Reasons for Mergers and Acquisitions — Advantages and Examples

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As of July 2021, the number of M&A deals worldwide has increased by 158% compared to the same period in 2020. As a result, interest in M&A processes and procedures is growing. 

The goals and motives for mergers and acquisitions are sometimes interchangeable, but is it a distorted mirror?

What is a merger?

A merger is when two companies join forces to form one new organization. The parties come to a mutual decision on the deal, sometimes sacrificing managerial control for the betterment of the new union. Typically, this new business entity operates under the leadership of both companies. 

Some examples of successful mergers include:

Walt Disney Studios and Pixar (2006)

At the time of the merger, Disney had been the market leader for decades while Pixar Animation Studios was just getting started—making a splash with CGI. Later, Disney became a consolidated brand, and Pixar’s performance grew stronger.

eBay and PayPal (2002)

eBay online auction site owners saw many reasons for mergers in facilitating payments on their platform. Both companies grew significantly at the time. The stock has gone up. Two years later, PayPal became a separate company by investors’ decision.

Sirius and XM Radio (2008) 

It is indeed an example of a prosperous deal. The Sirius XM broadcaster share price hit an all-time high in 2019. The company continues to grow as the number of subscribers reached almost 35 million in the first quarter of 2021.

Mergers of firms in an industry tend to expand their market share and improve their financial situation.

What is an acquisition?

An acquisition is a corporate development strategy where one organization buys all, or a controlling share, of another organization’s stock with hopes of strengthening their market position and gaining a sustainable competitive industry advantage.

This procedure does not create a new business. An acquired organization and its assets become the property of an acquiring company. That also includes management decisions — the buyer retains full authority.

Some examples of the largest acquisitions in history:

Vodafone Airtouch PLC and Mannesmann (2000)

Although the Germans were mostly against the purchase of Mannesmann by the British Vodafone, the deal did take place. The price was over $180 billion. The mobile phone industry was gaining momentum during those years. As a result, Vodafone became the largest telecom provider in the market.

Amazon and Whole Foods (2017)

This deal cost the American online portal $13.7 billion. By expanding its reach to brick-and-mortar sales outlets, Amazon can sell more products. By the end of 2017, the scale had tipped, breaking records — sales amounting to more than $13 billion.

Pfizer and Warner-Lambert (2000)

After a $90 billion takeover, Pfizer has grown into the world’s second-largest pharmaceutical corporation. The buyer’s goal was to obtain full rights to the drug, which the companies had jointly promoted earlier. Consequently, Pfizer managed the drug’s profits single-handedly.

Why do companies merge?

Darwin’s theory is that only the fittest survive — this truth is at the heart of business, too. At a particular stage, deals are a breath of fresh air for companies. Reasons for mergers stem from a desire to move forward and outpace competitors.

ReasonExpectation
Rise in valueParties expect a synergistic effect from a merger. The new company’s market value increases—the whole is greater than the sum of its parts.
AssetsCompanies want to obtain unique assets. If some other ways do not work, then they resort to a merger. Technology is the most enticing asset today.
Financial capacity enhancementLack of resources jeopardizes business development. The consolidated enterprise represents a higher potential. Its financial component affects further functioning, which is why directors merge.
TaxationTo reduce taxes, the party with the significant taxation and the one that bears the tax losses merge. The transaction lowers the tax burden of the newly-formed company.
Personal interest of managersIn this case, the deal is general managerial efforts to boost a company’s stock price to the maximum or obtain other benefits. Sometimes it is for building an empire by prioritizing company size over results.

Why do acquisitions happen?

Reasons for acquisitions are also different, but this procedure has proven superiority over alliances, for example. Those who acquire report accelerated growth and high competitiveness.

ReasonExpectation
Market expansionOrganizations typically want to promote their products internationally. So the deal is a tool for expansion and influence abroad.
New products or servicesIn this case, two parties can improve their position by selling each other’s products. A mutually beneficial deal realizes a two-way synergy.
Risk preventionAn acquisition is sometimes a protective measure. Operating in multiple industries or countries minimizes risks. If the performance of one organization is low, the other can balance out the financials if it is doing well at that time.
DebtsA buyer finds a financially stable target organization to get out of debt. Its good quick ratio, a measure of liquidity, paves the way for additional debt financing.
Competitive advantageAcquiring a competing business increases the power of the new one. Often, the target receives a premium for its shares for selling a strong, strategic position.

Should I choose a virtual data room for mergers and acquisitions?

The Great Merger Movement raised the issue of storage at the turn of the 20th century. Since the technology of that era was mediocre, physical data room was the only option available. Much later came floppies, CDs, cloud storage, and only then, virtual data rooms. Since then, businesses can:

  • Work in a protected space 

Regardless of what mergers and acquisitions might result in, parties need high data confidentiality. Encryption, role-based access, and activity logs speed up and automate the process.

  • Save money

This reduces costs not only on the rental of filing cabinets but also travel expenses. For directors, they have everything they need to settle matters from their office. The online platform providers offer services priced to suit any budget.

  • Ensure the transparency of cooperation 

Partner honesty and information transparency are important to both parties. Software is a reliable way to answer investor questions and secure confidential data.

Whatever the motives for mergers and acquisitions, those who prefer modern tools are more likely to succeed. And virtual data rooms step in as the most advanced option for smooth and secure M&A deals.

References

  1. “Motives for Mergers” CFI Education Inc. https://corporatefinanceinstitute.com/resources/knowledge/deals/motives-for-mergers/ 
  2. “Why do buyers make acquisitions?” Corporate Finance in Europe. https://www.corporatefinanceineurope.eu/blog/reasons-buyers-acquisitions.htm 
  3. “Successful Business Merger Examples and the Factors That Contributed to Their Success” by Julien Meyer. https://www.northstarib.com/resources/5-successful-business-merger-examples-and-the-factors-that-contributed-to-their-success  
  4. “Successful Mergers and Acquisitions” by Dheeraj Vaidya, WallStreetMojo. https://www.wallstreetmojo.com/successful-mergers-and-acquisitions/

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