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Mergers and acquisitions (M & A’s)Mergers and acquisitions


Mergers are...

Two companies joining as equal partners.


Acquisitions are...Mergers and acquisitions

One company buying another and taking control of it e.g. the purchase of the British chocolate maker, Cadbury, by the American food company, Kraft.



How to make M & A’s work


1. Compatible cultures

M & A’s won’t be successful, if the employees in each company have different values and attitudes (e.g. one company is less creative).


2. Leadership and customer satisfactionMergers and acquisitions

The boss of the bigger company must make sure everyone is focused on customer satisfaction, not just the implementation of the merger or acquisition.


3. Complementary skills and core competencies

Only buy or merge with a company that has the skills and products you need to:

  • improve your strengths and competitiveness.
  • overcome your weaknesses.

Synergy will be hoped for, where the new business performs better than the two companies operating separately.

 Mergers and acquisitions

4. Motivate people

  • keep and reward the best employees.
  • involve them in decisions relating to the merger or acquisition.
  • deal with people's problems arising from the merger.
  • explain the reasons for any redundancies.
  • reassure the remaining employees that they have a great future (particularly those in the company that’s being taken over).


5. Benefit from economies of scale

M & A’s make an organization bigger, so enabling it to benefit more from economies of scale (the cost savings of large scale production)- for example:

  • Purchasing economies – bigger discounts from bigger purchases.
  • Marketing economies – if you sell more, you can spend more on advertising e.g. TV advertising.
  • Production economies – greater benefits from mass production.


6. Avoid diseconomies of scale

These result in higher costs because the bigger company is more difficult to manage because of problems in points 1 to 4 above.

The biggest difficulty is likely to be a culture clash when the two companies believe in different things (see point 1 above).


7. Leveraged buy-outs (LBO’s)

Employees borrow money to buy their company to avoid an unwanted takeover bid.

When managers do this, it’s called a management buy-out (MbO).


Key quotes explained


“Big is beautiful”

A slogan commonly used in the 1960’s to describe the benefits of economies of scale from bigger companies.Mergers and acquisitions

It contrasts with the phrase, “Small is beautiful”, coined by Fritz Schumacher.(pictured right)



Mergers and acquisitions

“Success is 5% strategy, 95% execution”

- Percy Barnevik , ex-boss of the Swedish engineering company, ABB (pictured right)

Choosing the right company to buy or merge with is much easier than making the merger or acquisition work.



Mergers and acquisitions

“Strategy must in the long run be responsive to human needs”

- Kenneth Andrews, American business professor (pictured right)

M & A’s don’t work, if employees’ needs aren’t satisfied.



Mergers and acquisitions

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”

- Warren Buffett  , American share investor (pictured right)

Wise advice on buying a company.



Best books and articles


Mergers and acquisitions

Bryan Burrough (pictured right) , Barbarians at the Gate (1990)

Best-seller about the unethical financial dealings surrounding the leveraged buy-out of Nabisco, the makers of Shredded Wheat. Three rules apply:

  • never pay in cash.
  • never tell the truth.
  • never play by the rules.


Mergers and acquisitions

Michael Porter (pictured right) , From Competitive Advantage to Corporate Strategy (1987 Harvard Business Review article)

Diversification is only successful if:

  • the business being bought is in a profitable and less competitive industry (as indicated by Porter's five forces - see industry analysis). 
  • the business gains competitive advantage from its link with the company that bought it or vice versa.

  • the cost of entry into the new business isn't too expensive. 

Satisfying these three tests is so difficult that most diversification fails.  

Diversification is most successful if businesses are successfully interrelated to achieve a common organizational purpose.

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