Mergers and
acquisitions
What are Mergers and Acquisitions?
A merger simply involves two separate companies, normally in
similar size, combing to make one new company, whilst an acquisition is the
purchase of one company by another in which no new company is formed.
The key principle behind merging or acquiring businesses is
to create shareholder value, in that two companies together will create more
value than two companies running separately. Both mergers and acquisitions play
a big part in the corporate finance world, with M&A transactions taking
place every day. Most companies decide to merge for a variety of reasons; the
table below shows four different classes of merger motives.
Synergy
|
Superior Management
|
Managerial Motives
|
Third party motives
|
Two firms together are
worth more than two separate firms
- Market power
- Economies of scale
- Entry to new markets
and industries
- Tax advantages
- Risk Diversification
|
Target can be purchased
at a price below the present value of the future cash flow when in the hands
of new management
-Elimination of
inefficient and misguided management
|
- Status
- Power
- Remuneration
- Survival
- Free cash flow
- Hubris
|
- Advisers
- At the insistence of
customers or suppliers
|
(Arnold, 2013)
There are many different types of mergers, there are three different examples shown below:
Horizontal
Merger
This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This type reduces the number of competitors in the segment and gives a higher edge over competition.
Vertical Merger
Vertical merger is a merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations.
Conglomerate Merger
Conglomerate merger is a where of two companies belonging to different industry sectors combine their operations.
Despite the benefits of mergers and acquisitions which
include, among others, a diversification of product and service offerings,
larger market share, utilisation of operational expertise and research and
development, many M&A activities fail to work out well. One of the most talked about failed merger
was that of AOL and Time warner at the height of the Internet craze in 2001. AOL
purchased time warner for $165 billion. Both companies sought to capitalise on
the convergence of mass media and the internet. However, the synergy of these two dynamically
different companies never occurred. Shortly after the merger the dot-com bubble
burst, which caused a significant reduction in the value of AOL, and in 2002
the company announced losses over $99 billion.
Another reason why mergers quite often fail is due to
strategy. Two businesses often have very different strategies and growth
models. These are fundamentals of a business, and are normally unseen from the outside.
Merges and acquisitions usually require some collaboration or alignment of both
strategies, however this usually leads to some kind of failure as it is
implemented poorly. As well as poor synergies and strategies there are other
areas which companies fail to address when merging, these can include, bad
management, poor leadership, clashing company cultures and brand management.
A merger
may seem like a good idea and there are many successful mergers and
acquisitions but there are also some big failures. It is clear that many
companies find it easier than others therefore it is crucial that a company seriously considers
the benefits and side effects of M&A transactions.
References
Arnold, G. (2013) Corporate Financial Management (5th ed.) Essex: Pearson
