• thinkigcse.com

Mergers and Takeovers

A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. 

For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America.

A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. 

An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.

Target companies can employ a number of tactics to defend themselves against an unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over.

Watch a Video

 

Types of Mergers 

Distinguished by the relationship between the two companies that are merging: 

  • Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. 
  • Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. 
  • Market-extension merger - Two companies that sell the same products in different markets. 
  • Product-extension merger - Two companies selling different but related products in the same market. 
  • Conglomeration - Two companies that have no common business areas. 

Distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors: 

  • Purchase Mergers - This kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument.
  • Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. 

Synergy

All mergers and takeovers have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. The success of a merger or acquisition depends on whether this synergy is achieved. 

By merging, the companies hope to benefit from the following: 

  • Staff reductions 
  • Economies of scale
  • Acquiring new technology By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. 
  • Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities.

Why a merger/takeover may or may not achieve objectives

An example is the epic failure of the when eBay decided to buy Skype for $2.6 billion in 2005, only to sell the company four years later for $1.9 billion. Apparently, it didn’t work out because eBay and Skype were unable to integrate their technological systems successfully.

Good Reads

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/where-mergers-go-wrong

http://www.pearsoned.co.uk/bookshop/article.asp?item=439

http://www.bmmagazine.co.uk/columns/opinion/many-mergers-fail/

http://knowledge.wharton.upenn.edu/article/why-do-so-many-mergers-fail/

Watch a Video

 

 

 

Exciting News!

IMPORTANT MESSAGE

Quizzes and worksheets on this website have been developed in Flash format. Flash is no more supported by browsers. Therefore, you might see blank pages on some instances. Install Flash player plugin for Chrome from Chrome Web Store. Click here 

Similarly, for other web browsers you will have to activate the relevant flash player plugins.

JOIN OUR ONLINE COURSES

New Youtube Channel - ThinkIGCSE

Hi Everyone, I have launched a new YouTube channel with more than a 100 videos on  Economics and Business Studies, tailored specifically for IGCSE and A Level and IBDP students.

Subscribe now and join us on this learning journey: @thinkIGCSE

WHO'S ONLINE

We have 103 guests and no members online

MindMaps

PDF FILE

Download

Cheatsheets

PDF FILE

Download

Crosswords

PDF FILE

Download

Save
Cookies user preferences
We use cookies to ensure you to get the best experience on our website. If you decline the use of cookies, this website may not function as expected.
Accept all
Decline all
Read more
Analytics
Tools used to analyze the data to measure the effectiveness of a website and to understand how it works.
Google Analytics
Our website uses Google Analytics to understand how you interact with our site and improve your browsing experience. These cookies collect information in an anonymous form, including the number of visitors to the site, where visitors have come from, and the pages they visited. The data helps us analyze trends and user behavior to enhance our website's functionality and content.
Accept
Decline
Marketing
Set of techniques which have for object the commercial strategy and in particular the market study.
Marketing
Our website uses Google marketing cookies to deliver personalized ads and measure the effectiveness of our advertising campaigns. These cookies track your online activity to help us show you relevant ads on Google services and partner websites.
Accept
Decline