Mergers and acquisitions (M&A) are a economic processes of consolidation of business and capital, occurring at macro- and microeconomic levels, as a result of which larger companies appear on the market.
Merger is the union of two or more business entities, resulting in the formation of a new economic unit. It is a business combination in which one of the merging companies (the main one) continues to operate, while the others lose their independence and cease to exist as legal entities. All rights and obligations of the affiliated companies pass to the main company.
Acquisition is a transaction made in order to establish 100% control of the main company over the economic company and carried out by acquiring more than 30% of the authorized capital (shares, etc.) of the absorbed company with the subsequent merger of the absorbed company with the main company.
Classification of the main types of mergers and acquisitions
Depending on the nature of the merger, the following types of mergers are distinguished:
- horizontal merger – a combination of two or more companies offering the same products into one company. Advantages: increased competitiveness, etc.;
- vertical merger – the merger of a number of companies, one of which is a supplier of raw materials for the other. Advantages: reduced production costs, increased profitability of production;
- generic (parallel) mergers – a combination of companies producing interconnected goods. For example, the association of a computer manufacturing company and a computer component manufacturing company. Advantages: concentration of the production process within one company, the ability to optimize production costs, increase the profitability of the new company (compared to the sum of the profitability of the companies participating in the merger);
- conglomerate (circular) mergers – a combination of companies that are not interconnected by any production or sales relationship. A merger of this type is a merger of a company in one industry with a company in another industry that is neither a supplier, nor a consumer, nor a competitor. The benefits of such a merger are not obvious and depend on the specific situation;
- company reorganization – a combination of companies involved in various business fields. The benefits of such a merger also depend on the specific situation.
Geographically, mergers can be divided into:
- transnational (with participation in transactions of transnational corporations).
Depending on the attitude of the management staff of the companies to the merger or acquisition transaction, the following transactions can be distinguished:
By nationality, we can distinguish transactions:
- internal (occurring within the framework of one state);
- export (with transfer of control rights to foreign market participants);
- import (with the acquisition of control rights over the company abroad);
- mixed (with the participation in the transaction of multinational corporations or companies with assets in several different states).
Motives for deals
Since the late 1980s, Richard Roll’s “hubris theory” has become widely known, according to which the acquisitions of companies are often explained by the actions of customers who are convinced that all their actions are correct and prudence is impeccable. As a result, they pay too high a price to achieve their goals.
The theory of agent costs focuses on the conflict of interests of shareholders and managers, which, of course, exists not only in mergers and acquisitions. The presence of their own interests may give rise to special motivation for mergers and acquisitions from the management, which contradict the interests of shareholders and are not related to economic feasibility.
There are the main motives for mergers and acquisitions:
- desire for growth;
- synergy – in this case, the complementary action of the assets of two or more companies merging into one company, the combined result of which far exceeds the sum of the results of actions of each of the companies participating in the merger. (One of the incentives for merging may be the use of economies of scale. This is a special case of the synergy effect);
- “underestimation” of the absorbed company in the financial market;
- personal motives of managers;
- improving management quality;
- the desire to build a monopoly;
- motive for demonstrating optimistic financial indicators in the short term.
Absorption can be used by a large company in order to supplement its range of goods offered, as an alternative more effective in comparison with the organization of a new business – that is, by acquiring a ready-made enterprise instead of organizing a new enterprise.
The largest mergers and acquisitions
- Vodafone Airtouch and Mannesmann
- Pfizer and Warner-Lambert
- Exxon and Mobil
- Citicorp and Travelers Group
- SBC Communications and Ameritech Corporation
- Vodafone Group Air and Touch Communications
- Bell Atlantica and GTE
- BP and Amoco
- Qwest Communications and US WEST
- Worldcom and MCI Communications
- America Online Inc. (AOL) and Time Warner
- Glaxo Wellcome and SmithKline Beecham
- Royal Dutch Petroleum Co. and Shell Transport & Trading Co
- AT&T Inc. and BellSouth Corporation
- Comcast Corporation and AT&T Broadband & Internet Svcs
- Pfizer and Pharmacia Corporation
- JP Morgan Chase & Co and Bank One Corp
- Pfizer and Wyeth
- Merck and Schering-Plough
- MTN and Bharti
- Merchants Bank and the Community Bank, N.A. family.