The world of business is an ever-evolving ecosystem where organisations continually seek innovative strategies to adapt, grow, and thrive. In this dynamic landscape, mergers and acquisitions (M&A) have emerged as pivotal instruments for companies to restructure, expand their market presence, and harness synergies. These strategic manoeuvres have the power to reshape industries, redefine corporate landscapes, and influence the global economy.
Merger and acquisition refers to the ‘consolidation of companies’. Some merger and acquisition activities includes :-
- Purchasing and absorbing another company,
- Merger and its formation into new company,
- Acquiring some or all of its major assets,
- Making a tender offer (a bid to find some or all of shareholders’ stock in company),
- Staging of a hostile takeover, etc.
What is meant by mergers and acquisitions
A merger is the collaboration or unification of two or more companies to form a new company in expanded form.
For. e.g.- A+B= AB or C
Acquisition is the process of acquiring or selling one company to another. In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter it’s organisational structure. Acquisition is also known as takeover or, as we can say, acquiring a company takes over all the assets and liabilities of the target company.
It can be held in two ways:-
- The acquiring company pays cash to the target company.
- The acquiring company buys shares of the target company.
For example, if company A acquires company B, both entities exist but control of management goes into the hands of company A for both companies.
Note: Sometimes mergers and acquisitions are used interchangeably, but they are different. We can say:
- Merger- to combine
- Acquisition- to acquire
In acquisition, one company buys another’s outright and in merger, two companies come together to subsequently form a new legal entity. Generally, mergers are voluntary and involve companies of the same size and scope.
And in an acquisition, a new entity does not form a new company but in lieu of that, the smaller company absorbs the larger company and as a result, it ceases to exist.
Reasons for mergers and acquisitions
Reasons for mergers and acquisitions are:
- To eliminate competition,
- Establish a bigger market share,
- Create a strong brand,
- Reduce tax liabilities,
- Set off losses of one entity against profit of another, etc.
Types of mergers and acquisitions
In this type of merger, those companies that operate in the same industry and provide similar services come together; they may or may not be in direct competition with each other. And when they merge, they find greater bargaining power in raw materials and can also buy raw materials at cheaper rates .The idea behind this type of merger is to avoid competition between the units. For example, the bank merger of the 1980s and the merger of HP and Compaq were two different computer companies.
Disney merged with Hotstar as Disney+ Hotstar, an online streaming platform. Integration of Facebook, WhatsApp, Messenger, and Instagram into one Meta platform led by Mark Zuckerberg.
Horizontal M&A leads to:
- More markets share,
- Less competition,
- Reduction in cost monopoly,
- Gaining the goods and services of another company,
- New distribution channels, etc.
It represents a merger of firms involved in or engaged in different stages of the production of simpler products or services. For this, two or more companies dealing with the same product but at different stages may join to carry out the whole process itself. Vertical M&A helps get better control over the entire production cycle, which includes buying raw materials from suppliers and then adding value to the process of producing intermediate products to sell to the next buyer in the supply chain. It is considered to be of two types:-
- Backward integration- One company makes steel pipes and for that, he needs steel from steel supplier. For this purpose, the company goes back into its supply chain and merges with or acquires the supplier company.
- Forward integration- After preparing steel pipe, you need to sell it through a retailer to the customer, then you come forward in your supply chain and merge with the customer.
- A railway company may join with a coal mining company to carry coal to different industrial centres.
- Google’s acquisition of Android for $50 million in 2005 .
- In the 2016 acquisition of EMC by Dell for $67 billion, Dell was a manufacturer of personal computers, enterprise server and mobile devices, whereas EMC was a data storage company.
Vertical mergers and acquisitions leads to:
- Guaranteed source of raw material,
- No raw materials for competitor,
- Reduction in cost,
- Improve profitable margin,
- Reduce flexibility (which may result into new complexity in business management), Operational efficiencies, management control, etc.
Vertical versus horizontal merger
Vertical M&A happens in companies that are operating in the same industry but at different levels or stages of the supply chain. Whereas horizontal M&A occurs in companies that are producing simpler products and also at the same level or stages of the supply chain.
Vertical M&A gains more control over certain parts of the supply chain and horizontal M&A gets a bigger market share or expansion of product offerings.
Those companies come together because they are totally different from each other and come from totally different industries. Neither they overlap nor compete with one another or the merging companies are neither originally nor vertically related to each other. However,they see benefit in mergers. For example, if a car manufacturing company merges with a telecom company,a textile company may merge with a vegetable oil mill. There is nothing common between them. They are further divided into two:-
Pure conglomerate M&A
This consists of companies operating in totally different industries. W.R. Grace, a chemical business, acquired many different companies that include construction, gas, oil, agriculture, etc., which helped it enter a new market quickly.
Mixed conglomerate M&A
The goals of the company are to expand its product line or market line. Walt Disney’s acquisition of American Broadcasting Company can be considered this type of merger and acquisition.
These are some real life merger and acquisitions of this kind:-
Amazon and Whole food
Acquisition of the Whole Foods market by Amazon for $13.7 billion, which brings the total value of the two companies to $14.3 billion.
This type of M&A would be more challenging for businesses and for its success, we can consider some points like:-
Research the market to see if there is a company merged into this type that is working efficiently and also look for the aspects they followed to make it efficient.
- Be clear
Be clear about your goals. Why do you want this type of M&A? What is its need?
Keep interaction and organise important personalities of both firms, like the executive, sales and marketing teams.
- Know the company culture
Know the company culture because totally different management may affect employees’ willingness to work.
- Update and be updated
Teams in the company should be updated with new strategies, opportunities, new products, etc. so that they can work efficiently.
- Due diligence
Due diligence should be taken in the finances, legal policies, operations, etc. of both companies. These things should be done with more care and caution, which will prevent the merger from vanishing.
Essential processes and information, except confidential ones, should be maintained for employees.
Conglomerate M&A leads to:
- Spreading risk,
- New idea,
- More revenue,
- More efficiency,
- Expanded customer
- Cross selling of their products, which further leads to higher profits for new company, etc.
Concentric or congeneric M&A
When two different companies are operating in two different industries but their target audience is the same, this could be indirectly competing but their products are complementary. And they often use similar technologies and other processes. For example, a car manufacturing company merges with a car insurance company and a TV manufacturer merges with a cable company. They are related to each other in terms of customer groups, functions or technology. But it limits further diversification.
This type of M&A leads to:
- Larger market share,
- Diversification of products and services,
- New and bigger customers,
- Improved profits, etc.
Market extension M&A
Two companies come together that make or sell the same kind of product but in different markets. For example,one company makes normal pizza and another company makes pizza with less fat and is healthy when they come together in a market extension M&A. Its main objective is to extend the size of market to reach customers in a big number.
Market extension leads to:
- A larger client base,
- Different other resources of the other company,
- New working professionals,
- Improved competitive status,
- Improvement of products,
- Reduction of external risks,
- More profit, etc.
Product extension M&A
In this type of M&A, two different companies make two different products that are related to each other and operate in the same market. After M&A, both companies are allowed to use each other’s resources, which results in a reduction of additional costs. For example, in 1977, PepsiCo and Pizza Hut merged, though both products were different. Because customers wanted to consume them together, they merged. The merger leads to increase of sales by more than $436 million
Product extension leads to:
- Access to a larger set of customers,
- Earning higher profits,
- increasing customer satisfaction,
- Cutting down of additional costs, etc.
In this type of M&A:
- The private limited company merges with a public limited company so that the private limited company turns into a public limited company without any problems or complex processes. And it reduces or ends expensive compliance and also saves from complicated processes, or
- A weaker company merges with a stronger company, or
- A smaller company merges with a bigger company, or
- Loss seeking company merges with profit making company, or
- A subsidiary company merges with parent company, etc.
The company which got the control is accounting acquire and who issues share is legal acquirer.
Reasons for this type of M&A:
- For selling products at a higher level,
- For saving taxes,
- To increase marketing network, and
- For protecting trademark rights, etc.
Top mergers and acquisitions in India
- Vodafone and Idea
We can say that both companies came for merger by ‘Jio’s ‘arrival and ensuring price war. As the telecom business became highly competitive, both companies faced struggles. Vodafone owns 45% of the combined firm, with the Aditya Birla Group owing 26% and Idea owing the rest. Vodafone Idea launched its new identity, Vi.
- Walmart’s Acquisition of Flipkart
Walmart purchased Flipkart, which resulted in its entry into the Indian market. Walmart defeated Amazon in a meeting by paying $16 billion for a 77% stake in Flipkart.
- Zomato’s acquisition of UberEats
Zomato, an online food delivery and restaurant discovery platform, has purchased the Indian operation of UberEATS’s food delivery service for roughly $350 million.
- Zomato to acquire blinkit
Food delivery platform Zomato has agreed to acquire instant grocery startup Blinkit for $569 million in an all stock deal as it seeks to exploit a fast growing market for quick grocery delivery.
Both are streaming platforms owned by Star Network in India. Disney Hotstar was launched in March 2020 and gave access to Disney shows and movies to Indian consumers.
In conclusion, the world of mergers and acquisitions is a complex and dynamic landscape, characterised by the various types and strategies that organisations employ to achieve their growth and strategic objectives. Through this analysis, we have delved into some of the most common types of mergers and acquisitions, shedding light on their distinct characteristics, advantages, and challenges.
From horizontal mergers that seek to consolidate market share, vertical mergers aiming to streamline the supply chain, and conglomerate mergers diversifying across unrelated industries to friendly acquisitions driven by mutual benefit and hostile takeovers fueled by competition, each type carries its own set of considerations for businesses, shareholders, and the broader market.
- https://efinancemanagement.com/mergers-and-acquisitions/product-extension-merger https://blog.ipleaders.in/
- https://neumannassociates.com/general-blog/understanding-market-extension-and-product extension-mergers