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4.6: Mergers and Acquisitions

  • Page ID
    3999
  • Learning Objective

    1. Define mergers and acquisitions, and explain why companies are motivated to merge or acquire other companies.

    The headline read, “Wanted: More than 2,000 in Google Hiring Spree” (Oreskovic, 2011; The Official Google Blog, 2011). The largest Web search engine in the world was disclosing its plans to grow internally and increase its workforce by more than 2,000 people, with half of the hires coming from the United States and the other half coming from other countries. The added employees will help the company expand into new markets and battle for global talent in the competitive Internet information providers industry. When properly executed, internal growth benefits the firm.

    An alternative approach to growth is to merge with or acquire another company. The rationale behind growth through merger or acquisition is that 1 + 1 = 3: the combined company is more valuable than the sum of the two separate companies. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost efficient by combining with other companies.

    Mergers and Acquisitions

    Though they are often used as if they’re synonymous, the terms merger and acquisition mean slightly different things. A merger occurs when two companies combine to form a new company. An acquisition is the purchase of one company by another with no new company being formed. An example of a merger is the merging in 2010 of United Airlines and Continental Airlines. The combined company, the largest carrier in the world, flies under the name United Airlines, but its planes display the Continental Airlines logo. The merger will combine the scale of United Airlines with the management culture of Continental. Another example of a fairly recent acquisition is the purchase of Reebok by Adidas for $3.8 billion (Howard, 2005). The deal was expected to give Adidas a stronger presence in North America and help the company compete with rival Nike. Though Adidas still sells shoes under the Reebok brand, Reebok as a company no longer exists.

    Motives behind Mergers and Acquisitions

    Companies are motivated to merge or acquire other companies for a number of reasons, including the following.

    Gain Complementary Products

    Figure 4.6

    4.6.0.jpg

    Do you think by acquiring Reebok, Adidas has had an impact on Nike’s command of the running shoe market?

    Emily – New shoes – CC BY-NC-ND 2.0.

    Acquiring complementary products was the motivation behind Adidas’s acquisition of Reebok. As Adidas CEO Herbert Hainer stated in a conference call, “This is a once-in-a-lifetime opportunity. This is a perfect fit for both companies, because the companies are so complementary….Adidas is grounded in sports performance with such products as a motorized running shoe and endorsement deals with such superstars as British soccer player David Beckham. Meanwhile, Reebok plays heavily to the melding of sports and entertainment with endorsement deals and products by Nelly, Jay-Z, and 50 Cent. The combination could be deadly to Nike” (Howard, 2005).

    Attain New Markets or Distribution Channels

    Gaining new markets was a significant factor in the 2005 merger of US Airways and America West. US Airways is a major player on the East Coast, the Caribbean and Europe, while America West is strong in the West. The expectations were that combining the two carriers would create an airline that could reach more markets than either carrier could do on its own (CNNMoney.com, 2005).

    Realize More Efficient Economies of Scale

    The purchase of Pharmacia Corporation (a Swedish pharmaceutical company) by Pfizer (a research-based pharmaceutical company based in the United States) in 2003 created the world’s largest drug maker and the leading pharmaceutical company, by revenue, in every major market around the globe. The acquisition created an industry giant with more than $48 billion in revenue and a research-and-development budget of more than $7 billion (Frank & Hensley, 2002). Each day, almost forty million people around the glove are treated with Pfizer medicines (Pfizer.com, 2011). Its subsequent $68 billion purchase of rival drug maker Wyeth further increased its presence in the pharaceutical market (New York Times, 2009).