Horizontal mergers are common in industries with fewer firms, since competition tends to be higher, and the synergies and potential market-share gains are much greater in those industries. Both Facebook and Instagram operated in the same industry and were in similar positions with regard to their photo-sharing services.
Facebook clearly saw Instagram as an opportunity to grow its market share, increase its product line, reduce competition, and access new markets. Most often the logic behind the merger is to increase synergies by merging firms that would be more efficient operating as one. Apple Inc. The company manufactures its custom A-series chips for its iPhones and iPads.
It also manufactures its custom touch ID fingerprint sensor. These investments i. An acquisition , on the other hand, occurs when a company purchases the assets of another business such as stock, property, plants, equipment and usually permits the acquired company to continue operating as it did prior to the acquisition.
Mergers such as this one, in a well-established industry, can produce winning results in terms of improved efficiency and cost savings. In an acquisition , a corporation or investor group finds a target company and negotiates with its board of directors to purchase it.
Worldwide merger activity in the first quarter of was mixed. The volume of deals was lower but with higher dollar value. The total number of deals fell by The three main types of mergers are horizontal, vertical, and conglomerate.
In a horizontal merger , companies at the same stage in the same industry merge to reduce costs, expand product offerings, or reduce competition. Many of the largest mergers are horizontal mergers to achieve economies of scale. In a vertical merger , a company buys a firm in its same industry, often involved in an earlier or later stage of the production or sales process. Buying a supplier of raw materials, a distribution company, or a customer gives the acquiring firm more control.
The move enables Google to bolster the software tools it provides to its advertisers. A conglomerate merger brings together companies in unrelated businesses to reduce risk. Combining companies whose products have different seasonal patterns or respond differently to business cycles can result in more stable sales.
The Philip Morris Company, now called Altria Group , started out in the tobacco industry but diversified as early as the s with the acquisition of Miller Brewing Company. It diversified into the food industry with its subsequent purchase of General Foods , Kraft Foods , and Nabisco , among others.
Later spinning off many businesses, current product categories include cigarettes, smokeless tobacco such as Copenhagen and Skoal, cigars, e-vapor products such as MarkTen, and wines. A specialized, financially motivated type of merger, the leveraged buyout LBO became popular in the s but is less common today. LBOs are corporate takeovers financed by large amounts of borrowed money—as much as 90 percent of the purchase price.
Often a belief that a company is worth more than the value of all its stock is what drives an LBO. They buy the stock and take the company private, expecting to increase cash flow by improving operating efficiency or selling off units for cash to pay off debt.
Although some LBOs do improve efficiency, many do not live up to investor expectations or generate enough cash to pay their debt. The goal is often strategic: to improve overall performance of the merged firms through cost savings, elimination of overlapping operations, improved purchasing power, increased market share, or reduced competition.
Once a potential candidate is identified, managers are faced with the very real threat that another company could buy it. Indeed, moving quickly to acquire another company is appropriate in many cases. For example, if a management group sees only one candidate that meets its strategic requirements, or if imminent environmental changes could close off an opportunity, then quick action may be the best choice. For each acquisition, managers should consider what factors are accelerating the process and distinguish openly between corporate strategy and such factors as the interests of special groups or individual career and ego issues.
These considerations are, of course, intertwined in most situations. But addressing each one separately in a forthright manner can help the participants challenge easy or convenient explanations for making the deal rapidly.
After several years, we had indigestion so badly that we wished somebody else had acquired them. Experienced acquirers we interviewed consistently emphasized that it is better to let a deal go than to let momentum sweep a company into a partnership that it has doubts about.
A more concrete set of actions to mitigate momentum involves adjusting the incentives to do the deal that the various parties are experiencing.
The CEO and board should address the ways that such motives can escalate pressure to consummate an acquisition. Because acquiring company managers can exercise the most control over internal rewards, we will focus on those incentives here.
These rewards can take many forms. Career enhancements and ego satisfaction are two we have already highlighted. Another practice that some companies adopt is to appoint key acquisition analysts to top management roles in the newly acquired subsidiary. These procedures may encourage managers to think about taking the business into new areas, may foster managerial continuity throughout the acquisition process, and may help integrate preacquisition analysis into postacquisition operations.
But these methods also reward the pursuit of inappropriate acquistion candidates and can compound the problem of increasing momentum. An alternative that seems to address both sets of problems is the early and prominent involvement of line managers in the acquisition process.
Their experience can help the acquisition team remain focused on potential operating problems that analysts who lack an operating orientation might miss. When CEOs or other managers believe that the outcome of a proposed acquisition could affect their reputations, pressure to consummate the deal builds.
It would be naive to recommend that managers simply attempt to maintain a sense of distance and perspective—as though that were easy to do. But one technique that can help is a formal check-and-balance system that keeps those responsible for dispassionate review out of the process.
The CEO or the board can play such a role. It may still be difficult to slow the momentum, even with changes in reward structures. Some companies counter this problem by involving experienced board members and managers in acquisition activities. An experienced team is more likely to identify and probe into potential trouble spots and resist the urge to pursue poor choices. Our research indicates that the experience most lacking on acquisition teams is not that of staff or consultant specialists but of general managers who have been involved in all phases of an acquisition—including trying to make the partnership work.
During the acquisition process, both suitor and target enter into negotiations with certain expectations about the purposes of the acquisition, the benefits they expect, levels of future performance, and the timing of certain actions.
To reduce the potential for disagreement during the negotiations and to facilitate closure, the parties often agree to disagree for the moment and postpone resolution of difficult issues. Such practices may help to provide maneuvering room in negotiations and opportunities to save face in public announcements.
They may also help both parties find a common ground for agreement on seemingly intractable issues during the fast-paced negotiations. The two sides, however, must eventually clarify those parts of the agreement that remain ambiguous. As trust breaks down, both parent and subsidiary managers may overreact and become involved in bitter disputes. The ambiguity that had helped to close the deal may become a source of difficulty and conflict once the agreement is finalized.
But the two sides could not reach agreement on the responsibility for and on the timing of these actions. Instead, they left these decisions to other managers who had not been involved in the negotiations.
The differences of opinion that subsequently arose led managers in the parent and the subsidiary to compete with each other rather than with outside competitors, which hurt overall corporate performance. When their expectations for postacquisition performance are not met often predictably , parent company managers may believe that their earlier doubts about weak or incompetent management in the subsidiary were correct.
As conflict builds, managers in the acquired company are likely to believe that their worst fears of a malevolent takeover have been confirmed. In short, managers of acquisitions face an ironic situation: ambiguity is useful—if not essential—during negotiations. Yet the very ambiguity that aids negotiating sows the seeds of later postacquisition problems.
Managers should not seek to eliminate the ambiguity and uncertainty that are bound to be present. Instead, they should focus it.
Participants on both sides need to examine important aspects of the deal and decide which outcomes or actions are essential to them. Companies can resolve these ambiguities successfully by separating negotiating issues into two categories: inflexible requirements to which both parties must agree, and negotiable items that can either be resolved later or left ambiguous.
The two sides should address these points explicitly and should be willing to cancel the deal if they cannot reach agreement. Once they take this step, managers on both sides can then focus their attention on outcomes or actions they consider important but negotiable. We expect a certain return on our investment and have developed and refined a set of control systems that are an essential ingredient in our management approach. Classifying and distinguishing sets of issues has other benefits too.
Managers on both sides can develop an agenda for dealing with deferred issues in the immediate postacquisition period. In many cases, the operating managers, who must make the acquisition work after the deal, should handle these questions. Although some changes must be left to the operating managers, guidance should be provided concerning the purpose of the acquisition and the performance requirements.
If a common focus is lacking, mistrust between the parties will almost inevitably develop, forcing managers on both sides into defensive positions rather than an attitude of cooperation. We see your XYZ division as our entry into that business. Such clarification helps both the negotiating and the operating managers to sort out the problems and issues that must be addressed.
Equally important, clarification provides an external focus for their combined activities and reduces the possibilities of political infighting. In contrast, overly precise statements of performance expectations can backfire and increase rather than decrease the ambiguity and uncertainty in the situation. Precise definitions of expected results are often based on financial calculations that outside analysts have prepared with neither a detailed operating knowledge of the companies or industry nor a stake in making it work.
If detailed objectives become a straitjacket, they can have serious consequences as business conditions change. While qualitative statements are more ambiguous, postacquisition managers will have more room to maneuver if they have a general framework to guide them in the future. According to our research, a generally unacknowledged factor—the process itself—affects the outcomes of many acquisitions. We are not suggesting that these barriers occur in every acquisition; their frequency varies with the circumstances.
But we have found that hindrances do exist in the acquisition process, and they can have a significant impact on the ultimate success of the deal. Also, understanding how they might affect your particular situation can help minimize their detrimental effects. Who are the key advisers in this acquisition?
How do their analyses address the way in which the business will operate after the deal is closed? What is their incentive to contribute to the integration of the two companies after the acquisition?
Are any of them given precedence in decision making? Are some analyses systematically ignored? Are the decision makers giving adequate attention to operational considerations and nonquantitative issues? What person or group is charged with integrating analyses?
Are these people important and respected senior members of the organization? Do the reasons for the acquisition support arguments for speeding up the process? Does only one appropriate candidate exist? Is internal development an option if no acquisitions materialize? Do environmental factors for example, other bidders or impending regulatory changes make it essential to act quickly?
What are the sources of pressure to complete the deal? How is the rush to close affecting the acquisition? Do participants feel rushed and will it affect the quality of the work they do? Do hidden agendas exist among the advocates of the deal? Are reward structures affecting the rush to close? Are rewards based on acquiring the company or on making the best decision? Do the people involved receive promotions for completing the deal?
Will they be evaluated negatively if they suggest pulling out? Does a system of checks and balances exist? Is the board review process for acquisitions as detailed and rigorous as for other matters? Does any other high-level, uninvolved person or group exist that can review the acquisition process and decisions dispassionately? Have acquiring executives clarified what the company expects from the new subsidiary?
Have they defined minimum acceptable expectations for it? Have they stated these requirements clearly as nonnegotiable points? Have they also recognized and accepted the nonnegotiable concerns of the target company? Have both parties identified negotiable items that operating managers can resolve after the deal has gone through? Have the planners communicated to both organizations the basic motivation for the acquisition as well as the financial targets for its performance?
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