In the business world, the terms “mergers” and “acquisitions” are often thrown around as ways that companies grow, adapt, or change. But what do these words mean, and why should you care?
In this beginner’s guide, we’ll break down the basics of mergers and acquisitions (commonly abbreviated as M&A), explain why they happen, and explore their impact on the economy, consumers, employees, and experts who handle these transactions.
What Are Mergers and Acquisitions?
Let’s start with the basics. A “merger” is when two companies combine to form a single, new company. In a “true merger,” both companies are roughly equal in size and power, and shareholders from both organizations retain a shared interest in the new entity. For example, if Company A and Company B merge, they become a single, new Company C.
On the other hand, an “acquisition” is when one company buys another. The company being bought is usually smaller and becomes a part of the acquiring company. In this case, Company A would buy Company B, and Company B would cease to exist as an independent entity.
Why Do Mergers and Acquisitions Happen?
Companies merge or acquire for various reasons:
- Growth: One of the most common reasons is to grow faster. Rather than taking the time to build something from scratch, a company might buy another that already has what it needs—be it technology, talent, or customer base.
- Synergy: The idea is that the combined powers of two companies can be greater than the sum of their individual parts. For example, one company might be great at making a product, while the other excels at selling it.
- Eliminate Competition: By buying or merging with a competitor, a company can reduce competition, sometimes giving it the freedom to raise prices or gain more market share.
- Global Expansion: Companies looking to break into new markets often acquire firms already operating in those regions.
- Cost Efficiency: Mergers can help companies save money by sharing resources like technology, employees, and distribution networks.
How Does It Affect Employees?
Mergers & Acquisitions can create a range of emotions among employees. On the positive side, a merger might bring about new opportunities for career advancement and the chance to work on exciting projects. But on the flip side, mergers often lead to layoffs due to redundancies—two companies don’t need two accounting departments, for instance.
What’s the Impact on Consumers?
For consumers, the effects of M&A can be a mixed bag. Sometimes, the combined company can offer better products or services, often at a lower cost due to increased efficiency. However, reduced competition can also lead to higher prices and fewer choices.
What’s the Role of Regulatory Bodies?
Given the potential impacts on competition and market dominance, regulatory bodies like the Federal Trade Commission (FTC) in the United States often scrutinize proposed mergers and acquisitions. Their role is to ensure that these deals don’t create unfair advantages or monopolies, which would harm consumers.
How Are Mergers and Acquisitions Financed?
Mergers can be financed in several ways:
- Stock Swap: Both companies agree to exchange shares based on a certain ratio.
- Cash Purchase: The acquiring company buys the target company’s stock for cash.
- Debt Financing: Sometimes, companies borrow money to finance an acquisition.
Some of the biggest M&A deals have changed the landscape of entire industries. Disney’s acquisition of 21st Century Fox for $71.3 billion in 2019 is one such example. The merger created a media giant with unparalleled reach in film, television, and streaming services. Another instance is Microsoft’s acquisition of LinkedIn for $26.2 billion in 2016, giving Microsoft a strong foothold in the professional social networking space.
Mergers and acquisitions are fascinating aspects of the business world that shape our economy, affect our choices as consumers, and influence our careers. Whether they’re taking place in the tech industry, healthcare, or consumer goods, M&A activities are critical maneuvers that companies use to adapt and thrive in an ever-changing market landscape. Understanding the basics of mergers and acquisitions can help you better grasp how businesses evolve and how these changes may impact you, both as a consumer and as an employee.