Mergers and Acquisitions – A Fine Line Between Success and Failure

One of the main motivations for merging companies is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Budgets for certain departments can be cut and the new, larger company benefits from greater purchasing power, meaning that the costs of any raw materials and necessities are lowered. Also, the combination of multiple companies theoretically provides access to more customers, which leads to an increase in sales. In some cases, such as when Facebook bought the messenger app WhatsApp for $19 billion in 2014, the app that should have been a threat to Facebook, being one of the fastest-growing apps in history, was not only no longer the competition but actually fed into Facebook’s profits. The merging of two companies also allows for diversification of their services/products, for example, if two travel companies merge then they can provide a greater range of travel options to their customers. In addition to this, the combined businesses can make use of the skill-sets from both companies to improve themselves and ensure more customers and increase revenue.

King & Wood Mallesons

However, there can be downsides to merging, and if businesses don’t get it right then it can be disastrous for both parties. When multiple companies become one, there will be crossover in jobs and it is likely that many will be made redundant or moved to different areas of the company, which also increases the likelihood of integration issues when the merger commences. There is always a risk of complacency too, if the newly merged company begins to feel that their competition no longer poses a threat, leading to lower standards of customer services or in innovation-based businesses, a decline in productivity and research.

Several factors can lead to an unsuccessful business merger. One of the main ones is a lack of a post-merger plan, which lays out how synergy and control will be delivered. Companies are rarely concrete about what form synergy will take and do not estimate their cash flows quantitatively, instead working with floating statistics. Most countries have rules and regulations surrounding merging and acquisition; regulators in the UK look at different proposals for mergers and have the power to intervene if they deem it necessary. There are a few reasons that this could happen: where a merger might result in one firm having undue market power, or where the public interest may be threatened (such as with media companies, to make sure that there is not one single power controlling media). Some of the most successful mergers in history are Disney and Pixar, and Exxon and Mobil – who signed an $81 billion agreement to merge companies – and the biggest of all time, Vodafone acquiring Mannesmann, a German industrial conglomerate, for $180.95 billion which made them the world’s largest mobile operator and set the tone for future mergers and price wars amongst companies.

Emily Durston

Image: [The Blue Diamond Gallery]