Mergers and acquisitions strategy

 

Mergers and acquisitions strategy

Merger is consolidation of two companies into one and acquisition is one company taking complete control of another company. In other words merger and acquisition is a process of combining two companies into one for various reasons through different means. After such merger and acquisition the control of company often changes hands.

Merger and acquisition strategy is the action plan any company uses to take control of the target company. Any individual or a company who has maximum shareholding of a company has the ultimate say in company’s decision making. The way in which a company executes merger and acquisition may differ from company to company depending on situation, reason and financials of the both target and acquiring company. This transaction to be held legal has to be executed with in the regulatory norms under law defined for merger and acquisition of the company.

Reasons for merger and acquisition

·       Value creation: two companies may agree to merge to increase their shareholder’s wealth through value creation. Cost synergies, revenue synergies or resource synergy can be the agenda for such scenarios.

·       Diversification: A company may choose to diversify from its current business line and opt for M&A. conglomerate mergers, product extension, market extension are few scenarios for diversification mergers.

·       Acquiring company may look to acquire assets of Target Company hence merge or acquire the target company.

·       To come above the financial constraint of individual company merger can be a way as the merged company will have increased financial capacity to meet its requirement.

·       After the merger the tax liability of the acquiring company will decrease. A company whose taxable income is significantly high will choose the option to merge to evade tax.

·       Few mergers are also purely propagated and executed by the interest of the managers of acquiring company.

Types of mergers

1.     Horizontal merger- Merger with competitor in same market

2.     Vertical merger- companies merging with company in same supply chain for forward or backward integration

3.     Market extension merger

4.     Product extension merger

5.     Conglomerate merger

Some of the examples of fruitful merger and acquisitions from the past

·       Disney and Pixar/ Marvel acquisition- in the year Disney acquired Pixar for a whopping 7.4$ Billion, Disney acquired Marvel for $ 4 billion.

·       Google acquired android in the year 2005 for 50$ million.

·       In 2008 the Philip Morris International spun off from Altria group Inc

·       Anheuser-Busch Inbev acquired SABMiller in the year 2008 to become the largest brewer.

Not all mergers and acquisition are successful. When a company is acquired by large amount of borrowed funds, the transaction is popularly known as leveraged buyout. These types of acquisitions are known as hostile takeovers. Main reason for such hostile takeover can be either to privatize a  public company or to lift the underperforming company by giving support (financially, organizationally, asset perspective or management perspective) or to break a larger organization into smaller ones.

Advantages of M&A

·       The value of new entity formed is more compared to the two entities participating in the merger due to synergy.

·       New market opportunities are created for the new entity as well as the old companies post-merger.

·       Economies of scale is significant as usually larger firms are more efficient compared to smaller companies (target companies).

·       It can create multiple growth opportunities for both the companies as they don’t have to compete against each other in the market anymore. They can work with maximum co-ordination to maximize the resource utilization.

·       The combined entity can create more economic opportunities which would benefit both the parties from the strategical execution.

·       The companies can work to optimize their all available resource by sharing them, save cost on duplicating investment (both don’t have to invest areas like product research, market research, product development and supply chain)

·       They both can benefit from each other strategy and use expertise to explore and execute any strategy in an effective manner.

·       Employees might benefit from merger as an increase in their pay scale, perks and other benefits as per norms of acquiring company

·       The market coverage, penetration and exploration can be cost efficient.

·       It saves training cost for both the companies as they would expertise to train employees from both acquiring and target firm.

Disadvantages in M&A

·       Usually a merger creates distress among the employees of the organisations as there will a lot of organizational and hierarchical change in the newly formed entity.

·       Merger may even result in few layoffs of resources which are considered to be load by the new management of the company.

·       In case of leveraged buyout the debt on the target company increases exponentially, which will affect the profitability of the target company as the interest burden will increase.

·       There will be cultural changes in the newly formed entity which again might lead to cultural and organizational distress among the employees. This will hamper the productivity of the company.

·       In some case employees payroll, hike, benefits will get affected and again which will lead to distress, attrition and differences among employees in the newly formed organisation.

·       Monopoly in any market due to merger can cause price burden for consumers and there is high probability that firms will start exploiting consumers will high prices.

·       The acquiring company might experience diseconomies of scale and its overall efficiency might take a hit as it has to bear the burden of the smaller (Target) company.

·       The goodwill of the already established brand might get affected if the target company fails to meet the acquiring company’s standards.

 

Conclusion

Overall it can be concluded that M&A can be fruitful and benefit both companies as it only increases the strength of the participating companies. The crucial thing to consider is the execution of the merger and acquisition. Both parties should make sure it doesn’t cause distress among the employees. The cultural changes also should be made carefully to imbibe a proper hybrid culture which will not damage any existing employees. In case of leveraged buyout proper plan has to be laid out to meet all their liabilities over the period of time and make either of the parties doesn’t burden themselves with too much interest payment or cash crunch. The management of the newly formed company should carefully discuss each aspect (financial. Payroll, culture, hierarchy) and choose the best option which is good for both parties. Only upon successful execution of merger the anticipated synergy and growth can be achieved. Otherwise it can go wrong and both the companies will be affected.