These are two terms that have become synonymous with the daily financial news. In fact, if we didn’t know better, then we might think that they were, in fact, the same thing. Whenever two companies announce their intentions to join, the media can report the news in varying ways. And while some announcements never end up with a resolution, and the two (or sometimes more) companies fail to complete a deal, this is not necessarily a bad thing. Vodafone’s merger with the German company Mannesmann in the year 2000 was valued at over $180 billion. Despite opposition from within Germany, the price was eventually doubled to the original offer – and then the deal, although completed, wasn’t deemed a success with Vodafone having to write off billions of dollars in the subsequent years. It didn’t stop them becoming even more successful, though.
Companies can join together as the result of a merger or an acquisition (takeover), for a number of reasons. The most obvious is to increase the performance of the two companies while reducing costs. By buying your competitor, you naturally expect to increase your market share. Companies might also merge into seemingly unrelated industries as a way of lowering the impact of another industries performance on its profitability.
Buying your competitor is seen as a horizontal merger whereas buying your supplier (to cut out his margins on the goods you purchase) is called a vertical merger. Below are eight reasons why companies might benefit from a merger;
- It makes them grow quicker than through organic growth.
- As a way of pre-empting the competition. When sectors go through periods of growth, it becomes fashionable to buy up the assets of the companies involved to prevent a rival doing the same.
- If they are seeking to dominate their sector, then large companies will try to merge – although such a move can be stopped by the authorities if they think that the new company will have too much of a monopoly.
- Large companies will buy companies in countries with lower taxation to reduce their liability.
- Reducing back office staff by buying your competitor is always attractive to shareholders and often means that the outgoing CEO will receive a large compensation – unlike the other staff whose services are dispensed with.
- Buying another company increases your buying power. The bigger the order, the lower the unit price. M&A to lower your purchasing power is another way to reduce costs.
- New technology is expensive so rather than develop it themselves; large companies can buy smaller companies with new tech.
- If a company wants to expand by entering overseas markets, then what better way than to buy a company already operating in it.
To understand better how the larger M&A deals are structured and what they signify to the companies involved, it is worth looking at the true meanings of the terms used in these transactions. It is also worth noting that for public relations reasons, they don’t always mean what they say.
A company Merger is pretty much what you’d expect it to be; two companies combine to create a new one. Usually, the two are of comparable size, and the idea of the ‘merger’ is to ensure that the two of them are equal partners in the new organisation. In reality, this is very hard to achieve because it is very rare that two companies in the same sector would have similar balance sheets, organisational structures, or shareholder valuations.
Aside from the Vodafone’s huge merger with Mannesmann, there were other mergers which didn’t necessarily work out the way they were intended. The second largest merger in history was in 2000 when America Online (AOL) acquired Time Warner for $164 billion. At the time, most people accessed the internet through their landlines and AOL was one of the only providers of the service in the US. However, the post-dial-up age led to being quickly overtaken and their dominance reduced. The merger only lasted nine years before the two companies split again.
The acquisition is where one company purchases the other – usually a smaller company – and takes over it assets. There is no new company to emerge from the acquisition, and the smaller company is subsumed by the larger one. Another name for an acquisition is a takeover which has slightly unsavoury undertones when the target company is resistant to the move. It is at times like this that the PR departments often erroneously refer to the move by the bigger company as a merger.
The nature of business means that when one company takes over another, then there are going to be losers. Whatever is said about a merger being the strengthening of the two companies, it is unlikely to be true. Reducing costs will more often than require a reduction in head-count, which is never popular. The shareholders, on the other hand, will usually welcome such a move if it means higher dividends.
As was mentioned earlier, many proposed M&A activity does not take place. Be it for monopolistic concerns or falling interest from the companies involved after the initial approaches, the failure of a deal can often be for the better. An example of this was the 2016 approach by 888 Holdings and the casino operator, Rank Group, for the British bookmaker, William Hill. Had it been successful, the three-way deal would have brought together one of the country’s biggest online gambling companies and the country’s biggest high street bookmaker. Ultimately, the merger failed, but the outcome didn’t have any negative impact on either company involved, 888 Holdings have gone from strength to strength, their offerings of online poker, bingo and casino games are still hugely popular.
At the time, the gambling industry was going through a series of M&A deals – Ladbrokes and Gala Coral agreed a £2.3 million merger and the Irish bookmaker, Paddy Power and the online gambling company, Betfair, had agreed to merge.
So there you have it, mergers and acquisitions can positively impact both companies when they are carefully thought through, but there is no need to jump into a deal that isn’t right for both parties.