Mergers And Acquisitions
The key to success when having a business is doing what you can to ensure growth. That may be developing your product or service so it is better suited to the potential customer, reducing or eliminating competition or even making sure that your product or services are accessible to as many markets as possible. All of these objectives can be achieved when a company either merges with another one, or acquires it.
A merger is a transaction where two companies, usually of similar size and similar target audience and market, combine their assets to essentially become one company. Exxon and Mobil, two large chain of petrol stations, merged in 1998; creating the very successful ‘ExxonMobil’. Before this merger, both US based companies were competing in the same market and competing for the same customers. By merging, assets and staff from the original companies can be used more efficiently. This is because the cost of running the merged company will be lower than the combined cost of running the two original companies separately. For example, the cost of advertising to reduce the competition will decrease as competition from a previously opposing company has been eliminated. Therefore less will be spent on employing in house staff who work in marketing. The original companies also would have had separate headquarters, by merging, only one would be necessary so the owners of the merged company would be saving money on the running of a building.
An acquisition is when a dominant company acquires all the assets and rights of a smaller company by purchasing all of its stock. In 2014, Facebook acquired WhatsApp for $19 Billion. Facebook at this time was losing popularity, whilst WhatsApp had become more and more popular, especially in emerging markets – allowing users with different phone operating systems to communicate easily with only a connection to the internet. The acquisition of WhatsApp, enabled Facebook to capitalise on this popularity, without the cost of creating a platform to compete with WhatsApp or attempting to directly make Facebook (the social network) more popular in these markets.
This is useful for the above mentioned reasons described for a merger, but may be preferred if the owner of the smaller business is no longer interested in working on a project or if the business is becoming unprofitable. The dominant company may have the assets to transform a failing company. The dominant company may wish to acquire another company to 1) eliminate competition, 2) extend or further develop a current product, 3) open it up to markets where the smaller company may be more successful or 4) just to add it to its portfolio just to diversify its profit.
In order to have a successful deal:
- shareholders of both companies must be completely informed and treated fairly. Both business owners are required to ensure
- There should still be a healthy amount of competition in the market after the transaction
- There must be a full disclosure of the company’s’ rights and legal obligations
- In cases of issues with the transaction, clauses providing protection against indemnity should be present in any agreement
- Both companies should adhere to the Information and Consultation of Employees Regulation
To ensure that all parties involved are treated fairly, be sure to seek legal advice from a skilled and knowledgeable advisor that is prepared to take the time in order to take the course of action most suited to your needs.