Mergers and Industry Life Cycle

Mergers and Industry Life Cycle

As an industry proceeds through its life cycle, the type of merger and the motivation behind the merger will vary.

$$\small{\begin{array}{l|l|l|l} \textbf{Industry Life Cycle Stage} & \textbf{Industry Characteristics} & \textbf{Merger Motivations} & \textbf{Types of Mergers}\\ \hline\textbf{Pioneer/development} & {\text{Slowly increasing sales}\\ \text{growth}} & \text{Entry into new markets} & \text{Conglomerate} \\ 
& \text{Large development costs} & {\text{Pooling management}\\ \text{and capital resources}} & \text{Horizontal}\\  {}& \text{Low profit margins} & & \\ \hline\textbf{Rapid growth} & {\text{High-profit margin}\\ \text{companies}} & \text{Expand capacity} & \text{Conglomerate} \\ {}& \text{Low competition} & \text{Gain access to capital} & \text{Horizontal} \\  {}& {\text{Accelerating sales and}\\ \text{earnings}} & {} & {}\\ \hline\textbf{Mature growth} & {\text{Decrease in the entry of}\\ \text{new competition}} & {\text{Synergy in economies}\\ \text{of scale}} & \text{Horizontal} \\  & \text{Growth potential remains} & {\text{Improved operational}\\ \text{efficiency}} & \text{Vertical}\\ \hline{\textbf{Stabilization and}\\ \textbf{market maturity}} & \text{Increased competition} & \text{Synergy} & \text{Horizontal} \\   {}& \text{Increased capacity constraints} & {\text{To acquire new}\\ \text{capabilities and resources}} & \\ \hline{\textbf{Deceleration of growth}\\ \textbf{and decline}} & \text{Overcapacity} & \text{Ensure survival} & \text{Horizontal}\\   {}& \text{Eroding profit margins} & \text{Exploit synergy} & \text{Vertical}\\   {}& {} & \text{Increase profitability} & \text{conglomerate}\\  \end{array}}$$

Question

A company in an industry facing eroded profit margins and overcapacity is likely to have a horizontal merger. Which one is the most likely motivation for the horizontal merger?

  1. To ensure the survival of the company.
  2. To increase efficiency and profit margins.
  3. To get the lower cost of capital.

Solution

The correct answer is A.

Horizontal mergers are undertaken to ensure survival.

B is incorrect.  This is a motivation for undertaking a vertical merger.

C is incorrect. This is not a motivation to undertaking a merger.

Reading 18: Mergers and Acquisition

LOS 18 (d) Explain, based on industry life cycles, the relation between merger motivations and types of mergers.

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