Business Integration

Mergers and Acquisitions (M&As)

Successful companies make a lot of money, which sooner or later has to be spent. Large companies often have the choice of innovating – developing new products, services or markets themselves – and investing in R&D. Another possibility of investing money is capacity extension including buying new equipment and modern technologies. Buying or acquiring another company with successful products is one more possibility of investing capital. If the other company is too big to acquire, it is possible to merge with it. Thus, the phrase mergers and acquisitions or M&As includes ways of investing money into new companies and refers to the aspect of corporate finance strategy and corporate management.

In business and economics, a merger is a combination of two or more companies into a new single larger firm. Usually, mergers occur in a friendly selling where executives from the respective companies participate in a due diligence process to ensure a successful integration of all parts. Such actions are commonly voluntary and result in a new company name and in a new branding. A merger of two corporations that creates a new one with no company being dominant is called an amalgamation.

A takeover refers to one company (the acquirer) purchasing another (the target) and consequently the transfer of control from one business unit to another. Such events resemble mergers but without the formation of a new company.

A collection of unrelated businesses operating in different industries combined into a single corporate structure is called a conglomerate. In theory, the advantage of this form is that, with diversified businesses, the parent company is protected from isolated economic pressures, such as changing demand for a specific product. In practice, it can be difficult to manage companies in unrelated industries.

Reasons for and against M&As

As is mentioned above, the main reason for M&As is to invest money. Some other objectives for taking over or combining with other companies which add / maximise shareholder value are the following: economy of scale – this refers to the factors that cause the combined company to decrease the average costs of production as output increases; increased market share – it assumes that a company absorbs a major rival, thus reduces competition, and therefore reinforces its position in the market, and consequently, has increased revenue; synergy – the belief that together the companies will better use the resources and produce more than the sum of the two separate parts; geograthical, market and product diversification.

On the other hand, there exist reasons for M&As which do not add shareholder value. For example, empire building and managers’ hubris (managers have larger companies to manage and hence more power), increased managers’ compensations (the larger the company is, the higher the compensations are); overextension (making the organization fuzzy and unmanageable).

Major disadvantages of M&As for the society is surely reduced competition and choice for consumers in markets as well as price increases and job cuts. Moreover, hidden liabilities of a target entity can worsen the financial situation of an acquirer. Conflict with new management is another disadvantage of takeovers. After a hostile takeover, the former top management as well as some personnel from the acquired companies can be dismissed, or in a multinational company cultural constraints may arise. Conglomerates may become unmanageable and fail to achieve synergy; besides, they may be less flexible and efficient than individual companies.

Types of Business Integration

There are two main types of business integration (see Figure 1). Horizontal integration (a horizontal merger or acquisition) describes the joining of companies that are in the same stage of production. It is a combination of competing companies that perform the same functions. Vertical integration (a vertical merger or acquisition) refers to the combining of companies involved in different stages of production or marketing of a product or service.

Figure 1.