Mergers and acquisitions (M&A) are financial transactions in which two companies merge into a new entity, or a larger company acquires a smaller one, which is then absorbed into the parent or run as a subsidiary.

M&A activity surged in 2014 with over 7,500 deals for a combined value of £2.1 trillion.

In 2004, Sanofi-Synthélabo and Aventis, two large pharmaceutical companies, merged to form Sanofi-Aventis, while in 2008, the 150-year-old, $100 billion Tata conglomerate from India acquired Jaguar Land Rover from Ford Motors. Why do companies merge with or acquire each other and who really inhabits the world of corporate buyouts today?

Companies merge when the managements feel that each can offer the other some benefit, thereby benefiting the combined entity. Mergers are a way for a company to both increase its market share and achieve better economies of scale. For the company being acquired it can provide long-term stability and growth. Companies look at mergers and acquisitions when they want to grow quickly and inorganically.

In the case of the Tata-JLR acquisition, the synergies were obvious. The Tata group is a conglomerate that makes commercial vehicles, railway locomotives and the world’s cheapest car, the £1,500 Nano. The company is also among the top ten speciality steel producers in the world. At one stroke, the Tata group acquired a respected but financially weak luxury brand, while affording JLR cheaper access to speciality steel, its key raw material.

In six years since the acquisition, JLR has gone from a loss-making £4 billion company to a highly profitable company with revenues in excess of £21 billion. The company has added three manufacturing plants and over 5,000 jobs in the past four years.

The world of corporate buyouts is inhabited by more than just companies looking for quick growth. The merger and acquisition space is also occupied by financial giants like Berkshire Partners LLC, Providence Equity Partners and Charterhouse Capital Partners, which are basically large investment companies that use their financial strength to grow the size of their acquisitions. The objective here is to add value to a company and sell it at a profit, down the line.

Skillsoft acquired by Charterhouse Capital Partners made news recently for its £1.2 billion acquisition of Skillsoft, a company that provides electronic learning solutions to more than 6,000 customers including companies and governments. Charterhouse Capital Partners plans to use Skillsoft to consolidate the online learning market and to establish market leadership in the field.

However, not all mergers and acquisitions are as smooth as the Tata-JLR deal. The world's biggest merger by size was the £110 billion deal between AOL and Time Warner. The match between the largest Internet provider and the world's largest cable entertainment company was a match made in heaven, at least on paper.

In 2009, nine years after the merger, both companies went their separate ways. Merging the two very different cultures proved an insurmountable task and the synergy on paper didn't translate into results. The merger and its fallout have been discussed at length in numerous case studies.

Mergers and acquisitions will continue to play an important role in the growth and evolution of companies. Investors, though, need to do due diligence to see if the synergy that exists on paper will translate into measurable results.


Published by NYK Media as part of our web project - understanding money, money saving and business.

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