What are mergers?
When two or more companies join together, it is referred to as a merger. This leads to significant changes in organizational structures and internal functioning. A merger is a form of corporate restructuring. Many other activities, such as acquisitions, leveraged buyouts, performance improvement initiatives, etc., also form part of corporate restructuring. Mergers may involve absorption and consolidation. It is done by companies to increase their market share.
Movie Case Study
Tess used to work in the Mergers & acquisition department as a young associate. She witnessed that her boss continuously took credit for her ideas and dismissed her.
Tess decided to take matters into her own hands. She gatecrashes a wedding with a friend and meets the owner of the company. She pitches him for the idea, and he is willing to meet the team.
Absorption, as the name suggests, means one company acquires another company. Consolidation means that two companies combine to form a new company.
Types of mergers:
Horizontal Merger
This merger represents a merger of firms engaged in the same line of business or industry. These mergers are quite common as they seek to achieve synergies. Merging companies get bigger markets and clients. A classic example to understand this would be a merger of Pepsi and Coke. Both companies are in the same line of business. PVR and INOX merged to explore bigger markets in 2022. Both are cinema franchises, they combine to utilize advertising revenues, lower rental costs, and convenience fees.
Vertical Merger
A merger of firms engaged at different stages of production in an industry. It can be the company engaging in the supply chain. A shoe manufacturer merged with a leather manufacturer. For example, the merger of a company called ONGC (Oil and Natural Gas Corporation), a company engaged in oil exploration and production, with HPCL (Hindustan Petroleum Corporation Limited), a company engaged in refining and marketing, may improve coordination and control.
Conglomerate Merger
This merger deals with a merger of firms engaged in unrelated lines of business. For example, ITC is one of the biggest conglomerates, spanning hotels, paper boards, agricultural products, and FMCG, or fast-moving consumer goods.
Reasons for Mergers:
There are many reasons why two companies decide to join together. These are related to growth, diversification, economies of scale, managerial effectiveness, lower financing costs, and so on.
Strategic benefit:
If a firm has decided to expand in a particular industry, sometimes looks for merger & acquisition which offers several strategic advantages. It offers a special timing advantage because the merger enables a firm to leap several stages in the process of expansion. It may also be advantageous in terms of cost and risk.
Economies of Scale:
To widen the scope of activities and skills or assets, many firms decide to merge. For example, P&G can enjoy economies of scale if it acquires a consumer product company that benefits from its highly regarded consumer marketing skills.
Complimentary Resources:
If two companies have complementary resources, it makes sense for them to merge. For example, a startup that has innovative products would not have the marketing capabilities of a bigger firm in the same industry. These two can decide to merge to successfully use each other’s resources and have a bigger market share.
Recent Example:
Zomato was recently looking to be merged with Grofers. Zomato, a food delivery app, was looking to explore new public markets. Grofers is an online grocery e-retailer that touched the $1 billion club recently. Zomato acquired a 9.16% stake in Grofers. This deal will help Zomato come back into the grocery segment.
What are acquisitions?
When one company takes over another company and becomes the new owner in the process, this purchase is called an acquisition.
The acquiring company takes the majority stake in the acquired company. The legal structure of the company does not change, but management changes, and hence there is a cutting of staff (downsizing) and new divisions are created.
These changes can be stressful for the existing employees as it could mean that they might lose their jobs. To effectively manage this change, management must retain and resort to keeping the most valuable resources with the company.
Acquisitions are mostly done with a strategy in place. When companies are looking to expand to different markets, acquire new technologies, or maybe decrease competition, they might resort to the acquisition of companies. This can be a part of the growth strategy too, which means taking over a young company and incorporating its revenue stream into the business.
