Mergers and Acquisitions are a big deal in the finance world and create a lot of buzz (just like a rumored 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:
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 Jio. Mergers usually happen between 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: A merger between companies from the same industry
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.
To remember this better: Think of horizontal mergers like the marriage between Blake Lively and Ryan Reynolds where both belong to the Hollywood industry.
#2. Market Extension Merger: A merger between companies in the same industry but different markets
Here two companies from the same industry but different markets merge to increase their customer base. Example: Jimmy Choo and Micheal Kors are both from the fashion industry. Jimmy Joo is a Japanese brand, and Micheal Kors an American brand. Their merger helped each brand gain access to customers from different countries.
To remember this better think of Sania Mirza and Shoaib Malik’s marriage. Both are from the sports industry but one is from India and the other from Pakistan!
#3. Product Extension Merger: A merger between two companies selling different but related products in the same market:
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 in this space.
To remember this better think of Jennifer Aniston (actress, producer & businesswoman) and Justin Theroux’s (actor and screenwriter) marriage as they’re both working in the same industry but have different job profiles.
#4. Vertical merger: A merger between two companies producing different goods or services for making one product
Sometimes companies merge with their supplier company or even with their distributer company to fasten process and achieve better results. This is a vertical merger and its done to increase synergies (Synergy is the concept that the value and performance of two companies combined will be greater than their individual identity) between two merging companies. Think of a cone supplier merging with an ice cream maker, or a tire manufacturer merging with a company producing vehicles.
Example: Reliance and Flag Telecom: Reliance a telecommunications company took over FLAG which was a leading provider of international wholesale communication services
To remember this better think of Kate Middleton and Prince William’s marriage who come from different backgrounds but complement one another.
#5. Conglomerate merger: A merger between 2 firms in unrelated business
Here two companies from completely unrelated businesses merge to expand their business further.
Example: Pepsi-Co and Pizza hut. One is a beverage company while the other is a restaurant.
To remember this better think of Tina Ambani, an actress and Anil Ambani, a businessman’s relationship where both have nothing in common but together they are a power couple!
The happily ever afters: Few Successful Mergers & Acquistions:
1.) Disney & Pixar:
The merger between Walt Disney and Pixar has been a successful merger for both because 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 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 divorce: Few Not So Successful Mergers & Acquistions:
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 percent of its staff to cut costs.
2.) eBay & Skype:
eBay bought Skype for $2.6 billion in 2005 but because of differences between them and inability to integrate their technology they had to sell the company four years later for $1.9 billion.
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!