Mergers and Acquisitions

Read more about mergers and acquisitions in this section and answer the questions at the end. How could mergers or acquisitions benefit a company seeking new international markets?

Mergers and acquisitions allow for business synergy and cost savings. Synergy is the idea that a larger organization's combined value and overall performance would be greater than two separate companies. Synergy can also come about through cost savings or by combining operations to create more efficient processes.

Mergers and acquisitions can often reduce a company's spending on administrative staff, accounting, management, facilities, insurance, and other overhead costs by removing redundancy and duplicated functions.

LEARNING OUTCOMES

  • Define merger as a business strategy
  • Define acquisition as a business strategy
  • Explain why companies undertake horizontal mergers and acquisitions
  • Explain why companies undertake vertical mergers and acquisitions

When businesses acquire other businesses or operations that were previously competitors, suppliers, buyers, or sellers, they are engaging in a strategy known as integration. This strategy is based on the possibility of synergy, the idea that the sum of two entities will be greater than their individual parts – often expressed as 1 + 1 = 3. Integration can be accomplished in two primary ways: through mergers or acquisitions. A merger is the consolidation of two companies that, prior to the merger, were operating as independent entities. A merger usually creates one larger company, and one of the original companies ceases to exist. Mergers can be either horizontal or vertical.


A horizontal merger occurs between companies in the same industry. This type of merger is essentially a consolidation of two or more businesses that operate in the same market space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, since competition tends to be higher, and the synergies and potential market-share gains are much greater in those industries.

FACEBOOK + INSTAGRAM = HORIZONTAL MERGER

When Facebook acquired Instagram in 2012 for a reported $1 billion, Facebook was looking to strengthen its position in the social-media and social-sharing space. Both Facebook and Instagram operated in the same industry and were in similar positions with regard to their photo-sharing services. Facebook clearly saw Instagram as an opportunity to grow its market share, increase its product line, reduce competition, and access new markets.

A vertical merger is characterized by the merger of two organizations that have a buyer-seller relationship or, more generally, two or more firms that are operating at different levels within an industry's supply chain. Most often the logic behind the merger is to increase synergies by merging firms that would be more efficient operating as one.

APPLE: THE KING OF VERTICAL INTEGRATION

Apple Inc. is famous for perfecting the art of vertical integration. The company manufactures its custom A-series chips for its iPhones and iPads. It also manufactures its custom touch ID fingerprint sensor. Apple opened up a laboratory in Taiwan for the development of LCD and OLED screen technologies in 2015. It also paid $18.2 million for a 70,000-square-foot manufacturing facility in North San Jose in 2015. These investments (i.e., mergers) enable Apple to move along the supply chain in a backward integration, giving it flexibility and freedom in its manufacturing capabilities.

An acquisition, on the other hand, occurs when a company purchases the assets of another business (such as stock, property, plants, equipment) and usually permits the acquired company to continue operating as it did prior to the acquisition. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity.

Source: Lumen Learning, https://courses.lumenlearning.com/wm-introductiontobusiness/chapter/mergers-and-acquisitions/
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