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Ex.1 Read the text below, and underlines the answers to the first three questions above.

Successful companies have to find ways of using their profits. Sometimes they develop new products or services, perhaps to diversify and enter new markets, but sometimes it is easier to take over other companies with existing products and customers. Acquiring a competitor in the same field of activity (horizontal integration) gives a company a larger market share and reduces competition. If a company is too big to buy, it may be possible to merge with it: to combine the two companies to form a single new one. Companies can also acquire businesses involved in other parts of their supply chain (vertical integration), generally to achieve cost savings. Backward integration involves acquiring suppliers of raw materials or components; forward integration is buying distributors or retail outlets.

The way to acquire part-ownership of a company is a raid, which simply involves buying as many of a company's stocks as possible on the stock market. Because this increases demand, the stock price will immediately rise. A raid is unlikely to result in the acquisition of a controlling interest. More often, a company will launch a takeover bid: a public offer to a company's stockholders to buy their stocks at a certain price (above the current market price) during a limited period of time. If all the stockholders accept the bid, the buyer has to purchase 100% of the company's stocks, even though they only need 50% plus one (or in practice, perhaps much less) to gain control of a company. If the board of directors of a company that is subject to a bid agrees to a takeover, it is a friendly bid (and if the stockholders sell, it becomes a friendly takeover); if the company does not want to be taken over, it is a hostile bid (or hostile takeover).

Companies are frequently encouraged to take over other companies by investment banks, which generally have large mergers and acquisitions departments with lots of researchers analyzing the value of listed companies. Banks also advise companies involved in mergers and takeovers, earning high fees in the process.

Takeovers can lead to the formation of large conglomerates, which in turn can lead to a contrary phenomenon: leveraged buyouts or LBOs. Buyouts occur when financiers (corporate raiders or private equity funds) consider that a conglomerate resulting from a series of takeovers has not achieved synergy but instead has become inefficient, and so is undervalued on the stock market. In other words, the conglomerate's market capitalization is lower than the value of its total assets, including land, buildings, pension funds, etc. Raiders can borrow money, usually by issuing bonds (leveraged means largely financed by borrowed capital), and buy the companies. They then either sell off the subsidiaries, or close them and sell the assets, which is known as asset-stripping. The raiders then pay back the bonds while making a large profit. Until the law was changed, raiders were also able to buy companies and take possession of their pension funds.

Although raiders had a very bad reputation in the 1980s - a famous book about a huge LBO was called Barbarians at the Gate - private equity funds are more respected today for buying companies and making them more efficient prior to reselling them.


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