Chapter 3.2 Notes
Growth and Expansion
 How could you get your business to grow?
o Investing in factories, machinery, and new technologies
 This is the obvious way to grow a business yourself
 Toyota just opened a new factory in Japan that will produce 120,000 cars a year
 Benefits – factory is more economical in terms of saving money. It uses more technology
than the other plants they own in terms of new production methods etc., as well as
having a lower ceiling (aided by the new methods) thus reducing heating/cooling costs
o Engaging in a merger
 A combination of two or more businesses to form a single firm
 Sirius and XM
 Disney and Pixar
 Exxon and Mobile
 New York Central Railroad and PRR
 Daimler Benz and Chrysler
 Mattel and The Learning Company
 Sears and Kmart
 Sprint and Nextel
 AOL and Time Warner
 Quaker and Snapple
 Capcom USA and Blue Castle Games
o http://www.fenwickwest.com/docstore/Publications/Corporate/M&A_List.pdf
 Business Combinations
o Reasons to Merge
 Efficiency
 How can businesses merge in order to be more efficient?
o No longer need two presidents, two treasurers, two personnel directors
 What happens to the other guys?
 Forced out
 Given a position in the new company
o Can have more retail outlets or manufacturing capabilities without significantly
increasing managerial costs
 How is this possible? What would this look like?
 Take a look at Exxon and Mobile
o Before the merger, both had successful gas stations and
gas shipping businesses
o 1999 the two companies signed an $81 billion dollar
agreement to merge and form Exxon-Mobile
o Reunited Rockefeller’s Standard Oil of New Jersey
(Exxon) and Standard Oil of New York (Mobile)
 Was originally broken up by the US Supreme
Court in 1911 under Monopoly and Antitrust
legislation – Sherman Anti-Trust Act
 When it was broken up (into 34 companies)
some of the major companies (through other
mergers) became major players in the world oil
Chapter 3.2 Notes
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Growth and Expansion
market themselves (Standard had itself
controlled 91 percent of all oil production)
 Other companies that grew out of Standard are:
Exxon (S.O. New Jersey), Mobile (S.O. New
York), SOHIO (S.O. of Ohio), Amoco (S.O. of
Indiana), Chevron (S.O. California)
o Can standardize its products, get better discounts by making volume purchases,
and make more effective use of its advertising
When two companies merge, one usually gives up its separate legal identity
 Capcom – Japanese based video game developer, created games such as Street Fighter,
Resident Evil, Dead Rising
 Blue Castle Games (Vancouver Canada video game developer) – Dead Rising 2
o Blue Castle Games no longer exists, it is now part of Capcom
 Now does that mean it’s gone, off the face of the planet?
 No, it may still be a developer but it is now Capcom Vancouver
Sometimes the firm that is bought keeps its name for PR purposes
 XM and Sirius create Sirius XM radio
 Sears and Kmart
o Why would they want to do this?
 If it’s already a name brand, people trust it so why mess with it?
o Merger
 Sears found itself failing in the late 90’s losing out to Walmart’s and
Target type stores and High End Department stores – Stuck in the
middle
 Both stores purchased by a very wealthy hedge fund manager
 Decided to merge the stores
 Still downward spiraling
o Why? Focus on soft goods rather than hard goods (ie
clothes and home things instead of Kennmore
appliances etc)
 CEO who merged the two (Eddie Lampart) earned the title
America’s Worst CEO in 2007
 Quaker (oats) and Snapple
o People who drank Snapple new it was Snapple and trusted the label
o What would have happened if they had changed the name to Quaker or
something?
o Merger itself
 1994 – Quaker buys Snapple for $1.7 billion
 Had just bought Gatorade and had made it popular so it thought
it could do the same with the trendy Snapple.
 Wall Street criticized that they had over paid
 Quaker goes full bore on an ad campaign to take it to all grocery
stores etc.
 Failed
Chapter 3.2 Notes
Growth and Expansion
Snapple had become popular marketing to small
companies and trendy stores
o Brand couldn’t hold its own next to Pepsi and Coke’s
similar products
o Quaker sells Snapple for $300 million just 27 months
after buying it
o Quaker CEO and numerous executives lost their
reputations and were fired
Sometimes the name of the new company may reflect the identities of both companies
 Penn Central Railroad
o Pennsylvania Railroad and New York Central Railroad
 1968
 Were two of the bigger railroads in northeast and were competitors
 Were desperately trying to avoid the trend towards car and air travel
 Railroads were losing customers anyway and couldn’t keep up with the
costs of employees, government regulations
 Had to do some major cost cutting
 Merged to solve the problem despite being rivals
 Failed merger
 Inevitable drop in profits
 Poor management
 Culture clash between the two railroads
Sometimes firms merge in order to catch up with, or eliminate, their rivals
Sometimes firms merge to lose its corporate identity
 Book example
o Value Jet
 1990’s air carrier, focused on low cost, East Coast, etc.
 Value Jet 592
 Miami to Atlanta in May 1996
 McDonnell Douglass DC-9, crashed into the Everglades shortly
after takeoff killing 110 on board
o Older plane (27 years old, previously owned by Delta)
o DC-9 known to have issues (117 crashes, 2000 +
fatalities)
o Fire in the cabin was ruled the reason the plane crashed
 Chemical oxygen containers for transport
caused the fire (were listed as empty when they
weren’t)
 Crash Raised fears about safety of Value Jet
o AirWays
 Regional air carrier, smaller company
o Merger
 The two merged into one company, AirTran Holdings, with Value Jet
being the larger company, but due to the fears – Value Jet decided to
take the new company’s name in a way to get rid of theirs
o
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Chapter 3.2 Notes
Growth and Expansion
o Horizontal Merger
 Takes place when two or more firms that produce the same kind of product to join forces
 Example: Two Banks Merge
 XM and Sirius to Sirius XM
 NY Central and PRR to Penn Central
 Sears and Kmart
 NYSE and Deutsche-Boerse
o Very Recent – Tuesday
o Would be the world’s largest trading group
o Must get regulatory and shareholder approval first
 What type of stock would that make this then? – Common!
o Deal looks to be 60% DB and 40% NYSE
o Expect to close deal by the end of the year
o Vertical Merger
 Firms involved in different stages of manufacturing or marketing come together
 Companies believe that it is important to protect themselves against the loss of suppliers
 Time Warner and Turner Corporation
o 1990
 Time Warner at the time was a major communications corporation at
the time and controlled subsidies like Atari. It did not have a foot hold in
cable though. Had a foot hold in Hollywood etc. Made movies but
wanted to get into the TV business
 Turner Broadcasting corporation – started by Ted Turner – ran channels
like TBS, CNN, and others
 TW bought Turner
 Why would they do this?
o Easier than starting their own company and making
their own foray into the industry
o Turner was already established
 Everything has a price
 Conglomerates
o http://www.youtube.com/watch?v=ZQhB_RFPVQ8
 Rocko talks about fighting Conglomo – the local conglomerate that owns everything and is
polluting the rivers and drinking water. They are sent to fight the company by a giant rotting
compost heap.
 What can we take from this clip?
o Conglomo “Owns Everything” what does this mean?
o Firm that has at least four businesses, each making unrelated products, none of which is responsible for
a majority of its sales
o Diversification is one of the main reasons for conglomerate mergers
 Firms believe that if they do not put all of their eggs in one basket, their overall sales will be
protected
 Examples?
o Is Frito Lay a Conglomerate?
 They have a bunch of different brands
Chapter 3.2 Notes
o

Growth and Expansion
 Fritos, Sun Chips, Cracker Jacks, Tostitos, Doritos
 Those are four different companies right?
 Wrong!
Tyco International
 Their Google tagline says : Multi-national group of manufacturing and
services providing companies, active in healthcare, flow control,
security, telecommunications and electronics
 Right there you can see evidence of many different, unrelated industries
 Incorporated in Switzerland with US HQ in New Jersey
 Made up of 5 major segments: ADT Worldwide, Fire Protection
Services, Safety Products, Flow Control and Electrical and Metal
Products.
 Buying Brinks International (Broadview Security)
 Remember back to the 90’s
 One thing I always wanted was a Tyco RC car.
 Has nothing to do with Security Systems or Health Industry
machines, etc
 At the same time they were making RC cars they were also
producing deep see fiber optics and laying them
o Some of the many products made by Tyco include:
o Fire alarm systems (Simplex)
o Fire-fighting hardware and Fire-fighting foam
concentrates (Ansul, Skum, Total Walther, and Sabo)
o Circuit protection devices
o Engineering services
o Fire sprinklers (SimplexGrinnell, Wormald)
o Security systems (ADT, DSC)
o Valves and controls
o Pressure-relief valves for nuclear power generation
o Safety products (including industrial-site safety &
personal protective equipment (PPE))
o EAS (electronic article surveillance) & RFID (radio
frequency identification) products (Sensormatic)
o CCTV/Access Control Equipment (American Dynamics,
Kantech, Software House, CEM Systems)
o Touchscreen displays (ELO touch displays)
 Related? I think not.
Multinationals
o Corporation that has manufacturing or service operations in a number of different countries
o Essentially a citizen of several companies at a same time
 As a result, are subject to laws of and is likely to pay taxes in each country where it has
operations
 Again Tyco is a good example or Nike
 Nike
 Employs more than 30,000 People Worldwide
Chapter 3.2 Notes
Growth and Expansion


Owned by Phil Knight
o What else is Phil Knight known for guys?
 Oregon Ducks / Stanford – Went to school at both and donated money
 Ugly Uniforms and Ugly Basketball court thanks to him!
 Owns
o Nike Golf
o Nike Pro
o Nike+
o Air Jordan
o Nike Skateboarding
 Subsidiaries including Cole Haan, Hurley International, Umbro and
Converse.
 Bauer Hockey
 Worldwide Headquarters in Beaverton, Oregon
 Manufacturing
o 700+ Shops around the world
o Offices in 45 countries outside the United States
o Most of the factories are located in Asia
 Indonesia, China, Taiwan, India, Thailand, Vietnam, Pakistan,
Philippines, and Malaysia.
o Important because they have the ability to move resources, goods, services, and financial capital across
capital borders
o May also be conglomerates if they make a number of unrelated products, but are called a multinational
if they conduct their operations in several different countries
o Economic Strengths
 Help spread new technology worldwide
 Generate new jobs in areas where jobs are needed
 Produce tax revenues for the host country
o Do you think Nike Does these things?
o Economic Weaknesses
 May influence the political life of a host nation
 Exploit the economy of the host nation by paying low wages to workers
 Exporting scarce natural resources
 Adversely interfering with the development of local businesses
 Take jobs away from home
o Do you think Nike Does these things
Watch Michael Moore Clip and Discuss