Navigate the complexities of mergers and acquisitions using our ultimate guide. Learn about integration strategies, and post-merger challenges.
What Are Mergers and Acquisitions? Everything You Should Know
While reviewing business structures and sales, you might have wondered: What are mergers and acquisitions? These two ...
While reviewing business structures and sales, you might have wondered: What are mergers and acquisitions? These two strategies combine companies or assets to boost business. Restructuring also impacts a company's IT infrastructure. This could prompt a transformation or overhaul, which can drive efficiency and introduce new capabilities. It can also align the business with future technology trends. However, experienced professionals must handle the process to ensure a smooth transition.
Table of Contents
- What Are Mergers and Acquisitions?
- What Are the Main Types of Mergers?
- What Are the Main Types of Acquisitions?
- What Is the Mergers and Acquisitions Process?
- What Are the Legal and Regulatory Considerations of M&A?
- What Are the Pros and Cons of Mergers and Acquisitions?
- What Are Mergers and Acquisitions Effects on Cloud Infrastructure?
What Are Mergers and Acquisitions?
The specific M&A meaning depends on the companies' strategic decisions. M&A provides two approaches to achieving growth and expansion. In a merger, two or more companies combine to form one organization. On the other hand, an acquisition is a corporate action where one company takes over the control and ownership of another company.
To explain mergers and acquisitions with an example, consider the merger of Exxon and Mobil. This resulted in the formation of ExxonMobil, a multinational oil and gas corporation. A well-known example of acquisition is Google’s purchase of Android in 2005.
M&A strategies facilitate entry into new markets, enhance product portfolios, and achieve economies of scale. Sometimes they can even ward off potential future competition. For example, by owning both Facebook and Instagram, Meta took a top competitor out of the game while leveraging its features and popularity. It then made one product an extension of the other.
What Are the Main Types of Mergers?
Mergers and acquisitions come in different forms, each with unique advantages. Understanding the different types of mergers can help businesses make informed decisions that align with long-term goals.
A conglomerate merger occurs when two or more businesses from different industries merge. This strategy diversifies business operations and reduces risks associated with a single industry's economic fluctuations. The merger of Amazon and Whole Foods is one example.
Congeneric mergers involve companies operating in the same industry but providing different products or services. These mergers expand product offerings and can create synergies. When successful, they enhance the overall value of the combined entity. One good example is the Citicorp bank merging with Travelers Group in 1998.
These mergers help businesses get into new markets. They typically involve companies that sell similar products or services but in different regions. With a merger, both companies can pool resources and serve a larger customer base. If an American, Mexican, and Canadian bank merged to serve all North American customers, this would be an excellent example of market extension.
Horizontal mergers involve companies operating in the same industry and offering similar products or services. The primary aims of such a merger are to reduce competition, achieve economies of scale, and increase the market share. The ExxonMobile merger exemplifies this. These mergers often prompt antitrust investigations because reduced competition benefits businesses but not consumers.
A vertical merger involves companies that operate at different stages of a supply chain in the same industry. This type of merger can increase efficiency and cost savings and allow for a more controlled business environment by reducing dependency on external entities. PayPal and eBay present one of the best examples of a vertical merger. The merger allowed eBay to keep payment processing in-house.
What Are the Main Types of Acquisitions?
While there are apparent differences between mergers and acquisitions, the classifications have some similarities as well.
A congeneric acquisition involves a company acquiring another that operates in the same industry but offers different products or services. This type of acquisition allows the acquiring company to diversify its product offerings and tap into new customer segments. An example is Google’s acquisition of Fitbit to enter the wearable tech market.
Market extension acquisition is a strategy companies use to expand the geographical reach of their products or services. A company acquires another company that operates in a different market but offers similar products or services. The purpose is to broaden their customer base and increase market presence. One example of this is Amazon's acquisition of Souq, enabling Amazon to extend its reach in the Middle East.
In horizontal integration, a company acquires another that operates in the same industry and at the same level of the supply chain. As with horizontal mergers, the goal is often to eliminate competition, achieve economies of scale, and expand its market presence. A classic example is Facebook's acquisition of WhatsApp. Both products operate in the social media and communication industry.
Vertical integration occurs when a company acquires another operating at a different level of the same supply chain. The primary objective is to control various stages of production, distribution, and, sometimes, retail. This can result in cost savings, improved supply chain coordination, and higher barriers to entry for competitors. An example is a car manufacturing company acquiring a tire manufacturer.
A hostile takeover happens when the acquiring company proceeds without the consent or agreement of the target company's board of directors. It is often achieved by purchasing a majority stake in the target company's shares in the open market or persuading shareholders directly to sell them. One of the most famous examples of a hostile takeover is when Kraft Foods acquired Cadbury.
What Is the Mergers and Acquisitions Process?
This process is an intricate, step-by-step journey that requires careful planning and execution. Spending adequate time on each step helps business managers reduce risks.
1. Pre-Deal Preparation
This is the planning stage, where both companies decide what they want to get out of the deal. They must also analyze each other's financials and identify potential risks. The pre-deal preparation stage is an excellent time to hire external advisers who can provide expert advice, such as lawyers, accountants, investment bankers, and cloud migration specialists.
2. Due Diligence
In this step of an acquisition, the acquiring company thoroughly examines the target. It assesses everything from corporate finance to human resources and operations. The leading company does this to ensure that there are no surprises before closing the deal. In mergers, both companies should complete the due diligencestep to ensure the combination of brands and business processes achieves the intended goals.
3. Negotiation and Valuation
After due diligence, both parties negotiate the terms. This covers pricing, management, and structure. During this phase, the parties involved must agree on the target company's value. Financial professionals usually get involved at this stage.
4. Closing the Deal
After an agreement, closing documents and the closing date are drawn up. At this stage of M&A transactions, the companies must meet all conditions for closure to finalize the deal.
5. Post-Merger Integration
This is one of the most critical steps in the M&A process. At this point, the two entities officially become one. From here onward, all their systems and procedures must work as one cohesive unit. It requires a lot of coordination between both teams to ensure smooth integration.
What Are the Legal and Regulatory Considerations of M&A?
Companies must adhere to different laws and regulations depending on the industry and geographic location. These laws affect everything from fair competition to data migration.
These are some of the top legal considerations for mergers and acquisitions:
- Antitrust laws
- Taxation regulations
- Employees’ rights
- Data protection
- Corporate governance
- Industry regulations
What Are the Pros and Cons of Mergers and Acquisitions?
Mergers and acquisitions provide immense potential for success. Still, they are not without challenges and risks.
Pros of Mergers and Acquisitions
The combination of companies offers a variety of advantages that can accelerate growth:
- Expansion into new markets with improved access to resources and capital
- Reduced competition and increased market share
- The ability to diversify products or services, thereby mitigating economic risks
- Creation of economies of scale by reducing costs and increasing efficiency in production or distribution
- Stronger bargaining power with suppliers, creditors, and other vendors
- Increase in shareholder value
Cons of Mergers and Acquisitions
While embarking on a merger or acquisition can open up new avenues for growth, always create a plan for the potential downsides. Here are some of the critical challenges and risks:
- Cultural differences between the companies involved
- Antitrust regulations that could limit these types of deals
- The risk of overpaying for a target company
- High risk of turnover as workers anticipate job restructuring
- Potential loss of brand identity in acquisitions and the high cost of rebranding in mergers
- Loss of agility when small companies join larger ones
- Difficulties in integrating systems and processes
- Pressure from shareholders to perform after a deal is completed
What Are Mergers and Acquisitions Effects on Cloud Infrastructure?
Integrating the systems of two businesses can often call for cloud storage and service shifts. Managers must plan this shift carefully to ensure integration between the two entities. M&A can also provide an opportunity to optimize and modernize IT infrastructure, often leading to increased cloud adoption for efficiency and cost-effectiveness.
What are mergers and acquisitions concerns that cloud migration specialists can help with? We simplify the process of combining diverse IT infrastructures and migrating to the cloud. Our experienced professionals also create a seamless transition by minimizing downtime and disruption. Contact Cloudficient to get a quote today.
With unmatched next generation migration technology, Cloudficient is revolutionizing the way businesses retire legacy systems and transform their organization into the cloud. Our business constantly remains focused on client needs and creating product offerings that match them. We provide affordable services that are scalable, fast and seamless.