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Mergers and acquisitions (M&A) are often referred to as a single term. Though there are more similarities in them than there are differences, the main factor distinguishing the two is the companies' willingness for the M&A to take place.

A merger happens when two companies decide on joining forces in their respective fields of business – they may be identical, similar or totally different. Both their shareholders and management agree on surrendering their shares and revaluing and re-registering them under the new company. In December 2007, Malaysian companies Sime Darby Berhad, Golden Hope Plantations Berhad and Guthrie Holdings Berhads merged to create the largest plantations company worldwide worth approximately USD15 billion (largest listed company in Malaysia). They retained the name Sime Darby due to its established brand name.

An acquisition happens when one of the companies, known as the target company, displays hostility towards the acquiring company. In acquisitions, the acquiring company buys over the target company's shares. Management also changes, and more often than not, favours the members of the acquiring company. A prominent acquisition in the sports gear industry took place in January 2006, when Adidas-Salomon AG (Adidas) acquired US Reebok International Ltd (Reebok).

There are also several types of M&As that a company can partake in. A horizontal M&A denotes the merging of two competitors that share the same product lines and markets. A vertical M&A on the other hand, represents the merging of two companies that reflect a customer-company or company-supplier relationship. A market-extension M&A takes place when the companies sell similar products in different markets whereas a product-extension M&A sees two companies selling related products in the same market. A conglomeration represents two companies that have no common business focus. An example would be the acquisition of Texas Gas Resources (natural gas transmission) by CSX Corporation (railroad transportation) – conglomeration usually takes place between two cyclical / seasonal business models that compliment each other.

The Main Purpose of M&A

Companies engage in mergers and acquisitions for the main purpose of creating a higher shareholder value than the sum of the companies involved. This happens when the M&A provides an opportunity for the new or acquiring company to either increase revenue or to reduce cost.

There are several ways a company can increase revenue through M&A's.

The company foresees a new target market:

Dutch airlines, KLM, a prominet airline in Europe, purchased controlling stake in Northwest Airlines to expand their clientele to flyers who frequented routes to and fro America and Asia. The expansion in the target market allowed them to increase their sales revenue.

The company is able to develop new products through new available technical know-how:

When Commerce International Merchant Bank Berhad (CIMB), acquired Malaysian Bumiputera Commerce Bank Berhad (BCB), they spread their services to retail banking based on the BCB's previous business model as an individual company. They later went on to acquire Southern Bank Berhad (SBB), which, at the time, offered investors a leading mutual fund product. CIMB then repackaged the exisitng investment tool as CIMB-Wealth.

The company is able to increase product range:

Multinationals Procter & Gamble, producers of fast moving consumer goods, engaged in M&A's to increase their product range. They acquired Richardson-Vicks, capturing revenue from Oil of Olay and Vidal Sassoon brands; they also acquired Noxell Corporation, known for their products Noxema and Cover Girl.

The company forsees new business opportunities:

Leading natural and organic food supermarket retailer in the US, Whole Foods Market Inc, acquired Fresh and Wild Holdings Limited, the leading organic foor retailer in the UK. This provided Whole Foods Market Inc a new geographic business opportunity just by expanding beyond the US and Canada. Hass Hassan, chairman of Fresh and Wild Holdings commented that the M&A was set to "make improvements [in their stores]" in the UK and around Europe.

To compound the value of shareholder earnings, the company may also reduce costs with respects to the new consolidation of cost centres through the M&A.

The company capitalises on products of the previously individual companies:

The Reebok – Adidas M&A allowed Adidas to capitalise on Reebok's specialty products – women's sportswear. Adidas alone is positioned to serve the soccer industry, which is dominated by men. The M&A pooled market share from sales in football gear and women's apparel, without incurring new product research and development costs.

The company is able to eliminate redundant technology:

Leading search engine, Google, bought over video community website, Youtube, in recent years. This eliminated Youtube's redundancy in search engine optimisation through the use of Google's business model as a search engine. Google was also able to fill in their void of hosting videos.

The company is able to streamline staff:

After the SBB acquisition, CIMB offered close to USD35 million worth of compensation packages to streamline the combined human capital. This cost was perceived as part of the expenditure inherent in restructuring but was implemented to curb costs in the long-run.

The company enjoys an increase in bargaining power

Sime Darby's new status as the largest listed upstream palm oil group globally and the largest stock traded on Bursa Malaysia inevitably instigates higher bargaining power with industrial consumers both locally and internationally.

Benefits of a Merger

Synergy is a common word associated with M&As. Synergy or synergistic effects can be represented by a simple arithmetic equation of 1+1 = 3. This translates into the increase in combined shareholder value over and above the sum of the two original companies' shareholding values.

The materialisation of synergy, however, can be curbed by intangible factors that challenge the benefits of M&As. They are discussed in the following points:

Streamlining of human capital resources

An M&A facilitates the streamlining of the cream of the crop. When companies merge, major changes occur in corporate culture, management styles, business direction, and key operating procedures. Only those who are flexible and adaptable to changes would be elected to stay on in the new company. This gives opportunity for human capital to be streamlined and for top management to keep those who are most competent and valuable to the company.

Unfortunately, power struggles and political clans also exist; this hinders the streamlining process. These simple human factors can misrepresent the selection of candidates that should be retained in the new company.

There are other factors that curb the synergistic effects of streamlining human capital. It is not suprising to see a fair amount of demotivation amongst retained employees. This can be due to them losing their displaced colleagues. Blending in two different corporate families with different corporate cultures can also be a stressful phase, especially when new alliances are formed and acclimatisation takes a longer time. New hierarchial structures can also cause resentment, especially if certain personnel are sidelined from long-awaited promotions. Reporting lines can change drastically leaving new working teams with newer learning curves altogether.

The acquiring of the most effective technology

Advancements in technology systems nearly always guarantee synergy. Companies that acquire technology-focus firms that are relevant to their business application can develop a competitive edge. Similarly, new technology can lead to aggressive product development and cost reduction.

Again however, there are several factors that can curb synergy. There is a cost involved of training and transferring technical know-how to amateur members of the new company. Training takes time and space, which inevitably leads to cost. Coupled with resistance to changes, some employees (who use older systems) may want to revert back to former ways, just to accentuate their importance and expertise in the company. Another disadvantage may be the risk of reliance on self-developed technology. Unless the technology team is able to operate aggressively in the market and respond to competition as if they were an individual company, maintaining in-house developed technology can lead to saturated development. Sometimes, companies receive better support systems and services when they outsource from technology-focused service providers.

Increase in market dominance and growth opportunities

Synergy also materialises through increased market share and growth opportunities. Merged companies experience an increase in market share. The M&A between Reebok and Adidas in early 2006 is now a major threat to Nike's market leadership. Merged firms have also the opportunity to raise more capital as a larger and more cost efficient firm.

In some cases however, a merger also changes the perception of the company, especially when different brands are added to the product lines. Some mergers may have negative or confusing effects on consumer perception when a change of products and services fail to retain their interests.

Economies of scale

Economies of scale can also be achieved through mergers. New technology can wipe out manual work. A merged company has better bargaining power with suppliers. More work can be done in-house, such as advertising. All these changes lead to cost reduction. Sime Darby immediately announced a 10% growth rate in 2008, after the merger was completed illustrating their confidence in their market leadership in terms of size.

In general, size does matter, and size does bring in lower cost figures. However, mergers that are classified as conglomerations, where two different business-natured companies merge, economies of scales can not always be achieved, especially if the merger is not managed adequately. This is because, essentially, with two or more different business focuses, cost centres may not be consolidated as effectively as any one of the other forms of M&As. The different focuses and ideals may require separate cost elements to sustain the different business models.

Similarly, companies engaging in an M&A can not expect immediate economies of scales. Compensation packages from downsizing, time allocation for new training programmes, new branding and marketing schemes, are all major expenditures at the inception and the short-run following the M&A.

Conclusion

Companies engage in M&As to increase shareholder earnings by either increasing revenue or reducing costs. Generally, M&A's allow a more accurate allocation of resources to do both. Synergy is a common term associated with M&As, which is proof of deal's effectiveness. There are times however, where synergy may not be achieved, especially in the short run – companies have to work around the intangible factos that curb synergy to allow the new company to move forward as one and look for new business growth potential to increase shareholder value.