Thank you for staying with me. We're now going to put ourselves in the position of powerful buying company who is about to acquire a weaker company. Why do they do this? What's the reason for acquiring or for merging, if you put yourself in those shoes? Well, you have different goals for why you want to pursue mergers and why you want to pursue acquisitions. And of course, these also differ for different groups. And we're going to look, in this video, at the partners and buyers and in the next video we're going to look at the targets. What's the point for them in being taken over? So the goal for partners and buyers will group by horizontal mergers, vertical mergers and conglomerate mergers. And let's start with the horizontal ones. We can identify for example some competition related advantages. First of all, if you take out a company from your market, you lower competition. You take out one competitor, if you merge with him or if you take over that company. You reduce your risk of becoming a target if you grow yourself. It's going to be harder to take over a larger company, so the risk of becoming a target decreases of course. And you gain bargaining power. Gaining bargaining power, of course, is important if you want to bargain with your competitors, but it's even more important if you bargain with your suppliers or with your buyers. So, gaining bargaining power is an important reason for horizontal mergers. There may be production related advantages. Production advantages simply may mean that you are able to implement a better production technology as a consequence of that horizontal merger. You may be able to realize economies of scale and scope simply because you have a larger volume that you can use to spread fixed costs, that you can use to implement new technologies and so on and you may secure access to new technologies. So, let's assume that one ofyour competitors, let's say a smaller competitor, has just developed a new technology. This might simply mean that acquiring that firm gives you access to that new technology, which you otherwise, if it's patented, if it's protected, if it's secret, you otherwise would not have been able to do. There may be market-related advantages as well. You can get access to new products, right, so another firm, or a firm much as in the production example of a new technology, may produce a product that you are not capable of producing, so you enter new product markets, You may be able to access new markets and new consumer groups. So, if one of your competitors has a particular relationship to a special consumer market, to a special market segment, then buying that company gives you access to that same market segment. And finally, you may simply acquire a brand name. That's something we see a lot in the automotive industry. So in the automotive industry, it's often cheaper just to buy a brand that may have special appeal for special markets or for special geographical markets, for consumer groups and so on, rather than develop that brand by yourself. So, acquiring a brand name or an image is another important reason for horizontal mergers. Moving on to vertical mergers, this is about acquiring one of your suppliers or one of your buyers. Could be a distributor, for example. So one of the consequences might simply be that you reduce your transaction costs. If it's been complicated dealing with your supplier, if you had to renegotiate, negotiate and so on, just buying that company might reduce transaction costs by a significant amount. If it's part of your own company it's much easier to deal with them. You may gain control over upstream or downstream resources. So, if there's one input that you need specifically to be active in this market, gaining control by purchasing that supplier may be a very advantageous, may be a very profitable thing to do. And finally more or less as a consequence of the previous point, you may raise barriers to entry. If another firm would need the same access to a special supply but they don't get it because you've just acquired that company or because they would have an expensive job on their hands developing that supply on their own, they might decide not to bother entering the market in the first place. Finally, looking at conglomerate mergers. Conglomerate mergers are mergers that don't really have much of an obvious reason. There's no market advantage, there's no production-side advantage, there's no competitive advantage that you can gain out of a conglomerate merger. So, what's the point then? You may simply diversify risk. If one of your businesses is doing badly the other one might do well. That's by nature the idea of a conglomerate merger, that the fortunes of these two lines of businesses are not necessarily closely correlated, so you diversify risks. You may gain control over compliments. And finally, and that's often one of the reasons for mergers being a bad thing, or mergers not being successful, you may increase the power of management, you may build an empire. Right, so managers would rather manage large firms than small firms. There's evidence that the salary of a CEO is closely correlated with the size of a company. So increasing the size of a company may increase the salary of the CEO almost directly. So increasing the management's power, building an empire, is often one of the reasons for conglomerate mergers. So after a short in video quiz, let's now wrap up the reasons for buyers and for partners to merge and to acquire. So overall, there seem to be pretty good reasons to make that company ours, right? But you know what, it is not always bad news if your company gets acquired by a more powerful one. So of course there are hostile takeovers when you really don't want to be taken over, but even if your company is the target, you may also have enough reasons for accepting a deal voluntarily. Let's find out about this in the next video. [BLANK]
