What are mergers and acquisitions?
Mergers and acquisitions, or M&A, is a term that covers a variety of transactions that change the ownership and structure of businesses. It’s often more complex than one business simply selling to another, though, and there are differences between these two terms.
A merger occurs when two companies join together to create a third company. In some cases, the merged company may keep the name of one or both of the preexisting companies. The new organization also usually keeps various components of each of the businesses, including equipment, real property and employees.
An acquisition occurs when one company overtakes another. Most commonly, a larger company acquires a smaller one, but this is not a hard-and-fast rule. In most cases, the transition of the company to another is planned and offers some benefits for each party.
For example, a large tech company might acquire a small tech company because the smaller company has developed proprietary software that would be valuable to the larger entity. The owner of the smaller company benefits from the large payday associated with the sale. The remaining staff of the smaller company might benefit from being folded into the larger company, which brings new opportunities and resources for growth.
You may have heard the term hostile takeover. This is a type of acquisition that’s not cooperative. Instead, one company acquires the other by taking over management via shareholder agreements, buying shares or other “hostile” activity.
What are some merger and acquisition examples?
To better understand mergers and acquisitions, it’s a good idea to look at real-world examples. You’ve probably heard news about company acquisitions just in the past few weeks, and if you pay attention to business news, you’ll learn more about these types of transactions.
Here are some examples of mergers and acquisitions in the business world you may have heard of:
- Disney acquires Pixar. Disney has navigated numerous M&A activity over the years, typically gobbling up smaller entertainment organizations to expand its power in the industry. In a 2006 acquisition, Disney purchased Pixar for around $7.4 billion. This acquisition had benefits for both parties and incorporated Pixar’s growing animation expertise and experience into the Disney family.
- Amazon acquires Whole Foods. In 2017, Amazon purchased Whole Foods for $13.7 billion. Because Amazon intended the purchase to expand its own holdings in retail spaces, the Whole Foods brand remained intact and even the company’s operational headquarters remained in place.
- Exxon and Mobil merge. This historical example differs from the previous two because it’s a true merger. Exxon and Mobil merged their resources to create the ExxonMobil Corp. The goal was to combine expertise—Exxon had it for deepwater exploration while Mobile was a king of production. Each also had explorations in different parts of the world.
Why would a business merge with or acquire another company?
As you can see from the merger and acquisitions examples above, there are numerous reasons companies might enter into M&A activity. Some common reasons a business might consider mergers or acquisitions include:
- Combining resources. Companies that decide to merge may want to combine resources for further success. They may bring together workforces, market share or differing knowledge, equipment or processes.
- Gaining new resources. Businesses that acquire another often want to gain new resources. By buying another company, an organization can get a fully developed process or product without having to do all the work to bring it to market. In some cases, an acquiring company might get new patents, specialist employees, equipment or real estate it needs to continue to grow.
- Selling to a company better positioned for growth. On the opposite side of an acquisition, the selling entity may be looking to grow as well. A CEO that built a small company from the ground up may have reached the limit of what he or she can do and want to pass their baby on to a larger organization that can take the concept further. Often, the entrepreneur that started the company is ready to sell and move on to another project.
- Reducing competition. Both mergers and acquisitions can also be targeted at reducing competition. A larger company may swallow up smaller companies to keep them from competing, and businesses might join together to work cooperatively instead of against each other.
What is the success rate of mergers and acquisitions?
The failure rate for mergers and acquisitions is between 70 and 90%. That puts the success rate at around 3 in 10 at the high end.
Why do acquisitions fail sometimes?
M&A activity can fail for a number of reasons. These are extremely complex business transactions with many moving parts, and they don’t always work out as expected. Here are some of the most common reasons mergers and acquisitions might fail.
- Poor planning. These transitions take intense, expert planning. Companies must analyze big and small pictures, integrating disparate elements from each organization and planning for the future at the same time. Failing to design new processes and business organization correctly can result in the entire thing folding in on itself.
- Poor communication. Communication is critical during M&A activity. Businesses must create the right messaging to the right people at the right time to reduce impact on brand reputation, consumer confidence and employee morale. Any of those things can cause the transition to flounder or fail.
- Inappropriate valuation. In some cases, one business purchases another based on a concept of valuation that doesn’t pan out or was based on poor business analysis. For example, Quaker Oats purchased Snapple for $1.7 billion in the 1990s. It was a bad investment and the company ended up selling Snapple to a holding firm shortly thereafter—for a loss of $1.4 billion.
- Changes in the market. Sometimes, changes in the market can cause M&A activity to fail. The merger itself might change consumer perception of the brands, driving away customers. Or, the market might simple pivot quickly and unexpectedly, leaving an organization holding resources that are no longer relevant.
Potential impacts of mergers and acquisitions on personnel
Even when M&A activity is successful, it can have big impacts on your personnel and the business itself. Here are some potential impacts many teams face when they’re part of a merger or acquisition—especially if they work for the smaller entity or the one being acquired.
- Organizational structures change. Leadership is one of the first things that can change with M&A activity, and it often works from the top down. New CEOs and other executives take over. Staff may deal with new layers of leadership or begin reporting to a completely new manager. This can be confusing and stressful for many, especially if they liked and trusted their old leadership. It can also cause people to worry about whether or not they will lose their jobs too.
- People may lose their jobs. Some people may be laid off. This isn’t a given with every M&A, but if there are redundancies, the company will eventually get around to resolving them. That may mean people are let go completely or that certain individuals are moved into new positions.
- Staff might have to learn new skills. Whether or not someone is moved to a new position, staff may need to learn new skills. It’s common, for example, for one of the merging companies to win out when it comes to software or process systems. Staff originally from the other company may need to learn how to use these new systems. They might also have to learn information about new products, clients or company rulesets.
- Growth opportunities might develop. But it’s not all bad news for employees involved in M&A activity. Once the dust settles, there are often more growth opportunities in a larger company. Someone who had risen to manager and had nowhere else to go in a smaller company might be looking at potential director or VP positions within the new company in the future.
Ultimately, M&A activity is a business tool that helps companies grow and evolve. Whether or not this type of activity would be good for your business is a question only you can answer. When considering merging or selling your company, consider your personal business goals, the welfare of your staff and what the other entity can offer.