Mergers and Acquisitions | Management Optional Notes for UPSC PDF Download

Introduction

• Definition: Mergers and acquisitions are common strategies used by businesses to grow and increase their value.
• Decade Focus: In the 1980s, there was a lot of attention on mergers and acquisitions. In the 1990s, businesses began to approach these activities more strategically, considering ethical implications.
• Merger Defined: A merger is when two or more companies join together to form one entity, aiming to increase profits and value for stakeholders.
• Purpose: The main goal of a merger is to scale up operations, usually between companies with similar businesses.
• Acquisition: An acquisition occurs when a larger company buys a smaller one, either with consent or by acquiring a large amount of its shares.
• Example: United Breweries acquired Shaw Wallaces liquor business.

Merger

• A merger happens when two companies decide to combine their operations on an equal basis.
• It's like blending two companies into one to increase profits and create more value for stakeholders.
• Mergers usually involve companies in similar businesses aiming to grow together.
• The goal is to scale up operations and become more competitive in the market.

Acquisition:

• Acquisition means a big company buys a smaller one, often in the same line of business.
• It can be a friendly agreement or a forced takeover by buying a large amount of the smaller company's shares.
• For example, United Breweries acquired Shaw Wallace's liquor business, which means United Breweries bought Shaw Wallace's alcohol business.

Types of Mergers

• Definition: A conglomerate merger happens when one company buys a different kind of business.
• Explanation: The acquiring company adds the purchased company to its group but usually doesn't change much internally.
• Impact: Changes within the purchased company are minimal, and it remains relatively independent.
• Potential Issues: Sometimes, the acquiring company might send its own team to manage the purchased company, causing conflicts among senior executives and leading to higher employee turnover.

2. Vertical Mergers

• Definition: A vertical merger occurs when a company buys one of its suppliers or customers.
• Explanation: Interaction between the two companies mainly happens at the corporate level.
• Impact: The acquired company may lose some autonomy and see its executives demoted, leading to higher turnover.
• Potential Issues: Executives of the acquired company may feel inferior or lose social standing, impacting morale.

3. Horizontal Mergers

• Definition: Horizontal mergers involve two companies in the same or similar business.
• Explanation: The aim is to increase revenue by offering more products to existing customers.
• Example: When two soft drink companies merge, they become competitors in the same market.

4. Market Extension Merger

• Definition: This type of merger involves companies selling similar products in different markets.
• Example: A multinational software company buying a local software developer.

5. Product-Extension Merger

• Definition: Companies manufacturing different but related products merge.
• Example: A laptop manufacturer acquiring a company making portable hard drives.
• Explanation: Both products fall under the category of computers.

6. Concentric Mergers

• Definition: These mergers occur between companies with similar technologies or serving the same customers.
• Explanation: Though they offer different products, these may complement each other.
• Example: Companies in the same industry but with different product lines may merge.

Reasons for Mergers

• Growth Strategy:
  • Key Point: Companies merge to grow externally instead of relying solely on internal growth.
  • Benefits: This can help diversify products, expand existing lines, and increase market share.
• Economies of Scale:
  • Key Point: Merging can lead to cost savings through economies of scale.
  • Explanation: Larger companies may enjoy lower production costs per unit, for example.
• Tax Advantages:
  •  Key Point: Mergers may provide tax benefits.
  • Example: Consolidating operations can lead to tax efficiencies.
• Considerations for Mergers:
  • Compatibility:
  • Key Point: Companies should assess compatibility before merging.
  • Explanation: It's important to ensure the companies' goals, product mix, and core beliefs align.
• Strategic Planning:
  • Key Point: Managers must carefully plan mergers.
  • Role of Management Accountants: They play a crucial role in evaluating potential mergers and ensuring strategic alignment.

Mergers and acquisitions strategies:

Understanding the Acquisition Process

Acquisition refers to the process wherein one company purchases a controlling, 100 percent interest in another company with the aim of incorporating the acquired company as a subsidiary within its portfolio. The acquisition process is delineated into five distinct stages according to scholarly analysis.