Question

Deadly Art Puzzle Writing Assignment See Appendix 6 pages 217-219 Discussion Questions Selected Chapters 1. Chapter 1, Question 1: What are the advantages and disadvantages of business combinations? 15 points 2. Chapter 2, Questions 1: Discuss the differences between mergers, consolidations, and acquisitions. Give the advantages and disadvantages, including the tax impact ofeach

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Answer 1

ADVANTAGES OF BUSINESS COMBINATIONS

1. Business combinations eliminates wasteful competition. Costs incurred for advertisement and sales promotion by different small firms can be saved if they combine together.

2. When firms combine together, they can achieve economies of scale. They derive advantages through bulk purchase of raw materials, and economies in production, marketing, finance etc. Their costs, therefore is low. Products can be sold at cheaper prices which increases their sales.

3. If firms combine together, they can explore new markets, tap new consumer segments, engage in research and develop new products. This results in increased sales and profits.

4. Firms which combine together create a large entity. Such a large entity would have substantial resources. The resources can be used to acquire the latest technology, employ experienced and qualified talent and adopt the best practices in the business.

5. Patents possessed by one of the firms can be used by all the combined firms and products can be produced on a larger scale.

6. A combined firm can control the market in terms of pricing, level of supplies and sometimes may even enjoy monopoly power.

7. Small firms would find it difficult to survive recession and depression. If small firms combine together, the combined firm because of its huge resources and scale of operations would be able to survive even in difficult times.

8. Firms combining together can pool their knowledge and experience. All the firms in the combination can benefit from a vast pool of such shared knowledge.

9. The value of the combined firm’s securities would be higher. It would help the firm to raise capital much easily.

10. Firms can plan their production according to market requirements. The risk of overproduction can be reduced to a great extent.

DISADVANTAGES OF BUSINESS COMBINATION TO COMBINING FIRMS

1. Dis economies of large scale operations: Combined firms may become too large which leads to problems in co-ordination and control. Supervision might become difficult resulting in poor quality of products, wastage, corruption etc.

2. Delayed decisions: In large combined firms, decisions are delayed because of various levels of authority. The organization would not able to utilize opportunities in the market place.

3. Conflicts: Combined firms might witness conflicts of power, differences of opinion, politics etc which may destabilize the organization.

4. Unfair practices: Combination of firms might lead to monopoly situations. Monopolies might restrict output, create artificial scarcities, charge high prices, and produce low quality goods. All these affect consumer interests.

5. Lack of consumer choice: Combined firms might try to wipe out competition and prevent the entry of new firms. They would aim to control the market. The consumers would be denied the freedom to choose from products of different manufacturers.

6. Political corruption: Combined firms might bribe politicians to frame policies in their favor. They might also motivate the political class to act against their competitors.

7. Inefficiency: Combined firms aim for monopoly and control over the markets. There would be very less focus on improving efficiency and reducing costs. The consumers would be forced to pay high prices because of the inefficiency of the combined firm.

8. Less innovation: Combined firms would not concentrate on improving quality or on innovation. It is because they have an assured market. Spending on research and development would be considered to be wasteful by them.

9. Lack of personal touch: In a small firm, the owner would personally know his customers. He would know each customer’s tastes and preferences. The personal touch that is possible in small sized firms would not be possible in large combined firms. Tastes and preferences of individual customers might be ignored. It might lead to customer dissatisfaction, decline in sales and profitability.

10. Over capitalization: It is a serious problem faced by combined firms. The firm might be using capital more than what is required. This would result in high costs and poor return to shareholders.

11. Industrial disputes: In small firms the owner would personally know each employee. Since he has direct contact he can solve the problems of employees in the initial stages. In a large firm, the owners and employees do not have personal contact. Employee grievances may not be known and it might lead to strikes, lockouts etc.

12. Legal restrictions: Governments prefer competition in markets and take steps to prevent monopolies. The government might order combined firms to be broken into smaller units.

13. High risk: Combinations are quite huge in size with substantial investment of resources. In case a combination collapses, it results in substantial losses for all those connected with it. Large number of shareholders (loss of investment), employees (loss of jobs and livelihood), suppliers (loss of further business and), creditors (loss of loans advanced) suffer in case of failure of combination.

DIFFERENCE BETWEEN MERGER, ACQUISITION AND CONSOLIDATION

Merger: A merger occurs when two separate entities combine forces to create a new, joint organization. A merger involves the mutual decision of two companies to combine and become one entity. The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. Example –
• American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presence in North America.

Acquisition: An acquisition refers to the takeover of one entity by another. A new company does not emerge from an acquisition; rather, the smaller company is often consumed and ceases to exist, and its assets become part of the larger company. Example –
• An example of a major acquisition is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services Inc.

Consolidation: The unification of two or more corporations by dissolution of existing ones and creation of a larger corporation. It could also be a consolidation of several business units or into a larger organization. Consolidation is used to improve operational efficiency by reducing redundant personnel and processes. Example –
• c.€28bn three way merger combining the bottling operations of CCIP, Coca-Cola Enterprises (“CCE”), and The Coca-Cola Company’s (“TCCC”) Coca-Cola Erfrischungsgetränke (“CCEAG”) into a new Western European bottler, to be named Coca-Cola European Partners (“CCEP”). CCEP now is the largest independent Coca-Cola bottler in the world by revenues and EBITDA

ADVANTAGES OF MERGER

• Economies of scale – bigger firms more efficient
• More profit enables more research and development.
• Struggling firms can benefit from new management.

DISADVANTAGES OF MERGER

• Increased market share can lead to monopoly power and higher prices for consumers
• A larger firm may experience diseconomies of scale – e.g. harder to communicate and coordinate.

ADVANTAGES OF ACQUISITION

1. Speed. Acquisition is one of the most time-efficient growth strategies. It offers the opportunity to quickly acquire resources and core competencies not currently held by your company. There is near-instantaneous entry into new product lines and markets, usually with a recognized brand or positive reputation, and existing client base. In addition, the risks and costs typically associated with new product development can drop dramatically.

2. Market power. An acquisition will quickly build market presence for your company, increasing market share while reducing the competition’s stronghold. Where competition has been particularly challenging, growth through acquisition can reduce competitor capacity and level the playing field. Market synergies are achieved.

3. New resources and competencies. Businesses may choose acquisition as a route for gaining resources and competencies currently not held. These can have multiple advantages, ranging from immediate increases in revenues to improving long term financial outlook to making it easier to raise capital for other growth strategies. Diversity and expansion can also help a company to weather periods of economic or market slump.

4. Meeting stakeholder expectations. In some cases, stakeholders may have expectations of growth through acquisition. While not all stakeholders will insist on acquisition in particular as a growth strategy, under nearly all circumstances, stakeholders are looking for returns on any investment or other advantages for non-investing stakeholders. When there is pressure to perform and meet expectations for returns, an acquisition can often yield results more quickly than other means for growth.

5. Financial gain. Acquiring organizations with low share value or low price earning ratio can bring short-term gains due to assets stripping. Synergy between the surviving and acquired organizations can mean substantial cost savings as well as more efficient use of resources for soft financial gains.

6. Reduced entry barriers. Acquiring an existing entity can often overcome formerly challenging market entry barriers while reducing risks of adverse competitive reactions. Market entry can otherwise be a costly proposition, involving market research among other upfront expenses, and take years to build a significant client base.

DISADVANTAGES OF ACQUISITION

1. Financial fallout. Returns may not benefit stakeholders to the extent anticipated, and the expected cost savings may never materialize or may take far too much time to materialize due to a number of developing factors. These might include a higher-than-anticipated price of acquisition, an unusually long timeframe for the acquisition process, lost of key management personnel, lost of key customers, fewer synergies than projected and other unforeseen circumstances.

2. Hefty costs. Under some circumstances, the cost of acquisition can climb steeply, well beyond earlier projections. This is particularly true in situations of hostile takeover bids. In some situations of runaway costs, the added value may not be enough to justify the cost in dollars and resources that went into making the acquisition happen.

3. Integration issues. Integration of the acquired organization can bring a number of challenges. Company cultural clash can erupt and activities of the old organizations may not mesh as well as anticipated when forming the newly combined entity. Employees may resent the acquisition, and undercurrents of anxiety and anger may make integration challenging.

4. Unrelated diversification. When an acquisition brings together diverse product or service lines, there can be difficulties in managing resources and competencies. Management of employees and departments can face extreme hurdles and the time necessary to address such issues may deplete much of the value otherwise brought about by the acquisition.

5. Poorly matched partner. Unless he or she has extensive firsthand experience in implementing acquisition as a growth strategy, a business owner who does not seek professional advice in identifying a potential company for acquisition may target a business that brings too many challenges to the equation. A failed acquisition can rob an otherwise healthy organization of

6. Distraction from operations. When the acquisition faces too many challenges or the timeline for completion stretches out longer than anticipated, too much of the managerial focus is diverted away from internal development and daily operations. The post-acquisition organization can be harmed due to lack of managerial resources, resulting in fewer synergies or at the least, delays in savings realized from synergies.

ADVANTAGES OF CONSOLIDATION

1. Credit rating not effected
Consolidation simply means that you are paying off a number of loans with one larger one. As such, non of the older debt agreements are being broken and your credit rating will not be negatively effected in any way.

2. Monthly payments reduced to affordable amount
The monthly payment amount of the consolidation loan will be smaller than the sum of the payments of the old consolidated loans. This is particularly the case with secured loans which are paid over a much longer period than unsecured loans.

3. Fast Implementation
A loan can generally be arranged swiftly meaning that monthly payments can be reduced fast meaning you get your finances back under control swiftly.

DISADVANTAGES OF CONSOLIDATION

It is important to understand that as well as benefits consolidating your debts can also have some disadvantages. Before making a decision to take a consolidation loan you need to understand these in the context of your circumstances.

1. Overall debt increased
If you borrow money to consolidate debts, you will be charged interest on the new loan. As such, it is likely that your overall debt will increase.

2. Mortgage secured against your home
A mortgage or secured loan will be secured against your home. This means that if you find yourself unable to repay the loan in the future, your house wil be at risk of repossession.

3. Debt may become worse if your spending habits do not change
Taking a loan does not force a change in spending habits. Therefore it is easy to continue to use other forms of credit such as credit cards and get into trouble again.