Text V. Mergers and acquisitions
A merger is an agreement that unites two existing entities into one new company. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to satisfy shareholders wants and create value.
A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. The firms that agree to merge are roughly equal in terms of size, customers, scale of operations, etc. For this reason, the term "merger of equals" is sometimes used. Mergers are most commonly done to gain market share, reduce costs of operations, expand to new territories, unite common products, grow revenues and increase profits, all of which should benefit the firms' shareholders. After a merger, shares of the new company are distributed to existing shareholders of both original businesses. There are five main types of company mergers:
· Conglomerate: two or more companies are engaged in unrelated business activities. The firms may operate in different industries or different geographical regions. A pure conglomerate involves two firms that have nothing in common. A mixed conglomerate takes place between organizations that, while operating in unrelated business activities, are actually trying to gain product or market extensions through the merger. Companies with no overlapping factors will only merge if it makes sense from a shareholder wealth perspective, that is, if the companies can create synergy. A conglomerate merger was formed when The Walt Disney Company merged with the American Broadcasting Company (ABC) in 1995.
· Congeneric is also known as a Product Extension merger. It occurs when two or more companies operate in the same market or sector with overlapping factors, such as technology, marketing, production processes, research and development (R&D), join to form a new business entity. A product extension merger is achieved when a new product line from one company is added to an existing product line of the other company. When two companies become one under a product extension, they are able to gain access to a larger group of consumers and, thus, bigger market share. An example of a congeneric merger is Citigroup's 1998 union with Travelers Insurance, two companies with complementing products.
· Market Extension occurs between companies that sell the same products but compete in different markets. Companies that engage in a market extension merger seek to gain access to a bigger market and, thus, a bigger client base.
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· Horizontal occurs between companies operating in the same industry. The merger is typically part of consolidation between two or more competitors offering the same products or services. Such mergers are common in industries with fewer firms, and the goal is to create a larger business with greater market share and economies of scale since competition among fewer companies tends to be higher.
· Vertical: when two companies that produce parts or services for a specific finished product merge, the union is referred to as a vertical merger. Vertical merger occurs when two companies operating at different levels within the same industry's supply chain combine their operations. Such mergers are done to increase synergies achieved through the cost reduction which results from merging with one or more supply companies.
Defining the terms_____________________________________________________
| 1. commitment | a) amount of salaries and wages paid |
| 2. freelancer | b) one of the equal parts into which a company's capital is divided |
| 3. merger | c) a person who presides over a meeting |
| 4. payroll | d) a self-employed person |
| 5. R&D | e) the work a business conducts toward the innovation and improvement of its products |
| 6. chairperson | f) a combination of two companies into one |
| 7. sole proprietor | g) a person who is the exclusive owner of a business |
| 8. share | h) a promise to do something, duty to behave in a particular way |
Writing______________________________________________________________
1. It is a positive thing for people who are in senior management positions to have much higher salaries than other employees in the same company. To what extent do you agree or disagree?
2. Some people prefer to be freelancers. What are their reasons to be self-employed? Would you choose such an employment?
3. Several businessmen think that the most effective way to get ahead is to expand business boundaries via mergers and acquisitions while others assure the company will face a number of difficulties which affect profit.
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