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MERGERS AND

AQUISITIONS

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Strategic planning of
Organizations
• Strategic planning is behavior and way of thinking,
requiring diverse inputs from all segments of the
organization.
• The chief executive officer (CEO or group) is responsible for
the strategic planning process for the firm as a whole.
• Essential elements in strategic planning process:
– Assessment of changes in the environments.
– Evaluation of companies capabilities and limitations.
– Assessment of expectations of the shareholders.
– Analysis of company, competitors, industry, domestic
economy, and international economies.
– Formulation of mission, goals, and policies for the
master strategy
Diversification Strategy

• Growth and diversification may be achieved both internally


and externally, careful analysis may reveal sound business
reasons for diversification.
• Factors favoring external growth and diversification through
mergers and acquisitions include the following:
– Some goals and objectives may be achieved more speedily
through an external acquisition.
– There may be fewer risks, lower costs, or shorter time
requirements involves in achieving an economically feasible
market share by the external route.
– There may be tax advantages.
Driving forces for M & A

• M & A activity is always business driven; that is a simple


truism.
• The driving forces are:
– Financial or Stock market pressure.
– Company size and competitiveness.
– Company growth, particularly in market presence and share.
– Company asset base considered too small or is underutilized.
– Change in regulatory climate.
Types of Mergers

• Horizontal mergers:
– A horizontal merger involves two firms operating and
competing in the same kind of business activity.
• Vertical mergers:
– Vertical mergers occur between firms in different
stages of production operation.

• Conglomerate Mergers:
– Conglomerate mergers involve firms engaged in
unrelated types of business activity.
Horizontal mergers

• Horizontal mergers are regulated by government for their


potential negative effect on competition.

• horizontal mergers take place to gain from collusion or to


increase monopoly power of the combined firm.
• integration of two firms can result in socially beneficial cost
savings
Benefits and costs
Effects of horizontal mergers

• Industry-Wide Effects
• Technological Progress
• Technological Progress
Some cases of horizontal
mergers
• The Brown Shoe Case of 1962

• Von’s supermarket chain, 1966


Vertical mergers

• There are many reasons why firms might want to integrate


vertically between different stages.
• The efficiency an affirmative rationale of vertical integration
rests primarily on the costliness of the market exchange
and contracting.
Benefits of vertical mergers

• Technological Economies.
• Reducing Transaction Costs:
– search costs, contract negotiation costs
– the cost of reduced flexibility
• Eliminating Successive Monopolies
Anti-Competitive Effects
1. Foreclosure with No
Market Power
2. Foreclosure with Market
Power at One or Both
Levels
3. Extension of Market
Power to the Other Level
• alleged to have squeezed independent fabricators by
charging a high price for ingot and low prices for fabricated
products.
• explained as an attempt to protect its fabrication market
from competition from steel, a close substitute, rather than
an attempt to squeeze independent fabricators.
4. Facilitating Collusion in
High-Concentration
Markets
• Facilitating price monitoring easier.
• The anti-competitive effects of vertical integration are
unlikely to occur unless there is prior market power at one
or both levels, which suggests that the real problem is
horizontal market power.
Vertical Restrictions

• Resale Price Maintenance (RPM):


• RPM is either a minimum or maximum resale price.