant 8. Bad timing – mergers and takeovers that take place towards the end of a sustained boom can often turn out to be damaging for both businesses.

22. Evaluation: Why do so many takeovers and mergers fail to improve shareholder value?

23. 1/ Huge financial costs of funding takeovers including the burden of deals that have relied heavily on loan finance 2/ The need to raise fresh equity through a rights issue to fund a deal which can have a negative impact on a company’s share price. Over the three to five years after the deal on average, the share price of the acquiring company tends to drop. 3/ Many mergers fail to enhance shareholder value because of clashes of corporate cultures and a failure to find the all-important “synergy gains“ - Cultural incompatibility is common in the case of cross-border acquisitions 4/ Newly-integrated business may suffer a loss of key personnel & customers post acquisition 5/ With the benefit of hindsight we often see the ‘winners curse’ - i.e. companies paying over the odds to take control of a business and ending up with little real gain in the medium term. A good example would be the doomed takeover of ABM-AMRO by Royal Bank of Scotland just prior to the credit crunch 6/ Integration often leads to sizeable job losses with important economic and social consequences for local areas 7/ Bad timing – mergers and takeovers that take place towards the end of a sustained boom can often turn out to be damaging for both businesses. A good example occurred in the UK property market with Taylor Woodrow’s merger with Wimpey in a £5bn all-shares deal sealed just as property prices were peaking. Then house sales collapsed due to the credit crunch and the merged business suffered big losses.