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4.6 Mergers and Acquisitions

Learning Objective

  1. Define mergers and acquisitions, and explain why companies are motivated to merge or acquire other companies.

The headline read, “Ubisoft to Hire 900 in 12 Months.”Kris Graft, “Ubisoft to Hire 900 in 12 Months,” Next Generation, April 24, 2008, at http://www.next-gen.biz/index.php?option=com_content&task=view&id=10163&Itemid=2 (accessed June 20, 2008). The French computer and video-game publisher and developer Ubisoft Entertainment was disclosing its plans to grow internally and increase its workforce from 3,600 to 4,500. The added employees will help the company expand its operations and market share of games for PlayStation 3, Xbox 360, and Wii. When properly executed, internal growth benefits the firm.

An alternative approach to growth is to merge with or acquire another company. The rationale behind growth through merger or acquisition is that 1 + 1 = 3: the combined company is more valuable than the sum of the two separate companies. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost efficient by combining with other companies.

Mergers and Acquisitions

Though they are often used as if they’re synonymous, the terms merger and acquisition mean slightly different things. A mergerThe combination of two companies to form a new company. occurs when two companies combine to form a new company. An acquisitionThe purchase of one company by another with no new company being formed. is the purchase of one company by another with no new company being formed. An example of a merger is the merging in 2005 of US Airways and America West. The combined company, the nation’s fifth largest carrier, flies under the US Airways name but is headquartered in Tempe, Arizona, the home of America West. It was hoped that the merger would help the combined airlines better compete with discount rivals Southwest and JetBlue.Dan Reed and Barbara De Lollis, “America West, US Airways Merger Goes for a Tight Fit,” USA Today, May 19, 2005, http://www.usatoday.com/money/biztravel/2005-05-19-merger_x.htm (accessed June 20, 2008). An example of a recent acquisition is the purchase of Reebok by Adidas for $3.8 billion.Theresa Howard, “Adidas, Reebok lace up for run at Nike,” US Today, August 3, 2005, http://www.usatoday.com/money/industries/manufacturing/2005-08-02-adidas-usat_x.htm (accessed June 20, 2008). The deal will give Adidas a stronger presence in North America and will help the company compete with rival Nike. Though Adidas still sells shoes under the Reebok brand, Reebok as a company no longer exists.

Motives behind Mergers and Acquisitions

Companies are motivated to merge or acquire other companies for a number of reasons, including the following.

Gain Complementary Products

Figure 4.7

Do you think by acquiring Reebok, Adidas has had an impact on Nike’s command of the running shoe market?

Acquiring complementary products was the motivation behind Adidas’s acquisition of Reebok. As Adidas CEO Herbert Hainer stated in a conference call, “This is a once-in-a-lifetime opportunity. This is a perfect fit for both companies, because the companies are so complementary….Adidas is grounded in sports performance with such products as a motorized running shoe and endorsement deals with such superstars as British soccer player David Beckham. Meanwhile, Reebok plays heavily to the melding of sports and entertainment with endorsement deals and products by Nelly, Jay-Z, and 50 Cent. The combination could be deadly to Nike.”Theresa Howard, “Adidas, Reebok lace up for run at Nike,” US Today, August 3, 2005, http://www.usatoday.com/money/industries/manufacturing/2005-08-02-adidas-usat_x.htm (accessed June 20, 2008).

Attain New Markets or Distribution Channels

Gaining new markets was a significant factor in the merger of US Airways and America West. US Airways is a major player on the East Coast, the Caribbean and Europe, while America West is strong in the West. The expectations were that combining the two carriers would create an airline that could reach more markets than either carrier could do on its own.“America West, US Air in Merger Deal,” CNNMoney.com, May 20, 2005, http://money.cnn.com/2005/05/19/news/midcaps/airlines/index.htm (accessed June 20, 2008).

Realize More Efficient Economies of Scale

The purchase of Pharmacia Corporation (a Swedish pharmaceutical company) by Pfizer (a research-based pharmaceutical company based in the United States) in 2003 created the world’s largest drug maker and the leading pharmaceutical company, by revenue, in every major market around the globe. The acquisition created an industry giant with more than $48 billion in revenue and a research-and-development budget of more than $7 billion.Robert Frank and Scott Hensley, “Pfizer to Buy Pharmacia For $60 Billion in Stock,” Wall Street Journal Online, WJS.com, July 15, 2002, http://www.chelationtherapyonline.com/technical/p39.htm (accessed June 20, 2008). Each day, almost forty million people around the glove are treated with Pfizer medicines.About Pfizer, company Web site: Pfizer.com, http://www.pfizer.com/about/history/pfizer_pharmacia.jsp (accessed June 20, 2008).

Hostile Takeover

What happens, though, if one company wants to acquire another company, but that company doesn’t want to be acquired? You can end up with a very unfriendly situation. The outcome could be a hostile takeover—an act of assuming control that’s resisted by the targeted company’s management and its board of directors. Ben Cohen and Jerry Greenfield found themselves in one of these unfriendly situations: Unilever—a very large Dutch/British company that owns three ice cream brands—wanted to buy Ben & Jerry’s, against the founders’ wishes. To make matters worse, most of the Ben & Jerry’s stockholders sided with Unilever. They had little confidence in the ability of Ben Cohen and Jerry Greenfield to continue managing the company and were frustrated with the firm’s social-mission focus. The stockholders liked Unilever’s offer to buy their Ben & Jerry’s stock at almost twice its current market price and wanted to take their profits and run. In the end, Unilever won; Ben & Jerry’s was acquired by Unilever in a hostile takeover. Despite fears that the company’s social mission would end, this didn’t happen. Though neither Ben Cohen nor Jerry Greenfield are involved in the current management of the company, they have returned to their social activism roots and are heavily involved in numerous social initiatives sponsored by the company.

Key Takeaways

  • A merger occurs when two companies combine to form a new company.
  • An acquisition is the purchase of one company by another with no new company being formed.
  • Companies merge or acquire other companies to gain complementary products, attain new markets or distribution channels, and realize more-efficient economies of scale.
  • A hostile takeover is an act of assuming control that is resisted by the targeted company’s management and its board of directors.

Exercise

(AACSB) Analysis

Go online and research the merger of XM and Sirius. Why did the two satellite radio stations merge? Should this merger have been approved by the Federal Communications Commission? Whom does the merger help? Whom does it hurt? If you were the decision maker, would you approve the merger? Why, or why not?