Reasons for global mergers, takeovers and joint ventures

Definitions

• Merger: two businesses agree to combine into one.
• Takeover (acquisition): one business buys a controlling interest (more than 50% of the shares) in another.
• Joint venture: two or more businesses create a new, jointly owned business for a specific project or market, sharing costs, risks and profits while staying separate otherwise.

The ten reasons in the specification

1. Spreading risk and economies of scale: operating in more markets and producing more.

2. Entering new markets or trade blocs: an acquired local firm is already inside, avoiding tariffs.

3. Acquiring national or international brand names and patents: instant recognition and technology.

4. Securing resources and supplies: buying a supplier (backward vertical integration).

5. Maintaining or increasing global competitiveness: matching rivals' scale or capabilities.

6. Reducing competition: buying a rival raises market share and pricing power (but attracts competition regulators).

7. Making use of local knowledge: local partners understand customers, culture, law and distribution.

8. Government or legal requirements: some countries require foreign firms to have a local partner or limit foreign ownership.

9. Accessing supply chains and distribution networks: established links to retailers and suppliers.

10. Sharing costs and risks: especially in joint ventures for expensive projects such as new technology, mining or energy.

Drawbacks and evaluation

Mergers and takeovers can fail: culture clashes between national and corporate cultures, paying too much (a takeover premium), diseconomies of scale, difficulty integrating systems, loss of key staff, and regulatory investigation. Joint ventures can suffer disagreements over control and profit sharing.

The June 2024 series paper asked candidates to assess the advantages of inorganic growth for a Finnish dairy business that had taken over a wholesaler and formed a joint venture with an energy company. The mark scheme expected balance from culture clashes, cost and regulatory attention.

Worked example

A company buys 60% of a foreign firm's 50 million shares at $4.20 each. Calculate the cost of the stake.

1. Shares bought = 0.6 x 50 m = 30 m
2. 30 m x $4.20 = $126 m

Answer: $126 m for a controlling stake.

Check yourself

1. Which is the best definition of a joint venture?
   • One firm buys more than half of another's shares
   • Two firms combine completely into one
   • A firm contracts out production to a supplier
   • Two or more firms set up a new business that they own jointly
   Show answer

   Two or more firms set up a new business that they own jointly. A joint venture is a separate, jointly owned business.

2. A firm's shares trade at $8.00. A foreign bidder offers $10.40 per share. What is the takeover premium as a percentage?
   Show answer

   30 %. 2.40 / 8.00 x 100 = 30%.

3. A business buys 51% of a foreign company with 80 million shares at $2.50 per share. Calculate the cost.
   Show answer

   $102000000. 0.51 x 80,000,000 x 2.50 = $102,000,000.

4. Some countries limit foreign ownership in certain industries. Which method of entry does this most encourage?
   • A joint venture with a local partner
   • Exporting from the home country only
   • A 100% takeover of a local firm
   • Building a wholly owned factory
   Show answer

   A joint venture with a local partner. Where full foreign ownership is not allowed, a local partner is needed.

5. Explain why a business might take over a foreign company to acquire its brand name.
   Show answer

   An established brand already has customer recognition and loyalty in that market, so the business gains instant sales and market share without the time and cost of building a new brand.. Buying a brand buys its customer base and saves years of marketing.

6. Explain why a culture clash can reduce the benefits of an international takeover.
   Show answer

   Managers and staff from different national and corporate cultures may have different ways of working and making decisions, causing conflict, low motivation and staff leaving, so the expected cost savings and synergies are not achieved.. Integration problems often wipe out the hoped-for gains.

7. A chocolate maker buys a cocoa plantation company abroad. The main reason is most likely to
   • acquire a famous consumer brand
   • reduce competition from other chocolate makers
   • secure supplies of a key raw material
   • access a new trading bloc's consumers
   Show answer

   secure supplies of a key raw material. Buying a supplier secures resources (backward vertical integration).

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Level in Business specification (first teaching 2018)
• Pearson Edexcel IAL Business WBS14/01 mark scheme, June 2024 series (published August 2024)

Last updated 8 November 2026. Spotted a mistake? Tell us.