Mergers and Acquisitions: The High-Stakes Game of Growth
- Kimi Basamak
- Apr 11
- 4 min read
Updated: Apr 15
Mergers and acquisitions, the two ways of ‘combining’ businesses, are a staple of macro corporate strategy. They serve as ways for a business to expand its base and offerings, increase internal efficiency, and ultimately gain a competitive advantage in the market. Although these inter-business transactions may seem simple, they are often littered with financial and operational risk as well as ethical responsibilities.
Some merger and acquisition deals have catapulted businesses to be industry giants, including Disney’s acquisition of Pixar Animation in 2007, while others have collapsed because of financial problems and regulatory issues. A merger or acquition fundamentally impacts many parts of both businesses, especially operational and employee structures. Understanding the nuances of mergers and acquitions is necessary to build businesses that can expand to become market leaders.
Difference between Mergers and Acquisitions
A merger is the combination of two companies of relatively similar size and standing to create an entirely new entity. Both businesses that make up the new company bring something to the table that can enhance business, and all structural changes are made in agreement between the two. Mergers often result in mutual benefit, where the new collaborative approach can bring a refresh of corporate culture and leadership.
An acquisition, on the other hand, involves a small company being completely purchased, or acquired, by a larger company. This is done in one of two ways: a hostile takeover or a more friendly arrangement. A hostile takeover occurs when a company acquires another against its will, often by using aggressive tactics like pressuring shareholders. A friendly acquisition happens when one company willingly agrees to be bought by another, with the smaller company often receiving good compensation. Acquisitions are often more difficult to navigate, considering they result in an imbalance of power and therefore strong rearrangement of the subjugate company.
Strategy, Finances, Regulation, and Ethics
Two of the most important considerations for a business when agreeing to a merger or acquisition are the strategic and financial benefits and drawbacks. To determine if a merger will be financially beneficial, a business should analyze factors like profitability, debt, and restructuring costs. The company must also assess cultural compatibility to predict the dynamics between employees, especially communication. Strong financial projections and social dynamics are vital to ensure long-term success and smooth integration.
The failed merger between Daimler-Benz and Chrysler in 1998 is an example of poor strategic alignment and incompatibility. Without sound agreements between the businesses, the merger turned into a clash between their governments for power over the business, and resulted in a costly divestment in 2007.
Understanding the governmental regulation and ethical concerns surrounding mergers and acquisitions is also critical. No matter the agreement, these transactions will lead to job losses as the two companies improve efficiency. This raises concerns about job security and the corporation’s responsibility to take care of employees in these situations.
Other regulatory concerns over monopolization and market dominance arise when two large competitors agree to merge. In these cases, governments and regulatory bodies reserve the right to prevent mergers to maintain free-market captialism. This was most recently seen in the AI-processing industry in 2022, when Nvidia agreed to acquire competitor Arm for $40 billion before the US government intervened. Antitrust issues were cited, as this merger would allow for virtually complete market control for Nvidia over AI hardware.
Integrating Mergers
Although two entities may merge on paper, integrating the various aspects of the two businesses takes much longer. Blending operations, workforce, culture, governance, facilities, and many other aspects of business poorly can detract from any theoretical benefits. Cultural integration, in particular, is one of the most difficult obstacles in a merger. For instance, the fast-paced Internet boom was reflected in AOL when it merged with Time Warner in 2000, but Time Warner kept the role of traditional media. Because of this, combining working styles was impractical and led to severe inefficiency, causing the partnership to dissolve.
Another key challenge is the blending of systems operations, especially as companies become increasingly reliant on their own technology infrastructure. Merging IT and supply chain systems may create significant problems if software is incompatible, causing larger operation disruption. Operations integration is typically done behind the scenes, but it is a significant indicator of a successful merger; investors and customers often pay close attention when deciding if a merger will be successful or unsuccessful.
The Long-Term Value of Mergers and Acquisitions
In the long term, successful mergers and acquisitions can redefine competitive landscapes and set the direction for an industry. Take Google’s acquisition of YouTube, for example, as the reason search and advertising companies have ramped up monetization of social media advertisement. Sometimes, companies can grow out of acquisitions and become too large to manage effectively, resulting in dissociation agreements evident in General Electric’s restructuring over the last two decades.
Long-term perspective on acquisitions is also vital to ensure one company does not harm the profit-drivers of another. Meta’s acquisition of Instagram in 2012, for example, did not follow a typical restructuring process; instead, Meta invested in Instagram to continue developing its social media platform, allowing it to grow independently while simultaneously creating incredible revenue streams for the business.
The Bottomline
Mergers and acquisitions take both ends of the spectrum: they allow for incredible growth and innovation, but can also bring severe drawbacks and risk. Understanding the intricate web of factors that influence whether these deals are beneficial is necessary to make effective corporate and investment decisions.
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