Reasons for Global Mergers and Joint Ventures (Edexcel A-Level Business): Revision Notes

Reasons for global mergers and joint ventures

Introduction to global business expansion

When businesses seek to expand internationally, they face a strategic choice about how to enter foreign markets. While exporting can work for some firms, it becomes less attractive when other countries can produce goods or services more cheaply. Similarly, arrangements like licensing or franchising may not always deliver the best commercial outcomes for ambitious businesses with global aspirations.

Licensing occurs when a firm enters into a licensing contract with another firm to use its brand, intellectual property or to produce its product or service in return for a fee. Disney licensing its brand for merchandise and inventors licensing patents to manufacturers are common examples.

Franchising involves a long-term co-operative relationship whereby one party, the franchisor, contracts with another, the franchisee, to run its business. McDonald's operates through this well-known franchise model.

The scale of cross-border mergers and acquisitions

Cross-border mergers and acquisitions represent a significant component of international business activity. The data from 2014 demonstrates the global nature of these transactions, with companies from both developed and emerging economies actively buying and selling businesses across borders.

The data reveals several patterns. The United States leads both as a seller (1,545 deals) and purchaser (2,061 deals) of companies, reflecting its dominant position in global business. Germany (616 sales, 423 purchases) and the UK (879 sales, 859 purchases) show similarly high activity levels. Emerging economies like China (337 sales, 331 purchases) and India (225 sales, 130 purchases) demonstrate growing participation in international M&A activity.

Five key reasons for global mergers and joint ventures

Spreading risk over different countries or regions

Economic downturns can devastate even financially strong companies with healthy balance sheets. During recessions or financial crises, demand falls, credit becomes scarce, and profitability suffers. To protect themselves, businesses strategically locate operations in multiple countries where these risks are less likely to occur simultaneously.

This geographic diversification works like an insurance policy. When one market experiences difficulties, operations in other regions can maintain revenue streams and support the overall business. The principle is simple: don't put all your eggs in one basket.

Entering new markets and trade blocs

Growing organically through gradual expansion takes time and resources. Mergers and acquisitions offer a shortcut to international growth, providing instant market presence, established customer bases, and operational infrastructure. This route has become increasingly popular, particularly for firms from developing and transition economies seeking to compete globally.

China, Thailand, Mexico and India have been leading this trend, with businesses from these countries actively acquiring firms in developed markets. This represents a significant shift from historical patterns where investment predominantly flowed from developed to developing nations.

Market maturity often drives international M&A activity. When domestic markets become saturated with slow growth prospects, companies must look abroad for expansion opportunities. The international beer market exemplifies this perfectly. In developed markets, beer consumption growth has stagnated. Consequently, brewers pursued aggressive cross-border consolidation over the past decade. Four major brewers (AB-InBev, SABMiller, Heineken and Carlsberg) now control over 50 per cent of global market volume. These mergers delivered both access to new markets and substantial economies of scale, making the combined entities more competitive.

Acquiring national and international brand names or patents

Becoming a global player requires more than just good products – it demands brand recognition and protected intellectual property. Developing these assets internally requires enormous investment and carries significant risk. Acquiring an established business with strong brands or valuable patents provides instant credibility and market position.

Benefits of brand acquisition include:

• Strong brand recognition in target markets
• Established brand loyalty among customers
• Reduced competition for products
• Avoiding the high risk, cost and uncertainty of launching new products from scratch

Gaining access to intellectual property

Intellectual property encompasses creations of the mind – inventions, literary works, artwork – that law protects from unauthorised use. Developing intellectual property through internal research and development can take years and involve substantial financial risk. Acquiring it through mergers or joint ventures offers a faster, more certain route.

Legal protection mechanisms include:

• Patents for inventions (typically 20 years protection)
• Copyrights for literary works or computer programs (typically author's life plus 70 years)
• Trademarks for brand names or designs (renewable indefinitely)

Securing resources or supplies

Firms may merge with suppliers to control resources or supplies further back in the supply chain. This strategy, called backward vertical integration, makes sense when:

• Resources used in production are scarce or difficult to acquire, requiring reliable sourcing
• The firm needs to ensure inputs meet specific quality or price standards

Maintaining or increasing global competitiveness

Merging or acquiring another firm can create competitive advantages through bigger markets, economies of scale and scope, and cost savings. These benefits strengthen pricing power over both customers and suppliers. Where competition is fierce or a firm aspires to global market dominance, M&A can prove essential to strategy.

Scale economies drive many competitive mergers. A proposed merger between Applied Materials and Tokyo Electron demonstrates this clearly. Computer chip demand keeps rising, but the machines manufacturing chips are extremely expensive. The merger would give the combined entity a quarter of the market, strengthening its negotiating position against major customers (Intel, Samsung, Taiwan Semiconductor). The objective was acquiring scale and cutting costs, thereby resisting downward price pressure. The savings would fund long-term planning and hugely expensive research and development.

Tax optimization represents another competitive benefit from geographic collaboration. Firms may select merger partners located in countries with lower overall taxation. The merged entity can then relocate headquarters to the lower-tax jurisdiction, legally reducing tax bills. While politically controversial, these savings can be reinvested to improve competitive position. Companies operating legally and ethically will naturally seek to minimize taxation where possible.