Mergers and acquisitions refer to the joining of two companies to form one entity. This means everything from its assets, liabilities, and brand image, all become one entity. As a result, it is often seen to produce financial benefits as the combined company becomes more efficient.
Mergers and acquisitions are commonly referred to in the same way. They both reflect the combination of two companies. However, they are slightly different. Mergers reflect the joining of two companies by mutual consent. This usually involves some form of share allocation whereby the instigating firm offers shares in exchange for the merging firm’s shares – thereby creating a single entity. By contrast, an acquisition is more aggressive, whereby the whole ownership is completely transferred. Shareholders are ‘bought out’ and will no longer have a stake in the company.
There are other ways by which a merger may occur, but will result in mutual ownership of the company – with both companies taking an equal share on the board of directors.
An acquisition differs from a merger in the fact that money is exchanged in return for a controlling stake in the company. This might be through purchasing 50 percent of the company’s shares, to give it control over its decisions. Or, it may purchase the whole company upfront. These can be hostile whereby the acquired firm does not approve, or, it can be friendly whereby both are happy with the takeover.
The difference between a merger and an acquisition:
The most common difference between a merger and an acquisition relates to the size of the companies involved. When one company is much larger than the other, it is likely that it will integrate the smaller one into the larger one in an acquisition. The smaller company may still retain its legal name and structure, but is now owned by the parent company. In other instances, the smaller company ceases to exist completely.
When the companies are of a similar size, they may come together to form a new entity which is when a merger occurs.
In an ‘unfriendly’ deal (or hostile takeover), a target company does not wish to be purchased, but may do so out of necessity. In these instances, it is always considered an acquisition. How the transaction is communicated to shareholders, employees and the Board can therefore also play a role in whether a deal is considered an acquisition or merger.
Types of Mergers and Acquisitions:
There are four main types of mergers and acquisitions – they are: horizontal, vertical, conglomerate, and concentric.
- Horizontal :
A horizontal merger or acquisition is where the two joining companies operate in the same market, selling similar products. For example, if KFC and McDonalds were subject to a merger or acquisition, it would be known as horizontal. Both firms operate in the fast-food market, selling similar goods.
Through this form of integration, it is likely to result in synergies. As the two firms are in the same industry, they are likely to have areas of the business that overlap. They are then able to condense those operations. For example, the integrated firm may not need two HR or finance departments. It may also benefit from a more integrated distribution network, as well as better negotiating power over suppliers.
- Vertical :
A vertical merger or acquisition is where the two companies operate at different stages of the supply chain. So this might involve one company purchasing its supplier, or the supplying company purchasing the firm it sells to.
When two firms vertically integrate, they may not benefit from the same synergies as horizontal integration, but there are other advantages. For instance, it has more control over the timings and supply chain – thereby eliminating late and inefficient deliveries. At the same time, it is also able to capture the profitability of the firm along the supply chain, helping to reduce prices to the consumer and compete more fiercely.
- Conglomerate :
A conglomerate merger or acquisition is where two companies from completely different industries join together. The Amazon acquisition of Whole Foods in 2017 for $13.4 billion is one such example. Whilst Amazon is known for its e-commerce presence, Whole Foods is an American food retailer.
These types of mergers and acquisitions were relatively common in the 1960s, but have since been in decline. This is largely due to the fact that conglomerates are very complex and difficult to combine. There are two different companies with different skillsets and experiences, which mean the potential synergies are limited.
- Concentric:
A concentric merger or acquisition is where two companies operate in the same industry and have the same customer, but offer different products. These are generally complementary goods. For example, a concentric merger or acquisition would be if PlayStation purchased a game developer such as Activision. Both operate in the gaming market, but PlayStation makes hardware, whilst Activision produces complementary games.
This differs from a conglomerate in the fact that the other company operates in the same industry. It also differs from vertical integration in the fact that the two firms are not buyers or suppliers of each other.
Mergers and Acquisitions Examples:
Facebook and Instagram:
In 2012, Facebook acquired Instagram and its 13 employees in a deal worth $1 billion. Facebook was struggling to target mobile users and was well aware of the competitive environment it was in. The firm didn’t want to become the next MySpace, so decided to diversify and capture Instagram. It has since captured millions of users across the world, which has not only expanded its offerings but also help improve the core Facebook service.
The number of mobile users has increased year on year since 2012 and the capture on Instagram has allowed it to ride this shift away from the desktop. Instagram is more mobile-friendly and allows users to digest information in a more user-friendly photographic format. The acquisition was one of the best investments of the last decade, with Instagram now valued at over $100 billion.
Amazon and Whole Foods
In 2017, Amazon acquired Whole Foods in a deal worth $13.4 billion. It gave Amazon the physical presence across America that it wanted in order to expand in the grocery market. It now allows customers to order online and come and collect from the comfort of their car. This presents significant competition to Wal-Mart who has responded with its $3.3 billion acquisition of Jet.com – with the aim of expanding its online presence to fight Amazon.
Dow and DuPont
In 2017, Dow and DuPont announced a merger in a deal worth $130 billion – forming Dow DuPont. Both companies were among the biggest players in the production of polymers, chemicals, and agricultural products. So the merger produced many production benefits with DuPont cutting 10 percent of its staff following the merger. This came as part of a $3 billion cost-cutting initiative that followed the merger with job cuts and store closures.
Heinz and Kraft
In 2015, Heinz and Kraft merged in a deal worth $80 billion. It combined Heinz, a food processor which is famous for its sauces, and Kraft, which is also a food processor, with products in chocolate, biscuits, cheeses, and more. The resulting company, Kraft Heinz, is now the fifth-biggest food and beverage producer in the world, with revenues in excess of $25 billion.