Business Mergers and Acquisitions Explained

01/06/18

When it comes time for an enterprise to grow, diversify or even to change the nature of its business, a merger or acquisition is often considered. Although this is a subject that may be associated with multinationals and larger corporations, small business mergers and acquisitions are just as prevalent, making this topic applicable to owners and managers of all company types.

With that in mind, we’re going to present an overview of what mergers and acquisitions are, examine the differences, look at the reasons for them and discuss potential risks. We will also study two famous examples.

What is Merger and Acquisition?

According to the standard mergers and acquisitions definition, these are transactions in which company ownership is transferred to or combined with another legal entity, often resulting in a markedly different outlook for operations in the short, medium and long term.

The Difference Between Merger and Acquisition

In practice these two terms often result in the same outcome, however it should be noted that merger is the legal consolidation of two enterprises into one. Acquisition, on the other hand, involves the taking over of one enterprise by another through the transfer of ownership of some or all of the following:

  • Stock, which is measured in share units issued by a company;
  • Equity interests, which form the capital stock of a corporation, representing future prospects;
  • Assets, which are any tangible or intangible elements that can be used to produce economic value.

Reasons for Mergers and Acquisitions

There are many reasons for companies to engage in these types of transactions, including:

  • Offering new services, because it is possible when combining with another company to gain new business capabilities.
  • Acquiring new skills, because when a company joins with another company, they will have access to a broader base of staff members and specialisms.
  • Accelerating growth, because a business can rapidly increase in size through merger and acquisition deals.
  • Outmaneuvering competitors, because acquiring a company can often prevent other businesses from working with or buying that same company.
  • Benefiting from economies of scale, because often larger companies, with more people and capabilities, are able to perform more effectively.
  • Lowering costs, because new capabilities can make work more efficient and reduce the need for outsourcing.
  • Reducing taxation, because an acquisition can also, controversially, allow a company to practice what is known as an inversion and change to a jurisdiction offering lower rates of corporate taxation.

Aon itself has grown rapidly due our mergers and acquisitions strategy, Aon was created in 1982 when the Ryan Insurance Group merged with the Combined Insurance Company of America. It's a strategy that has seen us become one of the biggest global brokers with Henderson being our latest acquisition in the UK.

Managing Risks

Of course, there is a degree of risk involved with mergers and acquisitions, which is why these are never transactions that companies enter into lightly. Even if deals do go through successfully, there is the danger that the expected benefits will not materialise.

There are also potential complications which could occur during the process itself, such as the loss of data or breaches of confidentiality. As with any major business undertaking, it is generally considered a good idea to follow a policy of prudence. 

What Major Factors Drive Mergers and Acquisitions?

Other than the operational reasons a company may have for engaging in a merger or acquisition, there are also market forces which play their part in decision making. Perhaps the most important factors here are to do with investor confidence. In other words, mergers and acquisitions are often made during times of economic growth and avoided in bear markets.

However, some companies may see falling share prices amongst their competitors as an opportunity. The important thing to note here is that market factors can be a crucial consideration, but just how much they influence a company’s appetite for mergers or acquisitions depends on the management style of that company. 

Two Famous Mergers and Acquisitions

When discussing the most well-known examples it could be a good idea to look first at one of the largest deals in history, the acquisition of Mannesmann by Vodafone Air Touch in February 2000. This £112bn all-share deal took months to conclude, after rancorous negotiations, and was only completed due to last minute concessions made by Mannesmann’s board.

This deal is significant not just because of its size, but because of the controversy associated with it, and it was in fact investigated by the European Commission for monopoly implications. The result of this merger was that it left Vodaphone’s competitors racing to strengthen their own offerings.

At the other end of the spectrum, in terms of how it was conducted, was the merger of Disney and Pixar. Disney had released all of Pixar’s films prior to the merger, which meant that there were already synergies, along with a good working relationship, involved with the two companies. After the merger the two continued to collaborate harmoniously and the resulting films, including Tangled and Frozen, have proven to be enormously successful.

Mergers and acquisitions offer the potential for tremendous growth and development, which is why they are a form of inter-company transaction likely to always be popular. They also contain the potential for pitfalls, which, to a degree, can be managed and insured against.

If you find that your business needs a burst of growth or an injection of new skills and energy, you might find that the possible benefits of a merger or acquisition outweigh any other considerations, and in this case it could be best to enter any transactions gingerly and only after performing full due diligence.

Image courtesy of iStock

Whilst care has been taken in the production of this article and the information contained within it has been obtained from sources that Aon UK Limited believes to be reliable, Aon UK Limited does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the article or any part of it and can accept no liability for any loss incurred in any way whatsoever by any person who may rely on it. In any case any recipient shall be entirely responsible for the use to which it puts this article.

This article has been compiled using information available to us up to 20/08/21.

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