Topic 29 : Mergers and Takeovers

By Zhu Wenzhong

Copyright 2002 by Harcourt, Inc. All rights reserved.

LEARNING GOALS

Explain the difference between mergers and takeovers State the motives for merger or integration Explain horizontal integration, forward vertical integration, backward vertical integration, lateral integration and diversification by giving some examples State hostile and friendly takeovers Explain the difference between merger and joint venture

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.

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Mergers and takeovers

Takeover: One business acquires or controls another in management through buying over 51% of the shares.

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Motives of mergers and takeovers Quick way of expansion Cheaper than internal growth Costs saving by cross selling Cash available Economy of scale Consolidating market position Control Globalization Diversification
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Types of merger or integration

Figure
Backward vertical Previous stage of production

Lateral (similar) Diversification

(different)

Types of integration

Horizontal The same stage of Production or the same line

Forward vertical
Next stage of production

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Copyright 2002 by Harcourt, Inc. All rights reserved.

Types of mergers and integration

Two or more firms

Horizontal integration

which are exactly in the same line of business and the same stage of production join together.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Types of mergers and integration

Two or more firms in

Horizontal integration

Vertical integration

the different stage of production join together.

Backward integration(merging with raw materials or component firms Forward integration (distribution firms)

Copyright 2002 by Harcourt, Inc. All rights reserved.

Types of mergers and integration Two or more firms with

Horizontal integration

related goods which do not completely compete with each other join together.

Vertical integration

Lateral integration

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Types of mergers and integration Two or more firms in Horizontal integration

Vertical integration Lateral integration

completely different lines of business join together. Also called conglomerate merger

Diversification

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.

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.

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Copyright 2002 by Harcourt, Inc. All rights reserved.