When it comes to a business that is looking to merge or takeover another business, there are reasons they are doing this. Using an abbreviation of Merger, we can see seven reasons why businesses would want to merge with another business or takeover it.
Reconfigure the 5 Forces
- Threat of New Entrants – Low – Coca Cola took over Innocent because they saw them as a threat. They were a new entry into the soft drinks market gaining good market share early on.
- Threat of Substitutes – Low – An example of this is with a petrol company taking over and buying out an electric car company. They are removing the threat of new entrants providing a better chance of profit for the mother business.
- Bargaining Power of Suppliers – Low – You will want your suppliers to have less power over prices of your resources that you purchase from them. This is why many companies perform backward vertical integration. Taking over the suppliers means they can reduce the bargaining power of suppliers to a minimum increasing profit margins. An example is with Apple who are trying to integrate backwards and buy out a chip company called ARM.
- Bargaining Power of Customers – Low – A market where the customers have low bargaining power if with fuel. They cannot look for alternatives and have to put up with the prices of the fuel as they are: even if they increase. Customers have high bargaining power when there are many sellers in the market and not many customers. Therefore, a business could merge/takeover other businesses in the same market to reduce the amount of competitors reducing the customer’s bargaining power.
- Intensity of Competition – Low – If there are more competitors in the market, the chances are that each company will have to gain dominance through being price competitive. If not, the business may have to look for a USP of some sort being a normal USP (like Apple’s has with it’s ‘wow’ factor) or an ethical USP like Marks and Spencer have with their corporate social responsibility strategy, ‘Plan B’.