Vertical and Horizontal Mergers as Acquisition Strategies

This document discusses the benefits and drawbacks of vertical and horizontal mergers as acquisition strategies. It explains the concept of vertical integration and how it can lead to cost savings and improved market reach. It also explores the advantages of horizontal mergers in gaining competitive advantages. Additionally, the document outlines and discusses the alternatives to hostile takeovers and the tactics companies can employ to defend against them.

Mergers and Acquisitions

Contents
Question 2........................................................................................................................................3
Critically assess Vertical mergers and Horizontal mergers as acquisition strategies:............3
Question 4........................................................................................................................................7
Outline and discuss the alternatives to hostile takeovers:......................................................7
REFERENCES..............................................................................................................................11

Question 2
Critically assess Vertical mergers and Horizontal mergers as acquisition strategies:
Vertical Mergers: A vertical merger implies to form of merger wherein two or more firms
performing under separate supply chain operations for common goods or services. One of two
businesses participating under vertical integration/merger has a varying products or services but
is at distinct phases of the manufacturing process. Although, both firms are compelled for the
processing of finished products. Vertical integration/merger is related concept whereby an
organisation applies its activities to other stages of supply chain. Conversely, this could be
managed directly and therefore does not necessitate a merger between firms (Xie, Reddy and
Liang, 2017).
The synergies may involve structural synergies, that can lead to changes in the working
procedures of the two firms, such as retailer and the manufacturer. The deal can also extend its
market by encouraging manufacturer to sell tyres to rival automakers – thereby raising revenues
(Bonaime, Gulen and Ion, 2018). Financial synergies that may require exposure to credits or
funding by one of firms may be realised. For instance, a retailer may have debts on the balance
sheet contributing to restricted access by a financial institution to credit facilities.
A prominent vertical integration instance was 1996 merger between Time Warner a large
cable provider, and Turner Organization, a major broadcasting organization famous for CNN,
the TNT, Cartoon Network including TBS networks. The merger among Time Warner &
the AT&T (T: NYSE) was completed in year 2018, although not without intensive scrutiny.
Since about February 2019, when announced by Associated Press, Federal Court of Appeal
approved AT&T's acquisition of the Time Warner, denying Trump administration's argument
that around $81 billion transaction will hurt customers and limit competition
in Television industry. As per financial specifics of the merger presented on AT&T's homepage,
the merged company will generate improved financial synergy effects of around $2.5 billion.
Costs synergies of around $1.5 billions and sales synergies of $1 billions are anticipated by end
of 3 years after the completion of this deal (Salop, 2017).
One apparent advantage is that in vertical mergers enable companies to lower costs
because they already dominate supply chain. The willingness to lower costs gives companies a
massive leg over rivals. Independence from vendors often offers an incentive to deliver better

quality goods while reducing the costs involved with depending on third vendors. Vertical
mergers can favour businesses by growing their understanding of their brands and their brand
recognition (Greaney and Ross, 2016).
Horizontal mergers: A horizontal merger is kind of mergers that happen between
companies existing in same market. This form of merger within businesses is mostly the result of
bigger corporations aiming to build more productive economies of operation. Alternatively, a
vertical integration happens as companies from varying areas of supplying chain are merged in
order to render the manufacturing processes more productive and cost-effective. Horizontal
mergers could even help a corporation to gain competitive advantages/benefits. For instance, if
one corporation offers goods identical to another, the cumulative profits of horizontal merger
would offer the merged corporation a larger market share and position. (Stöhr and Budzinski,
2020).
This strategy is employed by an organisation that wants expansion through acquisitions.
Mostly mergers actually occur in highly fragmented markets where fewer companies operate and
synergies remain advantageous. Mostly on long term, they are allowed to expand their sector
share thereby lower their operating expenses. In addition, they will sell their clients a broader
variety of goods without needing to spend in increased resources. A possible merger among
Pepsi & the Coca-Cola will be one of century's mergers. Each firms operate in same business and
the merger will create a different, bigger corporation with a greater sector share. Moreover,
considering that the two companies have very close activities, horizontal integration would
enable them to reduce their expenditures. Although if one corporation has 35 per cent of market
while other has 15 per cent of the industry, new firm would have 50 per cent of the sector
(Rozen-Bakher, 2018).
The key goal of this strategy is to maximize selling by providing an additional array of
items to their present customers. Companies don't have to spend time or funds in creating their
own latest products. Horizontal mergers will also enable them to reduce the possibility of
consolidation in market. Horizontally and vertically mergers have distinct goals and will help the
corporation meet specific growth targets. If company want to maximize their sales or extend it's
product line, browse for possibilities for horizontal merger. Here that the prospective enterprise
would provide services and items close to their own, however with added lines

that company would prefer to provide or that run in a geographical region that is actually out
of their control (Salop, 2020).
Question 4
Outline and discuss the alternatives to hostile takeovers:
Hostile takeover arises whenever the leadership or executive board of target company
doesn't authorise the acquisition. In the absence of approval and support from such decision-
makers, acquirer heads straight to the owners of target business to approve the takeover. Mergers
and acquisitions represent typical strategies for firms who wish to increase their activities,
acquire new capabilities and capital, or eliminate competitiveness.
Although the original plan could be adverse to the targeted business, hostile takeovers, as
per Financial Sector Regulatory Body, have the ability to raise share prices with both acquirers
as well as targets.
The drawbacks of takeover include the possibility of declining stocks and the valuation of
the business and the increased costs of forced sales. Heading hostile takeover will also
have detrimental effect on the portrait of the company (Tachmatzidi, 2019).
In this regard following are certain key alternatives to a hostile takeover, as discussed
here below:
Poison pill
Perhaps the most popular defence against a hostile takeover, poison pill technique seeks to
render takeovers costly sufficient to dissuade buyers. It is formally recognised as shareholder
rights plan that encourages existing owners to buy new securities at discounted price.
Pros: poison pill approach could deter potential aggressive buyers and possible
takeovers or give target organization more attractive terms for purchase.
Cons: This strategy is difficult to dissuade aggressive or experienced acquirers and therefore can
trigger substantial harm to the business if improperly applied.
Tender Offer
An offering to buy shall be made where the seller agrees to purchase securities
at premium price. For instance, if current selling price of corporation 's stock is $10, seller will
bid a buying rate of $15, that is 50 percent increase.

Pros: Buyers do not need to formally purchase shares unless a certain number is tendered, that
reduces significant initial cash expenditures and avoids liquidation of stock alternatives in the
scenario of failure.
Cons: While tenders are successful, they can be expensive and time-taking for investors.
Pac-Man Defence
Target businesses can opt to prevent hostile takeovers by purchasing shares in prospective
purchaser's business, thus seeking for take-over their own shares. As counter tactic, Pac-Man
defence operates well when businesses are of same size (Ray, 2020).
Pros: To turn tables places the original customer in an adverse position.
Cons: This approach needs considerable capital and is highly expensive for the company and its
owners.
Employee stock-ownership scheme
Another alternative tactic is the development of a tax-qualified package that allows employees
greater involvement in the business. The theory is that staff are much more inclined to cast vote
for the management than to help a hostile purchaser.
Pros: This approach can improve employee morale and satisfaction.
Cons: Hostile investors will also reassure investors in proxy war.
Proxy fight
Often recognized as proxy voting or proxy contest, such tactic entails persuading investors to
support selling. While doing so, prospective bidder will then persuade those people to vote
towards management and executive director replacements that are more inclined to support the
takeover.
Pros: Forcing out dissenting members of board or management committee allows the acquisition
more possible and helps acquirer to set up new representatives to facilitate the transition of
control.
Cons: The rallying of shareholder assurance as well as support could be challenging. Including,
proxy solicitors will contest votes that prolong the timetable.
Differential voting rights
This pre-emptive alternative approach entails the creation of securities with unequal voting
rights, which ensures that owners have less rights to vote than management. If the owners have
to buy more shares in order to cast their votes, the takeover would prove more expensive.

Pros: This strategy allows corporate staff the most important control on the outcome of the
referendum.
Cons: Reduced voting rights can upset stakeholders.
Golden parachute
In the case of merger or takeover, golden parachute deal assures significant rewards to the main
executives of target company who have been let out as a consequence of the transaction. These
contracts will often dissuade aggressive bidders, because at very least have management
protection.
Pros: Businesses should mix this strategy with other tactics to further deter hostile purchasers.
Cons: It is a divisive tactic that may damage the credibility of the organisation.
Crown jewel
Employing crown jewels strategy involves selling most valuable properties of the business,
reducing its appeal to unwelcome customers. This is a dangerous tactic, since it reduces the value
of the business. Even so, many businesses would pursue friendly third-party firm, also alluded to
as white knight, to acquire their properties (Wolangiewicz, 2020).
Pros: The targeted business is becoming a less appealing takeover.
Cons: It's a higher-risk security. Without even white knight, the organisation will sacrifice its
most precious money.

REFERENCES
Books and Journals:
Xie, E., Reddy, K.S. and Liang, J., 2017. Country-specific determinants of cross-border mergers
and acquisitions: A comprehensive review and future research directions. Journal of
World Business, 52(2), pp.127-183.
Bonaime, A., Gulen, H. and Ion, M., 2018. Does policy uncertainty affect mergers and
acquisitions?. Journal of Financial Economics, 129(3), pp.531-558.
Salop, S.C., 2017. Invigorating vertical merger enforcement. Yale LJ, 127, p.1962.
Greaney, T.L. and Ross, D., 2016. Navigating through the Fog of Vertical Merger Law: A Guide
to Counselling Hospital-Physical Consolidation under the Clayton Act. Wash. L.
Rev., 91, p.199..
Stöhr, A. and Budzinski, O., 2020. Happily ever after?: Vertical and horizontal mergers in the
US media industry. World Competition, 43(1).
Rozen-Bakher, Z., 2018. Comparison of merger and acquisition (M&A) success in horizontal,
vertical and conglomerate M&As: industry sector vs. services sector. The Service
Industries Journal, 38(7-8), pp.492-518.
Salop, S.C., 2020. The 2020 Vertical Merger Guidelines: A Suggested Revision. Available at
SSRN.
Tachmatzidi, I., 2019. Comparative analysis of takeover defenses in strong and weak economies:
the paradigm of the UK and Greece.
Ray, K.G., 2020. Hostile Takeover: Who Benefits from Virtual Business Combination?.
In Advances in Mergers and Acquisitions. Emerald Publishing Limited.
Wolangiewicz, M.J., 2020. The Scope of Defense Against Hostile Takeovers in Poland: Another
Argument for the Triviality Thesis. European Review of Private Law, 28(5).