why a merger or takeover may or may not achieve objectives

1.3 Size of Business – Business Growth

Objective

Understand why a merger or takeover may or may not achieve a business’s strategic objectives and be able to evaluate the full range of growth options available to firms.

Key Definitions

• Merger: The combination of two (or more) companies to form a new entity, usually on a mutually agreed basis.
• Takeover (Acquisition): One company purchases a controlling interest in another, which may continue to operate under its own name.
• Friendly merger/takeover: Both parties cooperate throughout the deal.
• Hostile takeover: The target resists the acquisition; the acquirer proceeds without board approval.
• Organic (internal) growth: Expansion using a firm’s own resources – new products, market penetration, increased capacity, etc.
• Inorganic (external) growth: Expansion through external means such as mergers, takeovers, joint ventures or strategic alliances.
• Horizontal integration: Merging with or acquiring a competitor operating at the same stage of the production process.
• Vertical integration: Acquiring a supplier (backward) or a distributor/retailer (forward) to control more of the supply chain.
• Conglomerate acquisition: A merger or acquisition of firms operating in unrelated industries.
• Joint venture (JV): Two (or more) firms create a new, jointly‑owned entity for a specific project or market.
• Strategic alliance: A cooperative agreement between firms that share resources or knowledge but remain legally independent.

Measuring Business Size

Cambridge expects you to be able to identify the main size‑measurement methods, explain what each shows, and state when each is most appropriate.

Small‑Business Perspective

Small firms have a distinct role in the economy and face particular growth considerations.

• Advantages: flexibility, quick decision‑making, close customer relationships, strong owner‑manager commitment.
• Disadvantages: limited financial resources, reliance on a small skill base, vulnerability to economic shocks.
• Economic contribution (UK example): ~60 % of employment and a sizable share of GDP.
• Family‑business strengths: high trust, long‑term orientation, ease of succession when planned.
• Family‑business risks: succession disputes, resistance to change, nepotism.
• Stakeholder impact: growth decisions affect local communities (jobs, services), suppliers (order volumes), and employees (job security, career prospects).

Growth Strategies

1. Organic (Internal) Growth – the Four Routes

These are the four routes required by the Cambridge syllabus.

• Market penetration: Increase sales of existing products in current markets (e.g., a supermarket launches a loyalty card to boost repeat purchases).
• Market development: Sell existing products in new geographic or demographic markets (e.g., a UK fashion retailer opens stores in Spain).
• Product development: Introduce new products to existing markets (e.g., Apple releases a new iPhone model).
• Diversification:
  • Related diversification: New but related product lines (e.g., a car maker adds electric‑vehicle models).
  • Unrelated diversification: New products in a completely different industry (e.g., a bakery starts a catering service).

2. Inorganic (External) Growth – Options

Why Companies Pursue Mergers or Takeovers

1. Achieve economies of scale and scope.
2. Enter new markets or geographic regions quickly.
3. Acquire new technologies, brands, or expertise.
4. Increase market share and reduce competition.
5. Improve financial performance through synergies.
6. Diversify product lines and reduce business risk.

Potential Benefits (Objectives Achieved)

• Cost reduction: Shared resources lower production, distribution and administrative expenses.
• Revenue growth: Cross‑selling and an expanded customer base boost sales.
• Strategic positioning: Greater market power improves bargaining with suppliers and customers.
• Innovation: Access to new R&D capabilities accelerates product development.
• Risk diversification: Presence in several markets or sectors cushions against downturns.

Potential Drawbacks (Objectives Not Achieved)

• Cultural clash: Differences in corporate culture can cause disengagement and turnover.
• Integration costs: Short‑term expenses for systems integration, restructuring and legal fees may outweigh benefits.
• Over‑estimation of synergies: Expected cost savings or revenue gains may not materialise.
• Regulatory barriers: Antitrust concerns can block or delay deals.
• Loss of focus: Management attention diverted from core operations.
• Hidden liabilities: Poor due‑diligence can reveal debts or legal issues post‑deal.

Factors Influencing Success of a Merger or Takeover

Measuring Growth After a Merger/Takeover

Growth can be expressed as a percentage change in any relevant metric (sales, market share, profit, etc.).

G = \(\dfrac{S_{t} - S_{t-1}}{S_{t-1}} \times 100\%\)

where S_t is the metric after the merger and S_t‑1 is the metric before the merger.

Case Study Summaries (Cambridge‑style)

• Case A – Successful horizontal merger (Retail): Two UK supermarket chains combined logistics and purchasing. Cost savings of 15 % were realised within 18 months, leading to a 12 % rise in net profit and a 4 % increase in market share.
• Case B – Unsuccessful hostile takeover (Technology): A large software firm acquired a start‑up for its patented AI algorithm. Integration problems and cultural mismatch caused a 20 % fall in employee morale and a 5 % decline in revenue in the first year.
• Case C – Vertical integration (Manufacturing): An automobile manufacturer bought a tyre supplier. After three years, input costs fell by 8 % and the firm achieved a 3 % increase in profit margins.
• Case D – Joint venture (Energy): Two energy firms formed a JV to develop offshore wind farms. The partnership spread risk and allowed both firms to enter a new market without a full acquisition.

Key Points to Remember

1. Mergers and takeovers are tools for inorganic growth, not guaranteed routes to success.
2. Strategic alignment, cultural compatibility and realistic synergy estimates are as important as the purchase price.
3. Accurate due diligence prevents over‑payment and uncovers hidden liabilities.
4. Effective post‑deal integration – leadership, communication and a clear roadmap – determines whether objectives are achieved.
5. Small businesses often rely on organic growth, but may use alliances or joint ventures to overcome resource constraints.

Suggested Diagram – Stages of a Merger/Takeover

1. Strategic assessment (objective setting)
2. Target identification & preliminary evaluation
3. Due diligence (financial, legal, cultural)
4. Negotiation & deal structuring
5. Regulatory approval
6. Integration planning (systems, people, processes)
7. Implementation & monitoring
8. Performance review (measure against objectives)

Potential Exam Questions

• Explain how economies of scale can be achieved through a horizontal merger. Use a real‑world example.
• Discuss three reasons why a hostile takeover might fail to meet its objectives.
• Analyse the role of cultural factors in the success of a merger, referencing a specific case study.
• Compare and contrast organic growth with external growth through a strategic alliance, highlighting advantages and disadvantages for a small‑business.
• Using the growth formula, calculate the percentage increase in profit if a company’s profit rises from £8 m to £9.6 m after a merger.
• Explain when each method of measuring business size (turnover, employees, market share, assets, capacity) is most appropriate for a growth decision.
• Evaluate how a merger can affect different stakeholders of a small family‑owned firm.