Mergers are a big part of a company’s development. When you hear about a company wanting to spread its wings, you normally hear the word merger. A merger is an agreement that unites two existing companies into one new company. There are several types of mergers and several reasons why companies’ complete mergers. Most people mix up acquisitions and mergers. A merger occurs when two separate entities combine forces to create a new, joint organization. For example, Company X says they will give a certain number of shares to Company Y. So, the value of the exchange is determined by the relative share prices and the amount of shares agreed to trade. So, if Company Y is trading at £20 a share, Company X might offer them £23 a share and pay it in the stocks of Company X. If company X is trading at £46 a share, then every one stock of Company Y is traded for 0.5 shares of Company X. Some cash may also change hands. So, payment for a merger is usually in stock and comes from the stockholders of Company X since they are devaluing their shares by issuing more. Meanwhile, an acquisition refers to the takeover of one entity by another. Mergers are portrayed to the world as a way to increase a company’s profits or to take on a monopoly. However, mergers are not always successful.
There are many reasons why a business would want to merge with another business. The most common factor is the potential growth of the business. A business merger may give the acquiring company a chance to grow its market share. In addition, diversification in the business puts companies at an advantage when they choose to merge with another business. Furthermore, mergers may allow greater investment in R&D, this is because the new firm will have more profit which can be used to finance risky investments. This can lead to a better quality of consumer goods produced. In addition, there will be an increase in value of the merged company. The value of the merged company is greater than the sum of the independent values of the merged companies. For example, if A Ld. and B Ltd. merge and form C Ltd., the value of C Ltd. is expected to be greater than the sum of the independent values of A Ltd. and B Ltd.
The largest successful merger has been between Vodafone and Mannesmann. This merger took place in 2000 and was worth over $180 billion. Vodafone acquired the German company and as a result, Vodafone became the largest mobile operator in the world. The deal was significant because it signalled the telecom boom as mobile phones also began to increase in popularity. The total value of the Vodafone group on the stock market, after paying $183bn for Mannesmann in shares, was $365bn (£228bn), which made it by far the largest company on the London stock market and the fourth largest in the world after Microsoft, GE, and Cisco at the time of the deal. Another successful merger was Disney and Pixar. The merger of your favourite cartoon companies when you were a kid was considered one of the most successful mergers of all time. On May 5, 2006, the two esteemed companies Disney and Pixar merged. Disney acquired shares worth $7.4 billion in Pixar and made it Disney’s subsidiary. This was a vertical merger. A vertical merger is a merger between two companies that operate at separate stages of a production process for a specific finished product. The key reasons for the success of the merger of the two companies was that investors saw potential for Disney to leverage on Pixar’s computer animated characters which could be used in its vast networks. One successful example was “Cars”. The revenue in retail products from “Cars” was over $5 million. Pixar’s willingness to change to be a part of the international conglomerate helped. For Pixar it was a good move to face competitors like DreamWorks & 20th century fox.
There have been many mergers over the years but not all of them have been as successful as they were predicted to be. For example, AOL and Time Warner. At the peak of the internet obsession, two media companies merged, this was meant to be a revolutionary move. In 2001, Time Warner united with American Online (AOL) for $111 billion, It was combining the best of two worlds. However, the synergy of these 2 dynamically different companies never occurred. Merging the cultures of the combined companies was problematic from the get-go. Certainly, the lawyers and professionals involved with the merger did the conventional due diligence on the numbers. What also needed to happen, and evidently did not, was due diligence on the culture. A few scant months after the deal closed, the dot com bubble burst and the economy went into recession. Advertising dollars evaporated, and AOL was forced to take a goodwill write-off of nearly $99 billion in 2002. AOL was also losing subscribers and subscription revenue. The total value of AOL stock subsequently went from $226 billion to about $20 billion. AOL was indeed the king of the dial-up Internet world, but that world was rapidly being supplanted by always-on, much faster broadband. At the time of the merger, half the country had Internet access, yes, but only 3% had broadband. The decline of dial up internet access spelled disaster. AOL shot themselves in the foot as they refused to give this up. Since the merger, the stock decreased by 80%.
Another disaster was the merger of the famous oats brand merged with Snapple. The Quaker brand bought them for $1.7 billion, this was encouraged by the promising buy of Gatorade. Quaker Oats had the goal of making them as popular as Gatorade (also owned by Quaker Oats). Wall street at that time thought they had overpaid by $1 billion. Quaker therefore tried to sell the drink to every store and restaurant. However, their efforts failed miserably. Snapple only became successful due to their small marketing. Snapple had totally different distribution chains which quaker oats failed to understand. It was sold in small stores and thus the marketing strategies would be different. Quaker oats did not understand how to distribute and market to smaller retailers. Instead of going with what was already working for Snapple, they tried to change it to fit their distribution and marketing. After 27, months, Quaker sold Snapple for 300 million which resulted in a loss of $1.4 billion which equates to $1.6 million every day. Quaker Oats overvalued this company and overvaluing is a common error in mergers. Quaker oats thought that its growth, which before the acquisition had been impressive, would continue. Snapple used its prior growth to demand a high premium. Quaker went against most analysts as they thought this company would have a similar success to Gatorade. Due to this unsuccessful merger, it caused their Quakers’ reputation to be tarnished and resulted in multiple executives getting fired.
In conclusion, companies may have the right motive and idea to merge but they are not always as successful as they are predicted to be. The unsuccessful mergers are forgotten while the successful mergers get celebrated. Mergers are not always the right option and aren’t as positive as they are portrayed to be.
