Merger:
When two companies come together by absorption or closure of one separate legal entity in order to form a new entity is when the merger takes place. It is an undertaking that is practiced by various industries such as private investments, financial institutions, healthcare industries, etc. It unites two companies and forms a new company. A merger cannot take place without the full consent of the owners of the company. The companies that assent to merge with each other are most likely to be facing uniformity in terms of profits, customers, and many other factors. During such a merger, both the companies have to let go of their old stock for issuance of new stock for a new company. A merger can convert two weak or loss-making companies into one strong company with a combination of markets, assets, and various competencies.
Types of Mergers
Horizontal Merger
A horizontal merger takes place between two companies from the similar industrial field, more like competitors. When two firms compete against each other, the development of the economy becomes easier by fusing the operations. For instance, a merger between Pepsi and Coca-Cola can be regarded as the classic example of a horizontal merger as both companies compete against each other. However, a horizontal merger of two large companies causes a better impact in the market than a horizontal merger of two small companies.
Vertical Merger
A vertical merger takes place when two companies operate at dissimilar levels in the same industry to make a combination of their operations. For instance, the purchase of a dairy farm by a grocery store that makes profits by selling milk products. This type of merger is quite the opposite of a horizontal merger as it expands its business by creating products that compete with each other. Vertical Merger creates a company that provides a variety of goods and services. The owners of the two companies come across various challenges whilst carrying out such a merger.
Conglomerate
A conglomerate is classified into two types: pure and mixed. A pure conglomerate merger is the one where both the companies differ from each other, whereas the mixed conglomerate merger is the one where the companies are seeking an extension of products and expansion of markets.
Congeneric
This type of merger can also be regarded as a Product Extension Merger. Certain companies that vary from each other in various terms but have other similarities such as production process, technology, research and development, etc. When such a merger takes place, the firms acquire control over the market share and a large group of consumers.
Market Extension
Such merger companies make profits through the same product by selling them in different markets. The purpose of the companies behind such a merger was to gain access to a market bigger and better than the present one.
Acquisition
Unlike merger, acquisition is where one company purchases the shares of another company for expansion of business in another country. If a company purchases more than 50% stake of another company, then the acquirer of that company has the right to make all necessary decisions on behalf of the acquired company. An acquisition is made with the motive of entering the foreign market as a growth strategy. An acquired company seeks for start-ups or new growing companies to join it for the purpose of making a profit. This method is preferred by most companies as it is cost-efficient in terms of introducing new technology in the market.
Types of Acquisitions
Management Acquisition
Management Acquisition takes place when one company purchases shares required to take full control of the other company. Such a company is most likely to turn into private business instead of a shareholder-oriented business. This type of acquisition cannot be made without the shareholder agreement. The shareholders are the beneficiaries of such an acquisition as they can either earn profits by selling off their shares or continue to remain shareholders by maintaining trust in the company.
Asset Acquisition
Asset Acquisition takes place when one company agrees to purchase some or all the assets of another company. Such an acquisition occurs when one company is on the verge of bankruptcy. For instance, acquisition of intellectual property. The shareholders also benefit through this type of acquisition, however comparatively gain less profits than that deriving out of a management acquisition. This acquisition does not make the purchase of a business as a whole but the purchase of a particular stock.
Tender Offer
In such an acquisition, the buyer is required to make a tender offer for making the purchase of the existing shares of another company first. Such an offer is to be made in public. The offer is considered to be invalid if the board members disagree with it and the shareholders approve of the same. This acquisition must be announced in the trading stock exchange by the buyer.
Pros of Mergers And Acquisitions
- Exposure to the new market
As mentioned above, a merger or an acquisition instantly gains more consideration when it is exposed to a new market. Brand loyalty is a crucial factor and the same gains more recognition post a merger or an acquisition in the eyes of the general public. Consumers may get the opportunity of experimenting with new commodities, goods, and services.
- Adds more value to a combined entity than an individual one
A combined entity helps in an increase in the revenue more than an individual entity as together the two companies come out to be stronger with the combination of resources, market, capital, and many other factors.
- Reduction of Competition
When two companies competing against each other come together for expansion of business, the competition is eliminated. However, the shareholders are required to accept the offer of large premiums and such an offer in most cases leads to disappointment since large premiums are issued to the shareholders of other companies.
- Gateway to multiple opportunities
The mergers and acquisitions process takes place between companies that may be effective on a local level but are not leading the race when it comes to overall statistics. However, when they come together, they form an effective company that opens multiple economic opportunities for growth and development.
Cons of Mergers and Acquisitions
- Rise in Debts
Mergers and acquisitions when done by loss-making companies may result in an increase in the number of debts owed to other entities which results in a slowdown of business as a whole and create an impact on the new company’s potential for expansion and rise in the profit.
- Differences in Corporate Culture
A merger of two companies dealing with the same products may have identical nature of businesses, however, the work environment may vary depending upon the rules followed by each of two companies and such differences may lead to conflicts between the two. Such a factor may seem petty initially but may be more difficult to deal with when looked upon in a broader sense.
- Anguish between the employees of the company
A merger or an acquisition can give rise to loss of employment as the companies are more likely to cut out their assets causing an impact in their profit-making process. In such scenarios, the companies fire the underperforming employees with a view of the reduction of costs in order to reform into a stronger entity.
- Competitiveness
This point is related to the above-mentioned point as when the company is undergoing the firing process, the employees are worried about losing their jobs and such stress makes them develop a tendency to compete with the other employees in order to save their own job. In such cases, it is the duty of the HR Team to help in the maintenance of unity and harmony amongst the employees of the organization.
Examples of Mergers
- Indus Towers and Bharti Infratel
- Capital First and IDFC Bank
- Vodafone India and Idea Cellular
- Tata Steel and ThyssenKrupp
- Flipkart and eBay India
Examples of Acquisitions
- Zomato and Uber Eats
- Accenture and Droga5
- Apple and Intel’s Smartphone Modem
- Walmart and Flipkart
- Disney and 21st Century Fox
Conclusion
Mergers and acquisitions offer help in the creation of beneficial and efficient organizations, companies are scouting for methods to ensure their ability to reap the real benefits. However, it is not an easy process and all the factors must be taken into consideration prior to rushing into the same. The best decisions can be made by evaluating all the important points before deciding upon any merger or acquisition.
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