What Are Mergers and Acquisitions? - Definition & Examples

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  • 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
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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.

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