18. Mergers, takeovers & acquisitions. (Environment, 2.6)

Companies are bought and sold on a daily basis. There are some types of sale agreements:

mergers - two companies come together, blending their assets, staff, facilities and so on to form a new firm.

Takeover – acquisition of controlling interest in firm. So, the purchasing company owns all of the target company’s assets and takeover its management.

The acquisition happens when a company offers to buy all the shares of the company with cash, with stock or a combination of the two. This is called a takeover bid.

If a Board of Directors of target company agrees to a takeover, it becomes a friendly takeover. Takeover which is carried out against wishes of the board is a hostile takeover.

Companies have various ways of defending themselves against a hostile bid. For instance, they can try to find another company that they preferred to be bought by.

Sometimes the companies choose issuing new shares at a big discount, which reduces the holding of the company attempting the takeover, and makes the takeover much more costly.

19. Advantages and disadvantages of small businesses. (Environment, 2.5.3)

Small businesses are managed by their owners and have a relatively small share of the market. Small manufacturing firms employ fewer than 200 people. Large firms are typically incorporated (limited companies), where ownership and management are separated. Large companies that exploit economies of scale enjoy a cost advantage over small firms in the same industry. In particular, large firms have access to the following technical and financial economies. Technical economies occur in the production of a good.

As the firm expands, there is greater scope for specialization and the division of labour. Large factories can employ specialist skilled workers to do the same job all day with no time lost in changing tools or doing unfamiliar tasks. The indivisibility of certain types of capital means that many production processes are impossible on a small scale. Large firms can benefit by linking production processes that would otherwise be carried out in separate factories.

Financial economies allow large firms to raise capital on advantageous terms. Large firms are considered to be reliable and are therefore charged a low rate of interest and have access to capital markets such as the stock exchange. Selling shares is a relatively inexpensive method of raising large amounts of capital.

Despite the cost advantage to large firms of production in bulk, small businesses find a niche by providing specialized products for small markets (e.g. hairdressing cannot easily achieve a large scale of operation, and tends to be dominated by small firms.) An irregular or limited demand for a product prevents mass production. Small firms have the required flexibility and low overheads. Often small firms survive by accepting subcontracting work from large companies. In printing, where fixed costs form only a small percentage of total costs, low set-up costs encourage the development of small firms. Where the market for a good is restricted and highly localized, small firms survive, e.g.village shops.

In an attempt to stimulate the supply side of the economy the government has introduced a number of schemes to help small firms to survive: the Enterprise Allowance is a weekly sum paid to the unemployed while they are setting up their own businesses; the Business Expansion Scheme provides relief against income tax to investors in unquoted companies.