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101 Concepts for the Level II Exam

Level II Concept 40: Mergers and industry life cycles


Industry Life Cycle Stage Industry Description Motives for Merger Types of Mergers
Pioneering development Industry exhibits substantial development costs and has low, but slowly increasing, sales growth. Younger, smaller companies may sell themselves to larger companies in mature or declining industries looking for ways to enter into a new growth industry.

Young companies may look to merge with companies that allow them to pool management and capital resources.

Conglomerate

Horizontal

Rapid accelerating growth Industry exhibits high profit margins caused by few participants in the market. Explosive growth in sales may require large capital requirements to expand existing capacity. Conglomerate

Horizontal

Mature growth Industry experiences a drop in the entry of new competitors, but growth potential remains. Mergers may be undertaken to achieve economies of scale, savings, and operational efficiencies. Horizontal

Vertical

Stabilization and market maturity Industry faces increasing competition and capacity constraints. Mergers may be undertaken to achieve economies of scale in research, production, and marketing to match the low cost and price performance of other companies (domestic and foreign).

Large companies may acquire smaller companies to improve management and provide a broader financial base.

Horizontal
Deceleration of growth and decline Industry faces overcapacity and eroding profit margins. Horizontal mergers may be undertaken to ensure survival.

Vertical mergers may be carried out to increase efficiency and profit margins.

Companies in related industries may merge to exploit synergy.

Companies in this industry may acquire companies in young industries.

Horizontal

Vertical

Conglomerate