Mergers and acquisitions are is part
and parcel of investor information today. We can almost witness a business merger and acquisition from the business reports
every day. A company merger or takeover is a corporate restructuring to combine two or more companies and form a larger entity.
Many believe that the principle behind merger and acquisition comes from the idea that the “whole is greater than the
sum of its parts”.
Mergers and acquisitions is part of
corporate strategy with the main purpose to expand their company for long-term benefits. There are affirmative reasons why
a corporate merger or acquisition is vital. The main motives of this strategy are to buy up or combine market shares or to
achieve greater efficiency. One trivial merger and acquisition is when Google took over Youtube so that they can acquire a
market for their video platforms. The fundamental economic rationale for mergers and acquisitions is to create economies of
scale towards efficient and more productive corporations.
Mergers and acquisitions are two terms
used collectively to represent union of companies. However, these two words differ in intent. A merger is a union of two firms
of the same competitive size. The intent of companies merging on equal footing is rare. This is because the push factor for
mergers is that there is a strategic reason or dominance from one side. A famous company merger happened between Daimler-Benz
and Chrysler to form DaimlerChrysler (Investopedia 2007 [online]).
There are three types of mergers. A
horizontal merger takes place when two merging companies provide similar products in the same industry. The logic for such
action is to share a larger market for their product that combines geographical differences or different market demographics.
A vertical merger meanwhile is an occurrence of two firms working in different stages of the production chain of the same
goods combine. A vertical merger therefore creates a more integrated supply chain and a better grip on production markets.
Lastly, a conglomerate merger is a combination of seemingly unrelated firms. The combination of unrelated firms is mainly
done for diversification of assets across industries.
An acquisition is essentially a takeover
of a dominant company over a small company. While this action is advantageous for the buying company, the owners of the company
being sold sometimes profit by these acquisitions. In the case of Google, Youtube is a very promising company with the momentum
to expand. While Google sees the opportunity to buy the company, Youtube was able to negotiate a high price for its sale.
This is part of continuing corporate strategies that govern the dynamic of startups and established companies.
These actions are part of strategic
management aimed to expand, diversify, and efficiently allocate resources to provide more competition in the industry or to
create monopolies. These actions are necessary for some firms for reaching a corporate vision or matching revenue targets.
The dynamics of corporate mergers and acquisitions provide new opportunities for investors looking to find the next hot chip.
References
NetMBA. (2007). Corporate Strategies.
Available: http://www.netmba.com/strategy/process/. Last accessed 18 October 2007.
Investopdia. (2007). Mergers and Acquisitions.
Available: http://en.wikipedia.org/wiki/Conglomerate_%28company%29
. Last accessed 18 October 2007.
Wikipedia. (2007). Conglomerate. Available:
http://en.wikipedia.org/wiki/Conglomerate_%28company%29
. Last accessed 18 October 2007.
Wikipedia. (2007). Horizontal Integration.
Available: http://en.wikipedia.org/wiki/Horizontal_integration
. Last accessed 18 October 2007.
Wikipedia. (2007). Vertical Integration.
Available: http://en.wikipedia.org/wiki/Vertical_integration
. Last accessed 18 October 2007.
