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Mergers Are Like Marriages

Mergers Are Like Marriages

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.

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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 JioMergers 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.

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#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.

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#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.

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#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.

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Example – Reliance and Flag Telecom. Reliance a telecommunications company took over FLAG which was a leading provider of international wholesale communication services

Types of Vertical Mergers

Forward Integration: When a manufacturer (let’s say a baker) merges with its raw material supplier (let’s say a wheat farm owner), its called backward integration.

Backward Integration: When a manufacturer (the baker) merges with its supplier (chain of bakeries) for distributing its products, its called forward integration.

#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. 

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Types of Conglomerate Mergers

Pure Conglomerate: Mergers between firms in totally unrelated business. Example: Packaged food company merging with a Telecom company.

Mixed Conglomerate: Mergers between firms who have some degree of relation in business. Example: An animation studio merging with a film making company.

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.

3.) Daimler-Benz And Chrysler

In 1998, Daimler-Benz bought Chrysler for $36 billion. But due to the difference between Chrysler’s focus for accommodating lower-income customers and Daimler-Benz’s focus on higher-income customer, they broke up. In 2007, Daimler-Benz paid $650 million to cut off its ties with Chrysler.

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!

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