Mergers and Acquisitions

Merger and acquisitions deals are a lot more common than we think. The purpose of these deals is to generate shareholder value above that of the two companies added together when they were apart. There is $4.304 trillion investment into M&A deals in this 2015, according to International Business Times (I’ve included a link below of a pretty interesting article).

A merger is best defined as when two companies come together and form a new company, whereas an acquisition is when one company takes over another. I find these deals pretty interesting, especially when I found out that so many fail. It makes me wonder why so many companies go into these deals when they can be so risky.

Obviously there are a lot of reasons a company would initially go into an M&A deal, including reducing competition; generating shareholder wealth; securing supply; entering new markets; gaining intellectual property; taking advantage of a company being underpriced and many more. Generally, there will be more than one of these as reason for a business to complete an M&A deal. M&A deals are often referred to using the equation ‘1 + 1 = 3’ which highlights the intent to generate more value together than the two companies had separately.

When I looked into this topic a bit more, I realised how big the chance of failure is! There is so much room for error and the deal has to be executed impeccably for the deal to succeed. Some of these deals, however, are not down to managerial issues and are purely deals that were doomed to fail from the onset. Managerial motive can have a big impact on whether an M&A deal happens, a success in a deal like this can make a CEO’s career!

There is also the chance to do the reverse of this and break up companies, generally referred to as spin-offs. We also see that a lot of companies with several brands, divest some brands in order to streamline their brand portfolio. An example of this is when Procter and Gamble sold Iams to Spectrum, P&G as a business were not highly involved in the pet industry, so it was best to sell off this section of the company and focus on improving their other brands. This can be seen as the opposite of M&A deals.

There have been various examples of massive companies deciding to merge and it going disastrously and leading to a decrease in shareholder wealth, which is the opposite of what a company is out to achieve! An example of a massive merger was when US company Kraft bought UK company Cadbury, chocolate in America is a very different recipe to chocolate in the UK. Consumers did not take it well when it was announced that the traditional Cadbury chocolate recipe would be changed. I can’t say I took it well either - particularly the change in Creme Eggs! It remains to be seen what happens with this merger deal, I’ll keep you updated..

Have a read of this article if you’re interested! http://www.ibtimes.com/merger-acquisition-activity-hits-record-high-2015-report-2213166

Social Media Brand Value

Social networking is a huge market. There are millions upon millions of people who use social media daily. We have various types available to us, with some of the most well known being Facebook, Twitter, Instagram, Snapchat, Whatsapp and the more professional LinkedIn. Some of these platforms use advertising to make money, others have premium membership fees but others such as Snapchat don’t make money in these ways. Yet they all still have massive values, so how is it possible to value a brand which does not have a regular source of income such as sales.

These social media platforms are difficult to value as they don’t particularly have tangible assets, this makes it difficult to estimate a true value. A valuation can be useful to attract investors. On November 5, 2015, Facebook had valuations of $306 billion, according to CNBC, which is an incredible amount for a website with a low asset portfolio. There are a total of 1,440,000,000 active monthly users of Facebook which is a 12% increase from 2014.

There are various ways in which to value a company, with one of the most basic being Stock Market Valuation where the value is simply calculated as the share price x the number of shares. A social networking site, at present, is a good industry to invest in as it generates great returns. But looking to the future, can the social media platforms continue to generate such large amounts of profit without generally charging membership fees. I believe that if membership fees were introduced to the likes of Facebook, Twitter and Snapchat that the usage would decrease greatly, I know I would not pay for them! I can appreciate this is a stingey way to look at this as it would maybe cost up to £5 per month, but after being used to these sites being free, I know I would not be impressed if I was then asked to pay to use the site.

If people will be unwilling to pay for their memberships on these sites, the companies still need to ensure that they are generating revenues to survive and grow. Probably the best way to do this is through advertising, Facebook have now introduced advertising on the side of their news feed which is linked to what you search. I, for one, do not see a major problem in this, I am expecting to use Facebook for free so I understand that they need to make money somehow since that money is not coming from me! I have also seen how good advertising can be for companies on Facebook as they will reach a larger group of people so it seems to me a win-win situation.

It remains to be seen whether other social media platforms add in advertising, it would probably be more difficult for the likes of Snapchat to add advertising given the context of the site. So in order to gain value, they need to continue to add new features and update their app accordingly which will also ensure that they keep a high brand value!