Factors Influencing Merger & Acquisition

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When two companies decide to combine their operations, it is a merger. When one company acquires another company, it is an acquisition. It is a distinction without a real difference because mergers and acquisitions both result in combined entities. M&As usually require shareholder and regulatory approvals. The factors influencing M&As include strategic fit, cost and revenue synergies, and access to talented employees.

Strategy

  • "The Economist" magazine suggests in a January 1999 article that mergers work when there is a strategic fit. The article cites "closeness of approach" as the reason for the successful 1996 merger of Sandoz and Ciba-Geigy to create Novartis. Strategic fit refers to complementary products, markets and cultures. For example, Google acquired EBook Technologies in early 2011 to expand into the electronic reader market, a natural extension of its project to scan books electronically.

    Regardless of how it turned out, Daimler-Benz merged with Chrysler in 1999 because it saw an opportunity to expand its product offering in the North American market. Time Warner and America Online decided to merge in early 2000 because both companies saw a strategic fit: Time Warner would get an Internet presence and AOL would transform itself into a media company.

Synergy

  • Cost and revenue synergies are important factors influencing M&A decisions. A combined company streamlines common functional units, such as accounting and finance, human resources and investor relations. Duplicate management layers are eliminated and the merged company can end up with a more streamlined executive structure. These actions can save costs and improve decision making. Further cost synergies are achieved through economies of scale, which means that a bigger company is able to negotiate better prices with its suppliers and better optimize the utilization of its manufacturing capacities. When two companies combine, the sales representatives of both companies generally have a more comprehensive suite of products that they can offer their customers, thus potentially driving revenue and profit growth.

Talent

  • Access to talent is also one of the factors influencing M&As. For example, when Google and EBook or software maker Oracle and hardware vendor Sun merged, the merged entities gained access to experienced engineers, research expertise, copyrights and patents. The American Institute of Aeronautics and Astronautics, in a presentation hosted on its website, cites access to talented employees and managers as one of the key drivers of M&A activity in the aerospace industry.

Considerations: How to Make Mergers Work?

  • M&A transactions do not always succeed. For example, the Daimler-Benz and Chrysler and the Time-Warner and America Online mergers did not work out as initially planned. There must be a clear, strategic rationale for mergers to work, suggests "The Economist," which should not include the fear of being acquired or greed. A "managerial heavyweight" should be put in charge of the post-merger implementation process, which is important to bring the different cultures together and realize the various synergies.

References

  • Photo Credit Jupiterimages/Brand X Pictures/Getty Images
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