Mergers and Acquisitions

A merger occurs when two or more organizations (usually of roughly similar sizes) combine to become one through an exchange of stock or cash or both. Mergers can take place in two different ways:
Acquisitions: It is the purchase of a firm by a firm that is considerably   larger. The firm that acquires is called the acquiring firm and the other the merging firm.

Consolidation: If both firms dissolve their identity to create a new firm;  it is called consolidation.
Two firms may join hands through a cooperative or a hostile approach. A friendly merger takes place when both firms agree to combine their might in order to gain certain benefits i.e. Marketing synergy (using common distribution channels, sales force, sales promotion etc); better use of facilities; better  use of resources as in the case of mergers of banks or financial institutions; Management  synergy (using  existing managerial  talent). It results in a carefully negotiated acquisition of one firm by another.
A hostile merger – better known as takeover – refers to a surprise attempt by one company to acquire control (through the purchase of a controlling share of voting stock in a public traded company) of another company against the will of the current management. Organizations are more likely to become takeover targets when their performance lags below potential and negatively affects the price of their stock thus making them attractive targets for acquisitions.

Vertical mergers: It is a combination of two or more firms, not necessarily in the same line of business, having complementarity in terms of supply of materials or marketing of goods and services. In vertical mergers the merging firm would either be a supplier or a buyer using its products, intermediary product for final production. For instance, a footwear company may merge with a leather tannery or a chain of retail shoe outlets.

Horizontal  mergers: It is a combination of two or more firms in the same  line of business ; formed primarily to obtain economies of scale in production or broaden the product line, reduce working capital needs,eliminate  competition or gain better control over the market etc. For instance if Jet Airways combines with Indian Airlines it would be integrating horizontally. The same would be true if General Motors purchases Daewoo Motors Ltd for an agreed sum.

Concentric mergers: It is a combination of two or more firms somewhat related to each other in terms of customer functions, customer groups, production processes, or technologies used. An example of concentric merger is of the motor manufacturer who also decides to manufacture farm machinery! The new customers are only somewhat  similar to the old, the new product and its technology is only somewhat similar to a car and yet a car and the farmer are not wholly dissimilar – there is some commonality and hence scope for positive synergy.

Conglomerate mergers: It is a combination of two or more  firms unrelated to each other. Rather than concentrating on having a common thread running through their company, top managers who pursue this strategy are chiefly concerned with the  rate of return.

A cash rich company with few opportunities for growth in its industry may, for example move into another industry where opportunities are great , but cash is hard to find. Another example of conglomerate mergers might be the purchase by a corporation with a  seasonal and therefore uneven cash flow of a firm in an unrelated  industry with complementing seasonal sales that will level out the cash flow.

Mergers obviously enable firms to combine their resources and efforts. Facilities can be put to the best use, marketing efforts can be intensified and operating costs can be cut down significantly by bridging the growth  gap. A firm can expand its product line,  enhance its distribution network,  increase its market share and even reduce competition by acquiring competing firms. It can put the R&D facilities of the other firm to good advantage and even  avail tax concessions if the other firm  has accumulated losses. The acquiring firm can  improve its resource base (raising  debt or equity whenever the need arises).

Apart from the acquiring firm, the selling firm would like to go for mergers in order to:

–increase the value of its own stock;
–increase the growth  rate,
–acquire resources to stabilize operations,
–benefit from tax legislations,
–and bridge gaps in talent  at the top level

Mergers and acquisitions however, do not always produce results. The reasons are fairly obvious. Culture clash is often cited as one of the reasons. The acquiring firm  might have an aggressive culture and the  acquired one might be living in a different world altogether. The real weakness of the acquired company is hidden until after the acquisition and consequently are underestimated. Also, underestimated  are the cultural  and managerial problems of merging two companies and then running them as one. As  a result, insufficient  managerial resources are devoted to the process of merging.

The acquisitions by software firms in recent times have failed  to deliver the goods because of  poor pre-merger and post-merger planning and insufficient familiarity with the prevailing culture of the acquired firms, not sufficient attention being paid to the collective strengths and weaknesses of the merging firms.