W 3: Let's Get Together - Merging In The Balloon Market.

This worksheet looks at the merger of Cameron Balloons and Thunder and Colt balloons. For more information about the work of the accounts department at Cameron Balloons you may want to look at the accounts explanation section .

A printable version of this worksheet is available for filling in answers.

Step 1 - Getting it together

Cameron Balloons merged with Thunder and Colt Balloons in December 1994. Thunder and Colt had two large factories at Oswestry, both of which have since been closed. The company was purchased through the liquidator. At the time the balloon market was suffering from over-capacity. (See the worksheet on over-capacity for more details of the effects of this.)

There are various different ways to describe the integration of two companies:

Horizontal integration is when a company merges with one at the same level of production e.g. a brewery merging with another brewery.

Vertical integration is when a company merges with another company at a different stage of production - forward means a stage ahead of it e.g. a brewery taking over a chain of pubs whereas backward means a stage of production behind it e.g. a brewery taking over a hop farm.

Conglomerate integration is when two apparently unconnected companies merge.

• Which of these would best describe the merger of Cameron Balloons and Thunder and Colt?
• Why?
• What advantages might Cameron Balloons gain from this merger?

Step 2 - Scaling it up

• Many firms merge to take advantage of economies of scale. What different types of economies of scale are there?
• Which of these is Cameron Balloons most likely to have benefited from when merging with Thunder and Colt? Justify your answer.
  (Bear in mind that all Thunder and Colt production now takes place in Bristol along with Cameron Balloons production, though they still have separate marketing departments in the same building.)
• Which of these is Cameron Balloons least likely to have benefited from when merging with Thunder and Colt? Justify your answer.

Step 3 - Merging profitably

One key reason behind merger is of course to gain greater returns for the shareholders. How would you expect profit levels to change following a merger? What would you expect the relative profit levels to be before the merger, one year after the merger and five years after the merger? Why do you expect profits to change in such a way?