What is "Mergers and Acquisition"?
In 2022, in the face of rising inflation, increasing supply chain issues, and a possible global economic downturn, many companies are considering either merging with or acquiring other companies for beating competition and achieving their financial and strategic goals.
Just this week, French and British satellite firms Eutelsat and OneWeb announced plans to combine forces and create a "global leader" in the flourishing space-based internet industry to compete against US-based juggernauts like Blue Origin and SpaceX. Such deals are mushrooming every week. Therefore, we must educate ourselves about the meaning of "Mergers & Acquisitions".
Overview
In layman’s language, "Mergers & Acquisitions" (also called M&A) means buying and selling companies. These terms are usually used interchangeably, but in the strictest terms, this is how they are defined:
Mergers: When two or more companies merge to form a completely new company, each company holding a well-defined stake and role in the new company.
Acquisitions: When a company buys another company, a company's division, or a company's product line.
For example, Facebook bought Instagram for $1 billion in 2012. Instagram today contributes over $20 billion to Facebook's annual revenue. Thus, we can say that Facebook acquired Instagram.
But, why do businesses go for mergers and acquisitions? The reasons are of two types: strategic and financial.
Strategic Reasons
1. Increase customer base
Companies merge with or acquire other major companies in their industry to expand their customer base and get a bigger market share.
For example, in 2005, Google purchased the mobile startup Android. That is why, Google Play Services runs in the background on every Android device that ships with the Play Store, allowing Google to accumulate a prominent market share.
2. Remove Competitors
One way through which companies eliminate market competition is by acquiring or merging with competitors. During an acquisition, for example, the company making the purchase will be able to increase their market share while removing one of their competitors.
For example, the acquisition of WhatsApp, Instagram, and Messenger has helped social media giant Facebook to eliminate many of its competitors and establish itself as one of the most important companies in the world.
3. Diversification
If a company wants to diversify its product (or service) line, it usually buys a company that already sells those products or services instead of starting up a new line on its own.
For example, Facebook, the world’s largest social media site, bought Oculus VR, the leader in immersive virtual reality technology, in 2014 to enter the VR market.
4. Technological Synergies
When an established brick-and-mortar company merges with a tech-based company, the value of both companies increases.
For example, Amazon, a major online shopping site, acquired a major brick-and-mortar chain, Whole Foods Market, for $13.7 billion in 2017.
Financial Reasons
1. Finance Acquisition
Companies usually have a limit for borrowing loans or issuing stocks. Lacking adequate financial capacity, a company may merge with another to raise more capital for carrying out production, day-to-day operations and even, diversification.
2. Economies of Scale
When a company merges with or acquires one of its competitors, its level of production increases exponentially. As its level of production increases, its cost of production also decreases. As a result, its profitability rises.
For example, British Airways has merged with a few different firms over the years to create IAG (International Airlines Group). Together, the combined company is the second-largest airline in Europe in terms of revenue.