What are Mergers and Acquisitions?

There’s an idiom that says “two heads are better than one”. In the corporate world, mergers and acquisitions put this idiom to the test. In this article, we will be unpacking the concept of mergers and acquisitions in the corporate world.

Merger and Acquisition (M&A) is the broad term used to describe the fusion of two or more business entities into one stronger and more capable company. Although the words are often used interchangeably, mergers and acquisitions do not mean the same thing in theory.

A merger is a process by which two or more companies come together to form a new company with a new name, new ownership and management structure. Shareholders are issued new shares after a merger takes place. For example, both JP Morgan and Chase Manhattan Bank ceased to exist when the two banks merged, and a new bank, JP Morgan Chase & Co. was created. 

An acquisition involves the purchase or takeover of one company (the target company) by another company (the acquiring company). A new company does not emerge; instead, the target company may cease to exist, and the acquiring company absorbs its assets. Shareholders are not issued new shares after an acquisition. For example, when AT&T acquired Time Warner Inc in 2018, the latter ceased to exist as an independent company. In some cases, though, the target company is allowed to continue with its business as usual. For example, after eBay bought PayPal in 2002, Paypal continued with its operations as usual.

The companies involved in a merger are usually near equal in size, and they come together to decrease competition and increase operational efficiency. In reverse, the acquiring company in an acquisition is often more massive than the target company, and its purpose is to stimulate instant growth.

Interestingly, mergers can take different forms: they could be between two competing companies (horizontal merger); between a company and a supplier or a customer (vertical merger); between two businesses that serve the same consumer base in different ways (congeneric merger); two firms that sell the same products in different markets (market-extension merger); and even two companies that have no common business areas (conglomerate).

Examples of Company Mergers and Acquisitions

• ExxonMobil was not always ExxonMobil; there used to be Exxon, on the one hand, and  Mobil on the other side. But in 1999, the two companies signed an $81 billion agreement to merge and become Exxon Mobil – the third-largest energy company in the world today. This is undoubtedly one of the most successful mergers in the history of mergers.
• Glaxo Wellcome and SmithKline Beecham merged in 2000, to become GlaxoSmithKline– one of the largest pharmaceutical companies in the world.
• Walt Disney Co. acquired Pixar for $7.4 billion in 2002 and Marvel Entertainment in 2005 for $4 billion. Since the acquisitions, Disney has realised billions in revenue from the movies released by both outfits.
• In 2005, when Android was still a startup company, Google acquired Android for about $50 million. The deal allowed Google to compete in a market that was previously dominated by Microsoft’s Windows and Apple’s IOS. Today, Android is the most popular mobile OS in the world.

The above are some examples of the most successful M&A deals in history. But M&A deals can and do go wrong also. For instance, eBay & Skype’s merger and Quaker Oats’ acquisition of Snapple.  So, let’s consider the advantages and disadvantages of these types of deals.

Advantages and Disadvantages

In addition to increasing operational efficiency and stimulating growth, as earlier mentioned, M&As can help the companies involved in:

• Gaining a competitive advantage
• Diversifying their business processes
• Surviving the ever-changing market
• Acquiring relevant skills and technology for proper positioning in the industry
• Ramping-up profitability

But just as they come with many pros, M&As also have some drawbacks. They include:

• Monopoly and higher prices for consumers
• Reduced standards of corporate performance
• Diseconomies of scale – the business entity may lack a certain degree of control and struggle to motivate employees
• A potential decline in industry innovation
• Job losses

Mergers and acquisitions (M&As) are restructuring strategies employed by companies to accelerate growth and maximise profit.

Though they bear different meanings, the terms merger and acquisition (M&A) have become increasingly blended, and the new definition of M&A deals is slowly eroding the specific differences between them.

The above reflects the opinions of only the writers who are associated persons of Bamboo Systems & Technologies Ltd. and do not reflect the views of Bamboo Systems & Technologies Ltd. or any of its subsidiaries or affiliates. They are meant for informational purposes only. They are also not research reports. The third-party information provided therein does not reflect the views of Bamboo Systems & Technologies Ltd., or any of its subsidiaries or affiliates. All investments involve risk, and the past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. The price of a given security may increase or decrease based on market conditions, and customers may lose money, including their original investment.