Mergers and Takeovers

BTEC Business

MergersWhen 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’

MergersMerger 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

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

Economies of ScaleThere 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

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

Economies of ScaleThere 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