Optimal size

Optimal size

Frequently, the phrase spreading overhead is used in connection with economies of scale. This expression refers to the sharing of central facilities such as corporate headquarters, top management, and computer services.

Economies of Vertical Integration Operating economies can be gained from vertical combinations as well as from horizontal combinations. The main purpose of vertical acquisitions is to make it easier to coordinate closely related operating activities. Benefits from vertical integration are probably the reason that most forest product firms that cut timber also own sawmills and hauling equipment. Economies of vertical integration may explain why some airline companies have purchased hotels and car rental companies.

5This example comes from Michael Porter, Competitive Advantage (New York: Free Press, 1985).

Ross et al.: Fundamentals I VIII. Topics in Corporate I 25. Mergers and I I © The McGraw-Hill of Corporate Finance, Sixth Finance Acquisitions Companies, 2002

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852 PART EIGHT Topics in Corporate Finance

Technology transfers are another reason for vertical integration. Very frequently, a company will decide that the cheapest—and fastest—way to acquire another firm's technological skills is to simply buy the firm. For obvious reasons, this rationale is particularly common in high-tech industries. A good example is the acquisition of Vermeer by Microsoft that we mentioned earlier.

Complementary Resources Some firms acquire others to make better use of existing resources or to provide the missing ingredient for success. Think of a ski equipment store that could merge with a tennis equipment store to produce more even sales over both the winter and summer seasons, and thereby better use store capacity.

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