IntroductionMergers and Acquisitions are an essential component ofStrategical management of many firms and organizations all around the world. They are being used as a strategic survival tool, dueto the global competition between the companies. Managers of the acquiringfirms want to see their corporations expand as well as to make a bettercompetitor company in the industry and eventually gain the monopolistic power. Themain idea is that two companies together represent higher value than twoseparate companies.”Theterms merger and acquisition mean slightly different things, though they areoften used interchangeably.
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” (Investopedia, 2017). Some people have amisconception about the terms being a synonym, however, they have a differentmeaning. “A merger takes place when two companies combine their operations,creating in effect, a third company. An acquisition is a situation in which onecompany buys, and controls another company.” (Strategic Management: Formulation and Implementation,2014).Thereare many risks and factors that might cause mergers and acquisitions tofail. Google is however one of thecompanies that overcame the risks and achieved the benefits of successfulacquisitions.2.
General insight into M&AThere are countless motivationsbehind Mergers and Acquisitions. One of the main point is that the owners ofthe company desire higher position in the branch as well as growth of the firm,in order to withstand rising competition. While using M&A strategy theymight achieve the objective. There are different varieties of Mergers dependingon whether the merging companies are in the similar or different industry. According to DePamphilis(2016) We can categorize M&A into HorizontalMerger, Vertical Merger and Conglomerate Merger.
By acquiring basic knowledgeand terminology of M&A we are then able to evaluate Google’s strategy andits pros and cons. 2.1 Categorization 2.
1.1 MergersMergers are occurring when two or more firms are combined.All the assets and liabilities of a target firm are then absorbed by acquiringfirm. Unlike in acquisition, the absorbed company ceases to exist. According toSherman (2006) Although thebuying firm may be a considerably different organization after merger, itretains its original identity.
In simple words it is a process through whichbusiness of a firm is taken over by another firm and the target firm ceases toexist (Pautler, 2001).Horizontal MergerHorizontal Merger happens when two companies from the sameindustry merge together in order to sustain the competition in the sameindustry as well as gaining the higher position over other competitors. Themerging companies tend to be in competition and share the same services orproducts. As stated by Hassan and Ghauri (2014) It is common in sectors wherecompetition is higher and benefits of merging firms are greater on account ofsynergies and potential gains. The example of Horizontal Merger might be thecase of Facebook acquisition of Instagram.
As reported by Forbes.com (2012)Facebook acquired Instagram for $1 billion. By purchasing Instagram, Facebookstrengthened its position in the industry and eliminated potential competitionin photo sharing area. Vertical MergerIn contrast with Horizontal Merger, Vertical Merger takesplace between two firms that are not in the same sector.
To clarify, the twofirms produce different goods or services for a specific completed product. Whenmerging two companies together it enables the parent company to have wholeproduction cycle under control. Furthermore, Hassan and Ghauri (2014) mentionedthat the goal behind, is to reduce costs or improve efficiency by mergingsynergies/processes under common management and ownership. An instance of this typeof merger would be ConglomerateMergerConglomerate mergers occur between two companies with unrelatedoffers of products or services.
They are both in the different sector of thebusiness. There are two types of Conglomerate Mergers, pure and mixed.According to Hassan and Ghauri (2014) Pure ones involve firms with nothing incommon, while mixed conglomerate mergers relate to firms that are looking forproduct extensions or market extensions. The deal of Walt Disney Company andthe American Broadcasting Company is the noticeable case for Conglomeratemerger.
2.1.2 AcquisitionUnlike in Mergers where a process of negotiation is involvedbetween the two companies.
There doesn’t have to be necessarily a negotiationprocess In Acquisition. The Acquiring company buys the target company. Thereare two possible types of Acquisition: Friendly or Hostile. In FriendlyAcquisition the target company is not against the deal of being acquired. Onthe other hand, Hostile takeovers(Acquisitions) happen when the target companydoes not consent the deal. 2.
2 Reasons behind M&AThere are numerous reasons why M&A happen. The mainmotive of M&A is to increase profitability and strengthen position of thedominant firm. As reported by Rompotis (2015) ”The dominant rationale behindthe activity of the companies involved in mergers and acquisitions is thatacquiring firms can significantly contribute to the improvement of financialperformance”.Strategic Goals/Benefits SynergySynergy is one of the common reasons for merging. The valueof the merged company is greater than 2 separate companies. The performance ofthe firm increases and the fixed costs reduces by removing duplicate departmentsor operations.EliminateCompetitionIt happens when two small companies merge together in orderto stand a chance in the industry.
Thebuyer absorbs target company, thus it eliminates further competition and gainsgreater market share. Market powerManagerialFinancialTaxesTax benefits are another reason for merging. A firm withlarge taxable income merges with company carrying tax losses.
It results inAcquiring company tax liabilities being lowered. Furthermore, Companies locatedin high tax countries acquire a company in area with more favorable taxes. DiversificationAcquiring companies from unrelated industry is calledDiversification. Diversification allows a firm to reach broader range ofproducts that can be offered. The companyacquires another company from different industry that has higher grow prospectsso it can reduce the risk of having invested too much in one particular sector.
According to DePamphilis(2016) A firmalso may attempt to achieve higher growth rates by acquiring new products withwhich it is relatively unfamiliar and then selling them to familiar and lessrisky current markets.