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