Based on the academic literature, critically explain the motives behind Mergers and
Acquisitions and why Mergers & Acquisitions do not always have a successful outcome.
A merger is an agreement between two existing similar-sized companies to combine and
make one legal company. Both companies bring together their assets, human resource and they
are equal partners in the running of the day to day activities of the new entity. The merger is
initiated by the board of directors with approval from their majority shareholders.
Mergers are categorized into five main categories.
– Horizontal merger. This is a merger of two firms who are direct competitors operating in the
same jurisdiction, with similar goods and services.
– Vertical merger. A merger of two or more companies in the same supply chain.
– Congromelete merger. A Merger of companies that produce different products and services.
– Market extension merger. A merger of two companies that deals with production of similar
goods and services but operating in different markets and locations.
– Product extension merger. Merging of firms that produce goods and services that complement
each other in the market.
An acquisition is a takeover of one company by another company. Normally a larger
company takes over a smaller company and the acquired firm ceases to exist. A new company, in
this case, does not emerge from an acquisition.
They are different motives that lead to mergers and acquisitions of companies. These motives
include:
Increase market share, power, and control. A merger increases market share, control, and
power for the merged firm. This led to an increase in profits and service delivery efficiency due
to economies of scale. Market power enables a firm to have an advantage and bargaining power
for both suppliers and labor.
Diversification. Mergers and acquisitions enable a firm to enjoy risk reduction in production and
return to maximize profit by investing in diverse areas of operations. Diversification into new
markets, services delivery, and new product production also led companies to merge to achieve
the desired target.
Acquisition of assets. To acquire more assets a merger and acquisition is a way out. This move
may be inspired by a desire to gain access to assets that are unique or assets that may take a long
time to develop internally by a firm.
Increase financial capacity. Small firms merge to make one big firm to increase their financial
capacity. With increased financial ability it makes it ease production, gain access to loans from
banks, and acquire more assets.
Value creation. Businesses merge in order to increase more wealth for the shareholders. This is
based on the fact that there will be increased production and caters to a larger market.
Some situations make mergers and acquisitions of firms and companies fail to live up to
expectations, production and business profitability. These situations include:
Mis-valuation. The number, assets, human resources may look good on paper and fail to execute
on the ground. After the merger, the assets fail to generate revenue.
Poor integration process. Post Merger execution may lead to the disintegration of factors of
production. This may affect key labor force, different units, key projects, and policies.
External factors. External factors such as Inflation, economic downfall, or natural calamities
may affect the final performance of the merger. External factors are not fully controllable and the
business can only make decisions to avoid further losses.
Negotiation error. One firm might overpay as the acquisition fees leading to financial losses
and failures in production in the future.
Limited Business owner involvement. Minimal supervision and follow up from the business
owners right from business merger. Owner should take up a supervision role to ensure
everything runs smoothly and advisors should take on an assistance role.
Most mergers and acquisition firms and deals failure are a result of the above factors among
others. Business Owners, the board of directors, business owners, and advisors should be vigilant
about possible pitfalls and failures of a merger.