This section essentially provides information to supplement the Business Situation Framework and is applicable in situations where companies consider merging with or taking over other companies.
If you decide to apply the information in this section, you should first individually analyse each of the companies involved in the proposed merger with respect to the four components of the Business Situation Framework (company, product, customers and market/competition). You should subsequently analyse the potential benefits that could arise as a result of those companies merging to form a combined entity, accounting for the synergies and the added value that the merger/acquisition could create. Having completed your analysis, you can then use the quantitative data gathered to revise your initial hypothesis and then further analyse these benefits in a more quantitative manner (e.g. through estimating the size of cost savings).
Examples of questions you may be asked
- Our client XYZ is a major hotel chain. XYZ is considering acquiring its Hong Kong competitor ABC for £50 million and expects a Return on Investment (ROI) of 30% over the course of the next 3 years. Should they go ahead with the acquisition?
- FlyWorld (one of the largest European airlines) is considering acquiring CheapFlight (a major player in the “no-frills” low fare segment). Should the company go ahead with the acquisition?
Why Acquire, Merge With Or Cooperate With A Business?
Businesses acquire, merge with or cooperate with other businesses for a variety of reasons, many of which relate to the synergies that can arise. However, a less permanent solution may be to engage in alliances, partnerships or joint ventures, which give rise to similar benefits but also enable parties to retain some autonomy.
- Acquisition: when one business purchases another, either through mutual consent or through a hostile takeover.
- Merger: when multiple businesses voluntarily and permanently combine to form one business.
- Alliance / Partnership: when businesses or individuals with complementary capabilities or resources agree to cooperate in order to advance their mutual interests. For example, the inventor of a product may engage in a partnership with a lawyer, distributor or marketing agency. The parties typically share the costs, risks and rewards.
- Joint Venture: when two or more businesses agree to pool their resources and work together on a specific task or project, such as the development or launch of a product. The parties typically share the costs, risks and rewards.
- Synergies: synergies refer to the benefits that can result from the interaction between two companies. Examples of synergies include: the sharing of resources to reduce costs and the sharing of knowledge/human resources to improve product offerings. Synergies can ensure that the value generated by companies that have been combined exceeds the overall value that those companies could produce separately.
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By Jake Schogger - City Career Series