Simply the main idea about both mergers and acquisitions is to increase the performance, one plus one makes three. This equation is simply simplifying the target behind a merger or an acquisition between two companies. The idea behind is creating value for shareholders over and above the sum of the two companies, two companies together are more valuable than two separate ones .
A merger is when integrating two companies together in which the two companies will share control and equity with each other. Acquisition is when a company buys the other company and end up controlling it. Usually mergers happens between two equal size companies who agrees to go forward as a single new company, this kind of mergers is called “merger of equals”. For example, both Daimler-Benz and Chrysler formed a new entity named DaimlerChrysler upon merger. Actual mergers of equals are not very often. Usually, one company will buy another and as part of the deal’s terms, allow the acquired firm to claim that the action is a merger of equals, even if it is an acquisition, this is because equal merger usually sound better than acquisition in the market.
Types of Merger and Acquisition
From the business perspective, there are many types of business mergers, distinguished based on the relation between the two companies going in the process. Based on the US Federal Trade classification mergers types includes:
- Horizontal mergers which involve companies closely related from the product or service they produce,
- Vertical mergers which includes companies that had a potential or existing buyer-seller relation before merger, and
- Conglomerate or unrelated involve essentially companies that unrelated in terms of products-markets in which they are operating and the main target of this type of mergers is diversifying strategy.
Literature seems to suggest that both Horizontal and vertical mergers are more successful than unrelated mergers. From a practical perspective, this seems logic, because both horizontal and vertical mergers are more suspect to benefit from the economy of scale and scope, strategic fit of the company in terms of relatedness of the product-markets in which they are operating.
Why Companies is seeking Merger and Acquisition?
Companies in different industries are seeking mergers and acquisitions for many reasons and motives but in general, companies are looking forward to increase profits and rapid growth. Motives to increase financial performance includes:
- Economy of scale and scope,
- increase both revenue and market share,
- cross selling,
- synergy to increase managerial specialization or purchasing economies,
- taxation when a profitable company buys a loss one to use the loss in its benefit,
- geographic diversification, business diversification,
- resources and know-how transform
- vertical integration of products or technologies,
- absorption of similar business under the same management,
- and competition elimination.
When it comes to High-tech industry, in addition to the above motives, companies are looking forward to:
- joint or complimentary R&D programs,
- integrating both upstream and downstream partners,
- integration of users can help to identify market need for new technology
- and for large technology companies they are always looking forward to acquire new innovative ideas to guarantee leadership in their markets.
For SMs- small and medium size technology companies, acquisition can provide strategic, operating and financial benefit. Also large companies carrying the acquisition of small/medium companies benefits. Strategic acquisition can benefit SMs shareholders with earlier liquidity than IPO, with less risk and dilution. It also can provide SMs with immediate leverage of large companies established distribution and manufacturing infrastructure, without the required time and risk of internal development. Large companies benefit from the ownership of new products and technologies necessary to maintain its competitive advantage, growth rate and profitability.