Why do companies merge with or acquire other companies
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The total value of mergers and acquisitions reached an impressive $3.8 trillion in 2022, and experts predict even more deals by the end of 2023, showing the increasing importance of these transactions.
But what fuels this surge in M&A activity? In this article, we’ll discover ten possible reasons that drive companies to opt for M&A. Additionally, we’ll explore the six types of mergers and acquisitions and provide real-world examples of highly successful M&A deals.
Highlights
- Mergers and acquisitions involve the consolidation of companies to achieve business objectives, but they have differences. In a merger, companies combine to form a new entity, while an acquisition involves one company purchasing another to gain control over its assets and operations.
- M&A can be classified into different types, such as horizontal, vertical, conglomerate, market extension, product extension, and congeneric mergers, each serving specific strategic objectives.
- The main reasons for company mergers include revenue and cost synergies, diversification, cross-selling opportunities, market expansion, and access to new technologies and talent.
- The examples of largest mergers include Walt Disney and ABC, Microsoft and LinkedIn, IBM’s and Red Hat.
Mergers and acquisitions: what’s the difference?
Mergers and acquisitions (M&A) are corporate strategies involving the consolidation of two or more companies to achieve business objectives.
Even though the two terms are often used interchangeably, they have different meanings.
| Description | Aim | |
| A merger | In a merger, two or more companies combine to form a new entity, sharing assets and operations. Existing shareholders of each merging company receive new shares based on an agreed exchange ratio. | To achieve economies of scale, increase market share, or eliminate competition. |
| An acquisition | An acquisition occurs when one company purchases another, gaining control over its assets and operations. The target company may become a subsidiary or fully integrate into the acquiring company. | To access assets, technology, or new markets. |
6 types of mergers and acquisitions
Mergers and acquisitions can be categorized into several types based on the nature of the transaction and the strategic objectives they aim to achieve.
1. Horizontal mergers
A horizontal merger occurs between two companies operating in the same industry.
Aim: To achieve economies of scale, increase market share, reduce competition, or gain access to the technology of the new company.
Example: The Facebook acquisition of WhatsApp — both the acquiring company and the acquired one were in the same business of messaging and social media.
2. Vertical mergers
A vertical merger occurs between companies operating in the same industry but at different business points. For instance, a product producer merges with distribution companies to consolidate operations and reduce risk connected to the supply chain.
Aim: To improve operational efficiency, control the supply chain, and gain a competitive advantage by integrating complementary activities.
Example: Apple’s acquisition of AuthenTec, a producer of the Touch ID fingerprint sensor technology used in iPhones.
3. Conglomerate mergers
A conglomerate merger happens between two companies that operate in different markets. There are two types of conglomerate mergers:
- Pure, where the two firms continue to operate in their own markets
- Mixed, where the firms operate in unrelated business activities, but seek to gain product or market extensions
Aim: To increase market share, diversify businesses, and cross-sell products.
Example: The Amazon merger with Whole Foods, which allowed Amazon from Whole Foods’ physical presence, while Whole Foods gained access to Amazon’s resources and technology.
4. Market extension mergers
In a market extension merger, the integration is between companies that offer the same products or services, but in separate markets.
Aim: To expand its market reach and customer base by entering new regions.
Example: The merger between LAN and TAM — two equal companies which flew to different countries. The merged company, LATAM, gained competitive advantages and significantly expanded its market share.
5. Product extension mergers
A product extension merger occurs when two companies offer complementary products or services in the same market.
Aim: to expand the existing product line and cross-sell to customers
Example: The Pepsi-Pizza Hut merger, which provided a new market — every Pizza Hut restaurant — for the famous fizzy drink.
6. Congeneric merger
A congeneric merger involves companies in related industries with some degree of overlap in their products or operations.
Aim: To leverage synergies, share resources, and achieve cost savings.
Example: Citicorp, a banking giant, merged with Travelers Group, a financial services company. Companies had distinct product lines within the same industry.
10 reasons for mergers and acquisitions
Let’s take a look at some of the most common reasons and benefits for both sides of an M&A deal.
- To generate revenue synergies. One reason that companies participate in mergers and acquisitions is value creation. Companies involved in M&A can combine their strengths, resources, and customer bases, ultimately unlocking revenue opportunities and increasing profits.
- To generate cost synergies. Acquisitions can result in lower costs and efficiencies through economies of scale. By combining operations and eliminating duplicated functions, the merged entity may reduce costs and improve overall profitability.
- To diversify. Mergers can be driven by the desire for service or product diversification. By merging with another company operating in different industries, the combined entity can reduce its dependence on a single market or product line, spreading risk more effectively.
- To cross-sell. By combining the customer networks of both companies, they can leverage each other’s strengths and offer a broader range of cross-selling products or services to their customers. This strategy aims to increase sales and market penetration.
- To expand into a larger geographical area. When expanding into a new country or region, a company will often find it best to join forces with another local entity, rather than starting an operation from scratch.
- To eliminate competition. Acquiring or merging with a competitor can lead to the removal of direct competition from the market, increasing the market power and potential for higher market share.
- To increase market share. A successful acquisition can be a fast way for business leaders to expand market share and enter new markets. By combining forces, the merged entity can gain access to a broader customer base and increase its market presence.
- To acquire talents. A common motive for acquiring a company can be an opportunity to attract and retain skilled employees from the target company, expanding the talent pool and expertise within the merged entity.
- To drive product innovation. A company may seek a merger to gain access to new technologies, patents, or intellectual property that can enhance its competitiveness and innovation capabilities.
- To alleviate a tax burden. Sometimes, a larger company will acquire a business that isn’t doing so well as a way of reporting a loss and reducing its tax liability.
Examples of mergers and acquisitions
Here are three examples of successful mergers and acquisitions.
1. Walt Disney and the American Broadcasting Company (ABC)
Year: 1995
Value: $19 billion
The Walt Disney Company merged with the American Broadcasting Company (ABC) in 1995. This M&A brought together two successful businesses and media giants, combining Disney’s vast library of entertainment content, theme parks, and consumer products with ABC’s extensive television network and broadcasting capabilities.
As a result, Disney leveraged ABC’s broadcasting platform and reached a broader audience for its movies, TV shows, and theme park offerings. On the other hand, ABC benefited from Disney’s rich content library, incorporating beloved characters and franchises into its programming, driving higher viewership and advertising revenues.
2. Microsoft and LinkedIn
Year: 2016
Value: $26.2 billion
In 2016, Microsoft acquired LinkedIn for $26.2 billion, combining the technology giant’s productivity software and cloud services with LinkedIn’s professional networking platform. With access to LinkedIn’s vast user base, Microsoft aimed to integrate professional data and insights into its product suite, including Microsoft Office and Dynamics 365.
The merger enabled seamless access to LinkedIn profiles and targeted advertising opportunities, enhancing productivity tools for professionals. The strategic move strengthened Microsoft’s position in the enterprise software market and tapped into the growing demand for cloud-based productivity solutions.
3. IBM and Red Hat
Year: 2018
Value: $34 billion
IBM, a multinational technology corporation, acquired Red Hat, a leading provider of open source software solutions, for $34 billion. The acquisition aimed to strengthen IBM’s cloud computing and hybrid cloud offerings, providing businesses with a more comprehensive suite of enterprise-grade cloud solutions.
With Red Hat’s expertise in open-source technologies and containerization, IBM sought to accelerate its cloud and AI strategy, enabling clients to modernize their IT infrastructure and applications. The deal positioned IBM as a major player in the cloud computing market, competing against other cloud services providers like Amazon Web Services and Microsoft Azure.
FAQ
Merging with or acquiring other companies refers to the process of combining two businesses to form a single entity or buying a company to gain control over its operations, assets, and resources. Mergers involve mutual consent and cooperation between the companies, while acquisitions can be either friendly or hostile.
A company chooses between a merger and an acquisition based on its strategic goals and financial capabilities. A company seeking to combine resources and create a more powerful entity may prefer a merger. But if aiming to gain control over a company’s assets or operations, an acquisition might be a better option.
Merging with another company offers several benefits, including increased market share, cost savings through synergies, access to new technologies and expertise, and diversification of the business across different markets or industries.
The M&A process involves various stages, starting with strategic planning and target identification. Then, due diligence is conducted to evaluate the target company thoroughly. After that, negotiations take place, leading to the final agreement on terms and conditions. Upon reaching the agreement, the deal is finalized, and the integration process begins, aligning the operations and cultures of both companies to achieve the anticipated benefits and synergies.
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