Mergers & Acquisitions
When two or more companies agree to combine
their operations, where one company survives and the other
loses its corporate existence, a merger is affected. The
surviving company acquires all the assets and liabilities
of the merged company. The company that survives is generally
the buyer and it either retains its identity or the merged
company is provided with a new name.
Types of Mergers
Horizontal Mergers
This type of merger involves two firms that
operate and compete in a similar kind of business. The merger
is based on the assumption that it will provide economies
of scale from the larger combined unit.
Example: Glaxo Wellcome Plc. and SmithKline
Beecham Plc. megamerger
The two British pharmaceutical heavyweights
Glaxo Wellcome PLC and SmithKline Beecham PLC early this
year announced plans to merge resulting in the largest drug
manufacturing company globally. The merger created a company
valued at $182.4 billion and with a 7.3 per cent share of
the global pharmaceutical market. The merged company expected
$1.6 billion in pretax cost savings after three years. The
two companies have complementary drug portfolios, and a
merger would let them pool their research and development
funds and would give the merged company a bigger sales and
marketing force.
Vertical Mergers
Vertical mergers take place between firms
in different stages of production/operation, either as forward
or backward integration. The basic reason is to eliminate
costs of searching for prices, contracting, payment collection
and advertising and may also reduce the cost of communicating
and coordinating production. Both production and inventory
can be improved on account of efficient information flow
within the organisation.
Unlike horizontal mergers, which have no specific
timing, vertical mergers take place when both firms plan
to integrate the production process and capitalise on the
demand for the product. Forward integration take place when
a raw material supplier finds a regular procurer of its
products while backward integration takes place when a manufacturer
finds a cheap source of raw material supplier.
Example: Merger of Usha Martin and
Usha Beltron
Usha Martin and Usha Beltron merged their
businesses to enhance shareholder value, through business
synergies. The merger will also enable both the companies
to pool resources and streamline business and finance with
operational efficiencies and cost reduction and also help
in development of new products that require synergies.
Conglomerate Mergers
Conglomerate mergers are affected among firms
that are in different or unrelated business activity. Firms
that plan to increase their product lines carry out these
types of mergers. Firms opting for conglomerate merger control
a range of activities in various industries that require
different skills in the specific managerial functions of
research, applied engineering, production, marketing and
so on. This type of diversification can be achieved mainly
by external acquisition and mergers and is not generally
possible through internal development. These types of mergers
are also called concentric mergers. Firms operating in different
geographic locations also proceed with these types of mergers.
Conglomerate mergers have been sub-divided into:
Financial Conglomerates
These conglomerates provide a flow of funds
to every segment of their operations, exercise control and
are the ultimate financial risk takers. They not only assume
financial responsibility and control but also play a chief
role in operating decisions. They also:
Managerial Conglomerates
Managerial conglomerates provide managerial
counsel and interaction on decisions thereby, increasing
potential for improving performance. When two firms of unequal
managerial competence combine, the performance of the combined
firm will be greater than the sum of equal parts that provide
large economic benefits.
Concentric Companies
The primary difference between managerial
conglomerate and concentric company is its distinction between
respective general and specific management functions. The
merger is termed as concentric when there is a carry-over
of specific management functions or any complementarities
in relative strengths between management functions.
ACQUISITIONS
The term acquisition means an attempt by one
firm, called the acquiring firm, to gain a majority
interest in another firm, called target firm. The
effort to control may be a prelude
There are broadly two kinds of strategies
that can be employed in corporate acquisitions. These include:
Friendly Takeover
The acquiring firm makes a financial proposal
to the target firm’s management and board. This proposal
might involve the merger of the two firms, the consolidation
of two firms, or the creation of parent/subsidiary relationship.
Hostile Takeover
A hostile takeover may not follow a preliminary
attempt at a friendly takeover. For example, it is not uncommon
for an acquiring firm to embrace the target firm’s
management in what is colloquially called a bear hug.
