Mergers and Acquisitions are a big deal in the finance world and create a lot of buzz (just like a rumoured marriage). They are a tedious process and can sometimes take years to materialize. But not all mergers last, a few of them end bitterly leaving both companies distressed. Here’s a quick understanding of the different mergers and acquisitions.
What are Mergers & Acquisitions or M&A’s ?
Mergers are when two companies unite to benefit one another, like Idea merging with Vodafone, to compete with the cheap data plans offered by Jio. Mergers usually happen between two companies equal in size, profits or operations. While acquisitions, though used interchangeably with mergers, have a slightly different meaning. An acquisition is when a large company buys a part or whole of a smaller company like Facebook bought WhatsApp.
What are the different types of mergers & acquisitions?
Companies merge or acquire other companies for entering new markets, for expanding their product line or even for eliminating competition. Depending on the reason they can be classified as follows
#1. Horizontal Merger
Here two companies working in the same industry merge to eliminate competition. Example – Lipton tea merging with Brooke Bond tea. They both work in the tea industry and their merger led to a stronger entity.
#2. Market Extension Merger
Here two companies from the same industry, but different markets merge to increase their customer base. Example – Jimmy Choo and Micheal Kors, both are from the fashion industry. Jimmy Choo is a Japanese brand, and Micheal Kors is an American brand. Their merger helped each brand gain access to customers from different countries.
#3. Product Extension Merger
Here 2 companies merge to expand their product line so that they can earn more profit. Example – Facebook and Instagram both are in the social media space and their merger has helped eliminate competition.
#4. Vertical merger
Sometimes companies merge with their supplier company or even with their distributor company to fasten processes and achieve better results. This is a vertical merger and its done to increase synergies (synergy means value and performance of two companies combined is greater than their individual identity) between two merging companies. Think of a cone supplier merging with an ice cream maker.
Example – Reliance and Flag Telecom. Reliance a telecommunications company took over FLAG which was a leading provider of international wholesale communication services
#5. Conglomerate merger
Here two companies from completely unrelated sectors merge to expand their respective business further. Example – Pepsi-Co and Pizza Hut. One is a beverage company while the other is a restaurant.
The Happily Ever Afters
Few Successful Mergers & Acquisitions
1.) Disney & Pixar
The merger between Walt Disney and Pixar has been a successful merger for both. Even before their merger, the movies they produced together like ‘Cars’ had been a success. That’s why a merger made perfect sense for them.
2.) Jabong & Myntra
Myntra, an e-commerce company owned by Flipkart acquired Jabong from Global Fashion Group for a sum of US$ 70m. This deal was done to compete with other e-commerce sites like Amazon (United States) and Alibaba (China).
3.) Airtel & Telenor
Airtel which is under immense pressure due to decreasing customers and falling revenues is trying hard to stay afloat. Their merger with Telenor India will give the company resources to fight against Reliance Jio and Vodafone-Idea.
The Corporate Divorces
Few Not So Successful Mergers & Acquisitions
1.) Mattel & The Learning Company
Mattel in 1999 wanted to enter the educational software market by merging with almost-bankrupt, The Learning Company. But in less than a year after the merger The Learning Company lost $206 million, bringing down Mattel’s profit as well. By 2000, Mattel ended up losing $1.5 million a day and its stock price went on falling. Eventually, they sold the Learning Company, but Mattel had to lay off 10 per cent of its staff to cut costs.
2.) eBay & Skype
eBay bought Skype for $2.6 billion in 2005, but because of the differences between them and the inability to integrate their technology, they had to sell the company four years later for $1.9 billion.
So mergers are just like marriages some could fail while some have their happily ever afters! If you want us to decode any big merger that has been all over the news, comment and let us know and we will decode it for you!