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Topic 29 :

Mergers and Takeovers

By Zhu Wenzhong

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• Explain the difference between mergers andtakeovers

• State the motives for merger or integration

• Explain horizontal integration, forward vertical

integration, backward vertical integration, lateralintegration and diversification by giving someexamples

• State hostile and friendly takeovers

• Explain the difference between merger and jointventure

LEARNING GOALS

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Mergers and takeovers

Merger:

Two or more businesses join

together and operate as oneorganization with sharedmanagement.

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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

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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 thesame line

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Types of mergers and integration

• Two or more firmswhich are exactly inthe same line of

business and the samestage of production join together.

Horizontal integration

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• Two or more firms inthe different stage of production join

together.• Backward

integration(merging withraw materials or

component firms• Forward integration

(distribution firms)


Vertical integration

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• Two or more firms withrelated goods which donot completely competewith each other join

together.


Lateral integration


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• Two or more firms incompletely different linesof business join together.

• Also called conglomerate

merger


Diversification


Lateral integration

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Hostile and friendly takeovers

Hostile takeover :

• The targeted companytries to resist the bid.

• The targeted firm maytake some measures toresist, such as askinganother firm’ s bid,

forming managementteam, or announcingnew dividend plans,etc.

Friendly takeover :

• The targeted companyis willing to be

acquired or invite the bid.

• Reasons may includethe firm has met with

problems or it thinks itis better under thecontrol of another.

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Joint venture

• Two or more companies share the costs,responsibility and profits of a businessventure or investment.

• Advantages: enjoying growth of turnover with losingidentify, way of eliminating direct competition, etc.

• Disadvantages: possible control struggle if 50:50ones, cultural conflicts or disagreement in

management, etc.

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