Question

Week 12

1. Explain 2 reasons for the formation of corporate subsidiaries.

2. Identify four reasons for the formation of foreign subsidiaries.

3. Why is Amazon considering foreign subsidiaries in Europe as a management strategy?  

4. Explain two reasons why Vodafone and Verizon talked about an acquisition. Which company was acquired and what was the cost? Was this strategy of acquisition positive or negative?

5. Why did Google acquire Android? Explain why it was a good acquisition for Google.

Answer 1

1) Reasons for forming corporate subsidiaries are as follows:

a) Maintainance of brands: Sometimes a single company may have products of different features ut belong to the same product line but launch them under different brand names. So, the company may choose to form a subsidiary to keep the brands separate.
For example, Nestle is famous as a parent manufacturer of noodles branded as Maggi. Supposedly, Nestle decided to acquire another company in the market that manufactures noodles but of a different type. So, Nestle may prefer to keep that acquired entity as its subsidiary rather than merging it with the parent company in order to keep the brand identity separate and protect the goodwill of both the product and also keep the operations smooth without letting operations of one overlapping with another.

b) Better productivity: Companies also prefer having a subsidiary in order to differentiate their profit-making business segment s with the less effective one. Also, if the company feels like the business segments are not correlated to each other and it would be better to have a different working of each segment for better productivity then also the company may choose to separate their segments into a new subsidiary.

2) 4 reasons for forming foreign subsidiaries are:
a) Taking benefit of the tax structure in the new market.
b) Tapping better and cheap resources.
c) Gain economies of scale
d) Expansion of brand

3) Amazon currently has 3 fully owned subsidiaries in Europe - Amazon Services Europe S.a.r.l., Amazon EU Sarl, Amazon Europe Holding Technologies SCS.
Amazon is considering subsidiaries in Europe as it helps Amazon to expand its current base and gain geographical expansion. They also help in better management as warehouses in various places ease-out deliveries and storage issues for the company. There is also a factor of tax consideration that benefits the company.

4) Vodafone and Verizon deal

Verizon bought the Vodafone's share of 45% in Verizon.
The reasons behind the acquisition were that the communication industry was heading towards a wireless trend and Verizon being a telecom giant offering services of Internet, TV, phone service wanted to have complete control over the wireless communication segment of the industry.
On the other hand, Vodafone's profits were declining due to which the company had to sell a segment in order to get cash for managing the other remaining segments effectively by injecting liquidity.

Details: The cost that was agreed was $130 billion. This is what Verizon had to pay to get the stake back from Vodafone.
The strategy used was positive. The deal was not a hostile take over and had consent from both the parties - a fair and befitting deal for both and the deal involved payments in the form of cash and equity shares.

5) Google acquired android because :
In 2005, Android had started facing difficulties to keep up their operations as their plan of building OS for cameras wasn't taking off as expected.
It was then when Google was pitched a new idea of a prototype of the mobile OS by the Android founders and Google founders offered a deal of buying out the company for $50 million.
It has been a very successful acquisition by Google as today almost 86% of mobile phones run on Android OS. With a relatively small investment, Google has been able to turn around the story of Android and along with mobile phones, android OS is also used in watches, TVs, cars. The Android software has beat all the major rivals like Nokia's Symbian, BlackBerry, Microsoft's Windows Phones and is now the widely accepted and used operating software in the technology world.