The business world is not unfamiliar with mergers and acquisitions. If you’re new to the terms or want to understand them, you may be wondering:
- What is a company merger?
- What is an acquisition?
- Are company mergers and acquisitions the same?
- What are the causes or reasons for company mergers and acquisitions?
- What are the types of company mergers and acquisitions?
- What are some examples of famous successful company mergers?
- What are the advantages and disadvantages of company mergers?
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What is a company merger?
The word merger means when two or more entities join and the differences between the two gradually cease to exist. In a company sense, a merger is an act of joining two or more companies, organizations, or businesses into one.
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What is an acquisition?
An acquisition is a form of a merger. Generally, the word acquisition means buying something to add to what you already own. In business, an acquisition means a company buying majority shares or all of the acquired company’s shares.
Are company mergers and acquisitions the same?
Mergers and acquisitions are most times defined using similar words. However, the difference that lies between the two is how they happen.
The Edinburgh Business School module on Mergers and Acquisitions states that mergers often involve a negotiation process. The negotiation process’s purpose is to determine the viability, terms, and policies of the merger. The negotiations seek to eliminate various complications that may arise as a result of the merger.
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Acquisitions do not necessarily have a negotiation process. It is a case of big eating small, where the company executing the acquisition buys the majority shares or wholly owns the company it acquires. Acquisitions can be friendly or hostile. Companies bought in friendly acquisitions are willing to sell shares and usually use the mergers for growth. Negotiations take place. In hostile acquisitions, the company acquired is against the acquisitions and normally negotiations do not take place. Hostile acquisitions are commonly termed hostile takeovers.
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What are the causes or reasons for company mergers and acquisitions?
Synergy and Economies of Scale
Synergy means businesses collaborating to increase the value and benefit from the strengths of the amalgamated business unit. The resultant company benefits from increased facilities, increased clientele, enhanced managerial capabilities, and a significant increase in financial resources. The merged business scales up the ability for more productivity and operations.
It can be a difficult task for a company to achieve rapid growth. Mergers or acquisitions can be a sure way to realize these goals. Enhanced managerial capabilities, increase networks, and reach a larger market which helps establish modules for fast and stable growth of a company.
A company may wish to diversify and enter into a new line of products or services. Using internal investments to fund such a venture can be a huge risk and thus a company may opt to merge with another already established in that line of work. The merger will make the diversification process easier and save a lot of resources for a company.
Elimination of Competition
Two or more companies may merge to end competition among them. The merger would be a way to cut down costs incurred on advertising and promotions. The amalgamated company will also be in control of pricing. Lowering prices of products and services could potentially attract more consumers.
Hard economic times call for desperate measures. The COVID-19 pandemic hit the economy hard. Some companies may opt for mergers with others for survival. In some, cases governments will force companies to merge. The reason the government may intervene is to rehabilitate dying businesses. The aim would be to avoid an unemployment crisis for tax-paying citizens lest these businesses were to shut down.
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What are the types of company mergers and acquisitions?
A conglomerate merger is one where the companies involved are in unrelated fields of business. These types of mergers mostly happen in form of acquisitions. Largely, the individual companies continue to operate as they previously did only that they are under a conglomerate. The reason is that the individual companies operate in different markets. The merger can result from the need for financial backing.
Conglomerate mergers can be pure or mixed. A pure conglomerate merger involves companies that are completely unrelated whereas a mixed conglomerate merger is where a company seeks to expand product lines or to a different market. An example is an entertainment company merging with a streaming corporation. The two are in different but related markets but will form one conglomerate with more resources and reach.
This is a merger between companies that deal with the same products or services but are in different markets. A market-extension merger enables better and easier access to a new and larger market. An example would be a European telecommunications company merging with a telecommunications company established in African. The European company will gain access to a new large market to offer their products and the African company will gain more assets and resources in the merger.
This is a merger between companies that sell different products which are related but fall under the same market. The reason for this merger is to group products and increase individual companies’ customer base. The amalgamated business unit can maximize having similar distribution channels and supply chains. An example of such a merger would be an automobile manufacturing company merging with a tire manufacturing company. A more common example is a software manufacturing company merging or acquiring an applications developing company.
Horizontal mergers happen between companies that are competing in the same market and selling similar products. The main reason for this merger is eliminating the competition between the two. The amalgamated corporation as a result of the merger benefits from increased market shares, more resources, reduced advertising costs, and utilizing economies of scale.
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An example is two beverage-producing companies merging like in the case of Pepsi Co. and Rockstar. Pepsi Co. bought Rockstar for 3.85 billion in March 2020.
These are mergers where the companies involved sell different but related products or services. The companies also have the same supply chain. One of the main reasons for this merger is higher quality control. Other reasons include a better flow of products in the supply chain and the benefits of synergies.
What are some examples of famous successful company mergers?
Examples of famous mergers that were a success in the history of mergers and acquisitions are:
Facebook, Messenger, Instagram, and Whatsapp Merger.
Facebook acquired the three messaging services. In 2019 they announced plans to integrate the three. They clarified that the apps would remain as standalone offerings and the integration would be to make the interaction among the apps more fluid. The merger is an example of a horizontal merger where the apps were competing in the same market and offering related products and services.
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Walt Disney Company and American Broadcasting Company Merger
The merger happened in 1995. Disney bought ABC to gain access to broadcast television and sports coverage through ESPN. This is one of the best examples of a conglomerate merger specifically a mixed conglomerate merger as Disney already owned several cable networks. The merger helped the distribution of broadcast content.
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Pepsi Co and Pizza Hut Merger
In an attempt to increase its soft drinks reach Pepsi Co merged with Pizza Hut in a product extension merger in 1977. The two are not the product but serve the same market. Pepsi making Pizza Hut one of its subsidiaries was successful as post-merger sales increased by more than $436 million.
Walt Disney Acquisition of Pixar Studios
Walt Disney Company’s acquisition of Pixar Studios in 2006 is one of the best examples of a vertical merger. Walt Disney is a mass media and entertainment company. Pixar is an innovative animation studio. The merger gained Pixar access to a bigger market and more resources given Walt Disney’s financial power. Walt Disney gained higher quality control and domination in the animation production industry. The acquisition cost Walt Disney $7.4 billion.
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What are the advantages and disadvantages of company mergers?
Advantages of Company Mergers
- Mergers eliminate competition which would incur huge costs such as advertising. It also eliminates the occurrence of situations such as unemployment where losing companies incur losses and opt to reduce their labor resources.
- Mergers increase companies’ resources and scale up operations.
- There is an increase in shareholders as a result of organizations or companies merging. Shareholders benefit most from this whereas they continue owning shares and of a bigger corporation where on the other hand they would have faced losses or no longer own shares in a company.
- Mergers lower tax liability. A company with a substantial taxable income may merge with a company with significant tax loss to carry forward to lower their tax liability.
- Mergers allow for better financial and utilization of company resources. This results in better productivity which potentially boosts profits and enables the amalgamated unit to save on investment funds
- Access to new and bigger markets.
- Mergers give financial security and save time for companies planning on extending to new markets or diversifying themselves. Using internal investments can put the already established business or company at risk and or it could take the diversification process a long time to be successful.
Disadvantages of Company Mergers
- Mergers can create unemployment. When companies merge they may trim down the labor force in some sectors to avoid replication. The amalgamated company may need just one accounting team or one legal team compared to requiring a team of the respective teams when they were an individual company.
- Mergers create communication gaps. Merging companies may have different cultures and backgrounds which will result in a communication disconnect. This may then affect performance.
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- Increase in product prices. Mergers mostly benefit companies. Since the resultant merged company has better price control it may opt to increase prices of their products and services meaning the customer suffers.
- Mergers disrupt economies of scale. In mergers where the companies deal in unrelated products and services, it may be difficult to gel and gain synergies. This could lower employee motivation and lower productivity.