Mergers and Takeovers

1. Mergers and Takeovers Extra Notes for Economic Environment of Business

2. 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’

3. 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

4. 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

5. 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

6. 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

7. 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