Login
Copyright

What Are Mergers and Acquisitions? - Definition & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: What Is an Endowment? - Definition & Effect

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:00 What are Mergers &…
  • 0:25 Purpose of a Merger
  • 1:50 Purpose of Acquisition
  • 2:40 Issues in Combining Companies
  • 3:35 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay
Create an account to start this course today
Try it free for 5 days!
Create An Account

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

Do you understand the difference between and merger and an acquisition? Can you explain why a company might merger or acquire, and what can go wrong with the process? Read on to learn the answers to these questions.

What are Mergers and Acquisitions?

Mergers and acquisitions are both changes in control of companies that involve combining the operations of multiple entities into a single company.

In a merger, two companies agree to combine their operations into a single entity.

In an acquisition, one company purchases another company, and has the right to sell off operations, merge them into similar groups in the purchasing company, or close facilities or cancel products altogether.

Why Merge?

Companies would choose to merge together for different reasons:

  1. The combined entity would be larger, and have corresponding larger resources for marketing, product expansion, and obtaining financing. This could help them better compete in the marketplace.
  2. The combined entity could merge similar operations to reduce costs. Corporate and administrative functions, such as human resources and marketing, are often targets for combinations. They might also combine the production areas if the companies produce similar products and reduce costs by having fewer plants or facilities in operation.
  3. The combined entity might have less competition in the marketplace. If the products of the two companies competed for customers, they could combine their offerings and use resources for improving the product, rather than marketing against each other.
  4. The combined entity might have synergy in operations. Synergy is when combined operations show lower costs or higher profits than would be expected by just adding their financial information together on paper. This could be due to economies of scale, where costs are lower due to higher volume of production, or due to vertical integration, where greater control over the production process is achieved due to owning more steps in the production process.

Why Acquire?

Acquisitions are undertaken for strategic reasons. For example:

  1. A company might acquire another company to obtain a specific product. It can be less expensive to purchase a company offering a product you'd like to sell than building the product yourself. Software companies often purchase smaller companies that offer extensions to their product line if they become popular with customers, so they can add the functionality to their primary offering.
  2. A company might acquire other companies to increase its size. A larger company may have more visibility in the marketplace, and also better access to credit and other resources.
  3. A company might acquire another to obtain control over a critical resource. For example, a jewelry company might acquire a gold mine, to ensure they have access to gold without market price fluctuations.

Issues in Combining Companies

It can be difficult to combine companies, whether they are merging or one is acquiring the other.

Combining operations means that some people will lose their jobs, since the company might only need, say, one Director of Human Resources but they have 2 currently available.

Companies may have different systems for managing information, including production information, financial information, and even communications, such as email systems. There can be a significant effort required to merge the systems into a single system, in order to take advantage of the synergies of combined operations.

Companies may have very different cultures, and be unable to work together.

In an acquisition, the acquiring company may have paid too high a price for the other company, so that the anticipated cost-cutting and savings do not occur, due to acquisition expenses.

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?
I am a teacher
What is your educational goal?
 Back

Unlock Your Education

See for yourself why 10 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back

Earning College Credit

Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create An Account
Support