Mergers and acquisitions (M&As) are strategies that enable companies to grow. Merging with another company operating in the same business sector can increase market share and turnover. Acquisitions are different in that a company might buy an established business working in an industry unlike that of the purchaser.
These transactions can produce significant benefits for both parties; however, mergers and acquisitions also have the potential to be problematic, such as in cases where businesses may be impacted by regulatory issues or cultural clashes. Read on to discover more about challenges like these and how you can mitigate against them.
This guide provides an overview of mergers and acquisitions, including their different types, benefits and the challenges they present.
To research more aspects of mergers and acquisitions, explore our Mergers and Acquisitions open programme at Warwick Business School. This Executive Education programme draws on the experience and expertise of industry experts to help students understand the strategies and other factors that can determine success or failure.
Mergers and acquisitions are fundamentally different in that two companies often merge to create a larger business – growth in any business is a positive thing. Whereas, acquisitions occur when one company purchases another, usually when a large business purchases a smaller one. The total value of merger and acquisition deals globally was $3.7 trillion In 2019.
A merger or acquisition typically occurs following the purchase of assets, equity shares or by combining operational structures. These business deals are often motivated by a need to reduce competition, gain entry into new markets or acquire valuable assets and technology.
Let’s explore in greater depth the differences between mergers and acquisitions. The terms are sometimes used interchangeably, but there are some significant differences between the two. For example:
Horizontal mergers occur when two companies in the same or similar industries combine. For example, the merger between Disney and 21st Century Fox was horizontal. Such mergers allow companies to reduce competition, increase market share, cut costs, increase diversification, share complementary resources and skills, and realise economies of scale.
However, horizontal mergers can be problematic. Sometimes the process struggles to merge the two corporate cultures and difficulties arise in building working relationships because of variations in management styles. It can also face increased regulatory scrutiny, especially if the merger creates a company that is considered a monopoly.
In a vertical merger, two companies in the same industry but at different stages of the supply chain are merged, such as a manufacturer and a supplier. It aims to streamline operations and reduce costs. For example, when Apple acquired AuthenTec, the firm that makes touch-ID sensor technology, it took control of the production and distribution of the technology.
Vertical mergers enable companies to reduce operating costs, increase profits, improve quality control and improve the flow of information across the supply chain. However, a vertical merger can face integration challenges, limit flexibility and cause disruption to existing supplier relationships. Also, if synergies are overestimated, it can lead to higher costs.
These are mergers between companies in very different industries that enable them to diversify their business. For instance, Microsoft acquired the professional networking site LinkedIn. A conglomerate acquisition offers many benefits, including increasing market power, providing access to new expertise and technologies, and diversifying products, services, and markets.
However, this type of acquisition can create a lack of constructive collaboration between the companies, reduce efficiency, shift focus and resources away from the firm’s core business or result in a culture clash.
When a company acquires another in a different geographic location it is termed a market extension acquisition. The acquisition allows a company to increase its customer base by expanding the reach of its market.
When PepsiCo acquired the South African company Pioneer Foods in 2019, it extended its product offerings, grew its distribution network and market presence in Africa. These market extension acquisitions often face challenges when integrating the different cultures and business styles of companies. Dealing with new regulatory barriers can also be a problem.
Congeneric acquisitions are when the acquiring (purchasing) company and the acquired (target) company are not direct competitors but sell to the same customers. For example, PepsiCo’s merger with Gatorade and Tropicana Juice was a congeneric acquisition.
These companies often share similar distribution channels, production processes, technology or marketing. This type of acquisition can enable the purchasing company to increase its market share and expand product lines quickly. However, it can mean that because they are in the same industry and targeting the same clients, the scope for diversification is very limited.
Management acquisitions, also known as management buyouts (MBOs), are when a company’s management team or an individual from the team purchases the business from its owners. They purchase everything related to the business.
In 2013, the founder of Dell, Michael Dell, having secured backing from an equity firm, led an MBO to take the company private. This type of acquisition offers greater rewards and control of the business. It is typically funded with borrowed capital; however, this type of acquisition comes with significant risk and its success is not guaranteed.
Significant benefits can be realised through mergers and acquisitions; however, some drawbacks can become apparent when companies merge or acquire another business that were not obvious during the negotiations. They can have an impact on whether a deal is an eventual complete success.
Warwick Business School provides a range of executive education programmes designed to empower managerial or executive-level business professionals. Our Mergers and Acquisition programme blends practical applications with theoretical insights to assist students in gaining a high level of understanding of these business transactions.
To learn more about our courses, use our course finder or download a course information brochure that provides in-depth information about our highly regarded education programmes.
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