- 15 Marks
Question
One of the means by which companies expand is through mergers and acquisitions. However, there are other means of expansion aside from these methods.
Inkline Plc, one of your client companies, is intending to expand its business by means of a merger or acquisition. Your firm of management consultants has been asked to advise the management of the company on what steps to take while considering the merger and acquisition methods and whether it should go ahead with the expansion program or otherwise.
Required:
(a) Advise your client on:
(i) Four benefits derivable from its proposed means of expansion. (4 Marks)
(ii) Three probable demerits of employing its proposed method of expansion. (3 Marks)
(b) State two alternatives to merger and acquisition in your report. (2 Marks)
(c) Where the company decides to go ahead with either of these methods, indicate three criteria the company may consider in choosing its target company. (6 Marks)
Answer
(a) Advice on Benefits and Demerits of Proposed Expansion through Merger and Acquisition
(i) Benefits of Expansion (4 Marks)
- Faster Growth: Achieves growth at a pace faster than internal development.
- New Opportunities: Access to new products, markets, and customers from the acquired company.
- Market Entry: Simplifies entry into new markets with high entry barriers.
- Eliminating Competition: Prevents competitors from acquiring the target company.
- Cost Savings: Synergies may reduce costs and increase profitability.
(ii) Demerits of Expansion (3 Marks)
- High Costs: The acquisition bid price may be significantly high, leading to reduced ROI.
- Loss of Ownership: Proportional loss of ownership due to equity financing.
- Cultural Challenges: Merging organizations with different cultures may lead to conflict and employee dissatisfaction.
- Management Difficulties: Structural differences between companies may require time for resolution.
(b) Alternatives to Merger and Acquisition (2 Marks)
- Growth through internal development (organic growth).
- Growth by joint ventures, licensing, or franchising.
(c) Criteria for Choosing a Target Company (6 Marks)
- Strategic Fit: Target aligns with the acquirer’s strategic objectives such as market expansion or entry into new geographies.
- Affordability: Target company size and cost are within financial reach.
- Growth Potential: The target offers significant growth opportunities through synergies.
- Cultural Compatibility: The target has a compatible organizational culture and management style.
- Regulatory Compliance: Ensures adherence to local laws and regulations.
- Financial Stability: The target has a stable financial history and low risk.
- Tags: Acquisitions, Alternatives, Business Expansion, Mergers, Strategic Criteria
- Level: Level 3
- Topic: Mergers and acquisitions
- Uploader: Kofi