• 22Mar

    What Are Mergers and Acquisitions?

    Almost every industry in the public sector experiences Mergers and Acquisitions. Very often, headline-grabbing Mergers or Acquisitions become the center of attention. The recent acquisition of IBM’s x86-server business by Chinese PC maker Lenovo Group is one such example.

    The merger of Applied Materials and Tokyo Electron is an example of consolidation of two companies in the Integrated Circuit equipment production industry to form a larger company for their mutual benefits.

    What are the differences between Mergers and Acquisitions, and why do firms choose to merge, or choose to acquire other firms?




    Mergers and Acquisitions: The ‘What’ and the ‘Why’

    Both Mergers and Acquisitions consolidate firms. The first allows two distinct firms to merge, and form a new company. The latter allows one firm to purchase another firm, with the formation of no new company.

    Every business entity wants to earn the most profits possible, in general. In order to maximize profits, firms have to expand operations, at certain times. By merging two firms, or acquiring a different firm, it is possible to increase market share and also drive down costs of production due to economies of scale, among other reasons.

    Beyond that, two distinct firms could be strong in niche areas, so that when M&A (Mergers and Acquisitions) takes place, together they could offer a greater array of goods and services than each firm could do on their own to produce beneficial synergies.

    Other reasons for M&A could be increasing supply chain pricing power by taking over one of the suppliers which would have otherwise been making profits from the supply of intermediary parts and components.

    Numerous other reasons could push companies to go for M&A activities. Irrespective of all the other reasons, it is known that M&A is a closely followed segment of financial activity for professionals from numerous occupations.

    Examples of Failed Mergers and Acquisitions (M&A)

    The decision to merge two companies, or to acquire a competitor, or acquire another company that operates in the same or similar sectors, is often a tricky but crucial one. Failed mergers and acquisitions are quite common, and thus hard to ignore.

    Sandwich-chain Arby’s acquired Wendy’s in 2008, only for Wendy’s to part ways with Arby’s three years later.

    The sad tale of eBay’s acquisition of Skype is not much different. Only four years after the acquisition of Skype for $2.6 billion, eBay decided against the acquisition.

    An even more humiliating deal was that involving AOL and Time Warner. Spending a whopping $182 billion in 2000, AOL purchased Time Warner to create what was billed as the world’s largest media company. In 2009, opinions changed, moods soured and Time Warner left AOL.

    The list of failed mergers and acquisitions, or M&A, is long and extensive. However, that has not deterred prospective investors and firms from around the world to prowl ever so eagerly while on the lookout for their next target.

    For a wide variety of people, starting from researchers and analysts, to speculative investors, and dedicated advisors at M&A departments of major investment banks, Mergers and Acquisitions are the most watched and closely followed activities.

    For a wide variety of people, starting from researchers and analysts, to speculative investors, and dedicated advisors at M&A departments of major investment banks, Mergers and Acquisitions are the most watched and closely followed activities.

    Some of the Largest Mergers and Acquisitions

    For a wide variety of people, starting from researchers and analysts, to speculative investors, and dedicated advisors at M&A departments of major investment banks, Mergers and Acquisitions are the most watched and closely followed activities.

    Their importance to policymakers and academics cannot be downplayed either. M&A activities could reduce social welfare or efficiency gains if it results in concentration of market power in the hands of the newly formed firm, if the policymakers fail to take adequate preventive or corrective measures in due time.

    To gain a correct perspective on M&A deals, a few large Mergers & Acquisitions are mentioned.

    In 1999, British Telecom major Vodafone acquired German counterpart Mannesmann for $203 billion! Following closely on its heels in terms of size of the deal is the already mentioned merger of AOL and Time Warner.

    Vodafone features prominently, again, because of the merger of its US operations with its American counterpart Verizon in exchange for a deal worth a staggering $130 billion.

    Among other prominent cases of Mergers and Acquisitions are those of Exxon and Mobil, Royal Dutch and Shell, Glaxo Welcome and SmithKline Beecham and many others too numerous to list.

    Summary

    While Mergers and Acquisitions are frequently carried out and their importance for people from a wide variety of occupations across the spectrum has not diminished over the years, most M&A activities have proven themselves unjustifiable. Very often, such deals have resulted in abject failures and thus, exercising sound judgment becomes all the more important when it comes to such deals.

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