Page 21 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

direct costs are tiny compared to overheads). Therefore this factor could be particularly important
here.

Acquisition helps to avoid the risk of failure which is always associated with setting up a new
business.

Acquisition can eliminate a competitor from the market place, thus reducing the risk attached to
future earnings.

When one firm acquires another, synergies (value gains) are often achieved, so that the combined
firm is worth more than the two firms individually. For example, there could be savings in
marketing costs if two companies decide to target customers together rather than independently.
These savings will lead to value gains for the combined firm’s shareholders. Synergies that could
be generated if Novak decided to acquire another company in the pharmaceutical sector are
covered in much more detail below.

Disadvantages of acquisition (advantages of organic growth)
Organic growth is usually cheaper than acquisition - when a business is acquired, a premium often
has to be paid to cover the intangible assets (e.g. goodwill, patents, brand) of the target company.
Organic growth avoids the culture clashes which often arise if a business is acquired and the two
firms are integrated.
Organic growth can be planned very carefully to fit in exactly with the company’s objectives.
Sometimes when a new business is acquired, it may have some operations in different regions or
industries which the acquiring company did not plan to enter.

Conclusion
Novak has been flexible in the past and has used both acquisition and organic growth strategies,
because both methods have advantages in certain situations. Neither method is better in all
circumstances!

Synergies

Introduction
Synergy is the extra value created when two companies combine. It is sometimes referred to as
the “2+2=5 effect”.
There are several reasons why synergistic gains arise. These are:

operating economies, such as economies of scale and elimination of inefficiency,
financial synergy, such as the reduced risk caused by diversification,

other synergistic effects, such as market power.

I have explained below what sort of specific gains could be generated if Novak decided to acquire
another company in the pharmaceutical sector.

82 KAPLAN PUBLISHING