4.2.4 Reasons for Global Mergers & Joint Ventures

Global Mergers (GM)

🔗 An agreement between two businesses from different countries to permanently join together.

Pros and Cons of GM

• A greater amount of resources and production means -> Able to operate on a larger scale of output -> Economies of scale -> More cost-competitive
• Allows a business to diversify by being based in multiple countries -> Increases number of revenue streams -> Increases resilience to economic shocks and strengthens brand by attracting different customer demographics
• Eliminates competition -> Able to increase market share and therefore both customer base and brand strength
• Acquire two brand images -> Increase customer base from both previous brands -> Demand more price inelastic -> Able to charge higher prices due to brand loyalty and customer retention
• Large mergers may be regulated and assessed by regulatory bodies (E.G CMA in the UK) -> Slow process of deal going through -> Loss of competitive advantage during the time due to diverted attention -> Opportunity cost
• Clash of corporate cultures -> Lack of synergy between two workforces now working as one -> Disruptive to production and potentially demotivating for employees -> Fall in productivity and efficiency -> Less cost-competitive

Joint Venture (JV)

🔗 An agreement to work together on a project for a specific period of time.

Pros and Cons of Joint Ventures

• Benefit from the expertise of both workforces -> Enables high-quality products to be produced with specialisation in different aspects -> Able to command a high price -> Higher profit margins and increased customer retention
• Allows a business to diversify its product portfolio by entering new markets -> Increases number of revenue streams -> Increases resilience to economic shocks and strengthens brand by attracting different customer demographics
• Shared risk -> Less financial and time strain on business -> Able to allocate resources elsewhere and not neglect existing products/service lines
• Both parties will have their own interests at heart which may come into conflict -> Arguments slow down decision-making and disrupt production -> Loss of time and potentially higher costs incurred from correcting mistakes -> Detrimental to operations and competitiveness
• There may be an imbalance in levels of expertise investment or assets brought in -> Other aspects of the project neglected -> Customer satisfaction not maximised -> Loss of brand strength and reputation

Other Evaluation Points

• Stakeholder impact and their feeling on involvement/value in GM or JV -> Impacts motivation of workers, satisfaction of customers and happiness of shareholders
• Organic growth may slow down in the short term -> Neglect of other aspects of business and its own activities due to the process of external growth -> May improve in the long term though
• Regulatory bodies only have authority within their domestic boundaries -> Cross-jurisdiction issues with global mergers due to differing regulations in different countries

Methods of Business Growth

• Horizontal integration – Merging/taking over a fellow business (E.G Asda and Sainsbury's in talks of merger).
• Backwards vertical integration – Buying a supply chain business (E.G Sainsbury's buying a farm).
• Forward vertical integration – Being able to sell products through further distribution channels (E.G Primark moving online).
• Lateral integration – Selling your products in similar markets (E.G BT buying EE).
• Conglomerate integration – A business who are in diverse markets (E.G Virgin train, Virgin Media, Virgin Active). 🔗 Conglomerate – A large number of diversified businesses within a larger corporation (E.G Tata Group)