Question

1 Write down and explain the advantages and disadvantages for shareholders in the control group.

2- Illustrate the different types of mergers in details, mentioning how- when - why it occurs?

Answer 1

1. Shareholders in the control group are the ones who own the majority of shares in a company collectively. A controlling shareholder can be an individual as well.

Advantages :

(a) Shareholders in the control group have the power to direct a company's long term and short term goals according to their interests.

(b) When the company makes profit, such shareholders enjoy the maximum share of rewards.

(c) They have the power to freeze out by excluding the minority shareholders and buying their shares.

(d) They have the control to influence the decisions of board of directors even if it is not in the interest of minority shareholders.

Disadvantages :

(a) Since they own a majority part of the shares in a company, they are less diversified than other shareholders and also, they are the most affected when the company takes a hit and suffers a loss.

(b) Since most of the shareholders in the control group take decisions in their interests and only look out to fill their pockets often forgetting about the minority shareholders, it often leads to conflicts between the controlling shareholders and the minority shareholders.

(c) Shareholders in the control group often fear from the independently minded directors from losing their control in the company.

2. There are basically 5 type of mergers :

(a) Horizontal Merger : This type of merger takes place between the companies that belong to the same indistry and are in direct competition with each other in terms of market and product line or services. Such a type of merger is common when there are fewer firms in the industry. The purpose of a horizontal merger is to increase the market share and utilize the economies of scale by creating a larger business. For example, the merger of Daimler-Benz and Chrysler in 1988 is a type of horizontal merger.

(b) Vertical Merger : Such type of merger takes place between companies that offer different services or produce different parts of a product for the common final finished product. This type of merger is common when two different firms, which operate ar different levels of supply chain within a same industry, decide to combine their operations. The purpose of a vertical merger is to increase the efficiency in terms of costs and operations, increase the margins and gain more control of the distribution or the production process. For example, the merger of internet provider AOL with Time Warner is a type of vertical merger.

(c) Conglomerate Merger : Such a type of merger exists between unrelated companies that work in completely different industries and have unrelated business activities. A conglomerate merger in which the merging companies have nothing in common is called a pure conglomerate merger where as a conglomerate merger in which the companies look to expand their product line or market is called a mixed conglomerate. A conglomerate merger might take place to reduce the risk of loss through diversification, create a synergy or to increase a company's wealth. For example, the merger of the Walt Disney Company with American Broadcasting Company is a type of conglomerate merger.

(d) Product Extension Merger : This type of merger takes place between the companies that produce different yet related products and operate in the same industry. This merger is common when the companies operate under the same factors of technology, research and development, marketing, production processes etc. The main purpose of such a merger is to have larger customer base and therefore, a larger market share and also, to utilize similar production process and distribution channels. For example, the merger of Mobilink Telecom Inc. and Broadcom is a product extension merger.

(e) Market Extension Merger : This type of merger takes place between the companies that produce similar products or offer similar services but operate in different markets. Such mergers are common when companies look to expand their market. The main purpose of this kind of merger is to acquire a larger customer base and therefore, have a larger market share. For example, the merger of RBC Centura with Eagle Bancshares Inc. is a type of market extension merger.

Answer 2

1. Advantages and Disadvantages for Shareholders in the Control Group:

Advantages: a. Control and Decision-making Power: Shareholders in the control group have significant control over the company's operations and decision-making processes. They can influence strategic decisions, appoint the board of directors, and set policies that align with their interests.

b. Higher Dividends and Profits: Since the control group holds a substantial portion of the company's shares, they can influence dividend policies, ensuring that more profits are distributed among themselves.

c. Long-term Vision: Control group shareholders usually have a long-term vision for the company. They can implement strategies that focus on the company's sustained growth and stability, rather than short-term gains.

d. Greater Opportunities for Growth: The control group can direct the company to pursue growth opportunities and investments that benefit the shareholders and increase the company's value.

Disadvantages: a. Minority Shareholders' Rights: Minority shareholders may face challenges in having their interests represented adequately. Decisions made by the control group may not align with the interests of minority shareholders, potentially leading to conflicts.

b. Lack of Influence: Minority shareholders have limited power to influence decision-making, even if they disagree with the strategies implemented by the control group.

c. Limited Dividends: The control group may prioritize reinvesting profits into the company for expansion, which can lead to lower dividends for minority shareholders.

d. Risk of Self-dealing: There is a risk that the control group may use its power to engage in self-dealing or extract personal benefits at the expense of minority shareholders.

2. Different Types of Mergers:

Mergers occur when two or more companies combine to form a single entity. There are various types of mergers based on the nature of the companies involved and the purpose of the merger:

a. Horizontal Merger:

• Definition: A horizontal merger occurs between two companies operating in the same industry and at the same stage of the production process.

• When: Horizontal mergers typically happen to achieve economies of scale, increase market share, and eliminate competition. The merging companies aim to create a stronger, more competitive entity.

b. Vertical Merger:

• Definition: A vertical merger takes place between companies that operate at different stages of the production process or in the same industry's supply chain.

• When: Vertical mergers aim to enhance efficiency, reduce costs, and improve coordination between the merged entities. By integrating suppliers or customers, companies can control the entire supply chain.

c. Conglomerate Merger:

• Definition: A conglomerate merger involves companies operating in unrelated industries.

• When: Conglomerate mergers are driven by diversification strategies. Companies seek to spread risk and reduce dependence on a single industry. Such mergers can lead to a broader business portfolio and potentially higher growth opportunities.

d. Market Extension Merger:

• Definition: A market extension merger occurs between companies that serve the same market but have different geographic locations.

• When: Companies may pursue market extension mergers to expand their customer base, gain access to new markets, or increase their market share in a specific region.

e. Product Extension Merger:

• Definition: A product extension merger happens when companies offer complementary products or services within the same market.

• When: Product extension mergers aim to diversify the product portfolio, increase cross-selling opportunities, and leverage the combined strengths of the products or services offered.

f. Reverse Merger:

• Definition: A reverse merger involves a private company acquiring a publicly traded company, which allows the private company to become publicly listed without going through an initial public offering (IPO).

• When: Reverse mergers are often chosen by private companies seeking a faster and less costly way to access public markets and raise capital.

Mergers occur for various reasons, such as achieving economies of scale, expanding market reach, diversifying operations, improving efficiency, reducing competition, and increasing shareholder value. Each type of merger serves specific strategic objectives based on the companies' unique circumstances and goals.