Page 225 - DMGT548_GLOBAL_HRM

Global HRM

Notes 3. Market-extension merger: Two companies that sell the same products in different
markets (example: GTE and Bell Atlantic into Verizon).
4. Product-extension merger: Two companies selling different but related products in
the same market (example: a cone supplier merging with an ice cream maker).
5. Co generic: Mergers in the same industries and taking place at the same level of
economic activity-exploration, production or manufacturing wholesale distribution
or retail distribution to the ultimate consumer. Example, Prudential’s acquisition of
Bache and Company
6. Conglomerate: Mergers between the unrelated business or two companies that have
no common business areas.

Did u know? Accretive mergers are those in which an acquiring company’s earnings per
share (EPS) increase. An alternative way of calculating this is if a company with a high
price to earnings ratio (P/E) acquires one with a low P/E.

Dilutive mergers are a merger whereby a company’s EPS decreases. The company will be
one with a low P/E acquiring one with a high P/E.

Self Assessment

Fill in the blanks:

1. Ownership control of the company conveys effective control over the …….. of the company.
2. An ………. is the buying of one company (the ‘target’) by another.
3. Acquisition is also known as a takeover or a ………..
4. When a smaller firm will acquire management control of a larger or longer established
company and keep its name for the combined entity, it is called reverse ………..
5. When a ………… company that has strong prospects and is eager to raise financing buys a
publicly listed company may be with no business and limited assets, is called reverse
merger.

12.2 Motives behind M&A

The following motives are considered to improve financial performance:

1. In order to gain access to global markets like Ranbaxy buyout of Terepia has given the
buyer access to high growth markets like Romania and Eastern Europe.
2. To gain economies of scale in operations which means the combined company can reduce
its fixed costs by removing duplicate departments or operations, lowering the costs of the
company relative to the same revenue stream, thus increasing profit margins.
3. To increase their market share, this in turn increases their revenue. The buyer by absorbing
a major competitor will be able to increase its market power by capturing increased
market share to set prices.
4. To gain synergy with the existing business of the buyer.

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