Mergers and acquisitions continue to shape local and international business landscapes. By definition, a merger involves two organizations bringing together their respective businesses to become one. On the other hand, an acquisition involves a takeover of another company either by purchasing a controlling interest or by purchasing its entire business operation and assets.
Why organizations pursue mergers and acquisitions? Take note that these two are corporate level strategies aimed at driving business growth within a short period or promoting a competitive advantage against competitors. Of course, there are more specific reasons why companies pursue mergers and acquisitions. This article discusses the primary motivations for mergers and acquisitions through definitions and case studies, thus exploring some examples of mergers and acquisitions transpiring in a real-world setting.
Reasons or Motivations for Mergers and Acquisitions
1. Horizontal integration: Increasing market share and competitiveness as a motivation for mergers and acquisitions
On 25 September 2013, United States-based chip supplier Applied Materials Inc. announced its intention to acquire Japan-based chip supplier Tokyo Electron Ltd. for $9.39 billion. Roughly 10 months after the announcement, the two companies entered a mutual merger of equals through an all-stock deal that in turn, paved the way for the emergence of a new company—the Eteris.
The deal created a market value worth $29 billion and resulted in horizontal integration. Remember that both companies are two of the largest suppliers of semiconductor chips in the world.
Industry trends and evolving market behavior are several reasons that compel a company to merge with or acquire its competitor. High degree of competition and internal management problems could also leave a company with no choice but to succumb to acquisition by another company.
Note that key business customers of chips suppliers are embracing a new manufacturing trend. To be specific, Intel Corp., Taiwan Semiconductor Manufacturing Co., and Samsung Electronics Co. have been trying to reduce dependence on third-party suppliers by building their respective technological capacity needed to produce their supplies. This emerging supplier independence is shrinking the customer base of chip suppliers, including Applied Materials and Tokyo Electron.
Nonetheless, the merger between Applied Materials and Tokyo Electron is a strategy to maintain market dominance, specifically by combining their respecting customer bases and existing market shares, thus creating a barrier to entry and improving their economies of scale.
2. Diversification of business: Exploring newer markets and segments through mergers and acquisitions
Facebook, Inc. acquired two Internet-related or online-enabled services just within two years. On 4 September 2012, the company acquired online and mobile-based photo-sharing social networking platform and mobile app Instagram for $1 billion in cash and stock. This marks the first largest acquisition made by the social networking company. Moreover, on 19 February 2014, Facebook bought the mobile-based messaging service provider and app WhatsApp for $19 billion in cash and stock.
Mergers and acquisitions are common in Internet companies. Even Google, Inc. has successfully expanded its Internet empire through several large-scale acquisitions. One of these includes a $1.65 billion stock deal to acquire YouTube in 2006. Note that Google consolidated its businesses and restructured its organization under a single holding company called Alphabet Inc.
One known motivation for mergers and acquisitions is business diversification through exploration of newer markets and segments. Thus, instead of launching a new product or a business unit and investing in operational and marketing efforts, companies opt to acquire or merge with other companies with existing and established markets or segments.
Take note that the acquisition of YouTube signified the intent of Google to expand and diversify its business beyond search engine, particularly by embracing online multimedia entertainment and social networking. The market for YouTube is clearly different from the market of a search engine service provider.
In the case of Facebook, as part of its attempt to explore opportunities outsides its Facebook social networking site, it acquired two online-enabled and mobile-based communication platforms. This marked the recognition of the emerging mobile user market composed of different market segments, each having unique characteristics and defined purposes.
3. Vertical integration: Capacity building and technology sharing as a motivation for mergers and acquisitions
German sports car manufacturer Porsche merged with another German automaker Volkswagen in May 2009. This merger was a response to the 2008 Financial Crisis that threw the global economy into recession and subsequently, reduced vehicle sales.
It is also important to take note of the shared historical beginnings of the two companies. Despite the heavy costs incurred by Porsche, the merger remains reasonable because, for the longest time, the company has been Volkswagen’s main supplier of automotive parts.
Mergers and acquisitions are central to the history of the automotive industry. The American automaker General Motors, for example, emerged from the consolidation of minor automakers. Furthermore, the United Kingdom-based British Leyland dominated the entire British car industry during its heydays in the 1970s by acquiring and owning different subsidiaries and brands.
Another reason for mergers and acquisitions is capacity building and sharing, especially in the aspects of manufacturing capabilities and technological competencies. These allow a company to build and maintain a competitive advantage by creating a barrier to entry or a source of economies of scale.
Note that aside from consolidating and increasing market share, another reason why Applied Materials and Tokyo Electron merged is to address the problem of emerging production cost. Accordingly, for the past years, research and development have become costly while sales and customer demands have dwindled. The merger is nonetheless intended to cut cost by improving production processes through technology and capacity sharing.
The acquisition of the Android mobile operating system in 2005 by Google stemmed from the need to build a mobile presence and embrace the emerging trend in mobile computing. Remember that Android does not generate direct revenues for Google. However, because the company continues to develop the mobile operating system platform and gives it away to mobile phone manufacturers, Android has provided Google with the technological capacity needed to penetrate the mobile market.
4. Internationalization: Internationalization of business operation through mergers and acquisitions
There is an ongoing trend of global expansionism undertaken through cross-border mergers and acquisitions. In fact, the dawn of the new millennium saw a series of mergers and acquisitions that in turn, has now dominated the contemporary global business scene. This is a response to globalization.
India-based Tata Group and its subsidiaries, Tata Global Beverage and Tata Steel, best exemplified how emerging Asian companies have expanded and internationalized their business operations by acquiring established companies in existing or emerging markets.
Apart from the need to compete in the global landscape, another reason for these cross-border mergers and acquisitions is the changing global economic landscape. Accordingly, companies coming from Asian countries that are currently experiencing strong economic growth are more predisposed toward making aggressive strategic moves—such as cross-border mergers and acquisitions.
Nonetheless, a robust economic growth creates a suitable environment for companies to prosper. Hence, the seeming global trend in mergers and acquisitions is an obvious indicator of the emerging power, influence, and impact of rising economies in Asia.