5 of the Biggest and Most Important Mergers of the Last Decades

The world of corporations and business is one that moves a lot. Companies appear and disappear almost every day, at any time anywhere in the world. It is a dynamic world, so the industries and businesses are dynamic as well and are always looking to improve their status. One of the ways companies and corporations grow is through mergers and acquisitions, (M&A). The idea is to join forces and use the principle of “One plus one equals three” in order to gain advantages like a larger customer base, global footprint, access to distribution channels or suppliers, technical knowhow, and many other things. They don’t always go as expected, but when they do they give the business a competitive edge and enhance shareholder value. Let’s take a look at 5 mergers and acquisitions, that apart from being between 2 big corporations, they were all over the media headlines and were very important for countries, companies and the general public.

Facebook buys Instagram

Image courtesy of Esther Vargas | Flickr

In 2012, social network Facebook acquired the mobile photo-sharing service Instagram for the astonishing amount if $1 billion. At the time the company´s CEO Mark Zuckerburg said that it was not likely that they engaged in any other acquisitions of this size and importance. As everybody knows, Instagram is still an independent standalone app separate from Facebook, but with the acquisition, the idea was to improve the service ties between the two companies. The acquisition has been highly criticized because people don’t understand why they needed to spend a billion dollars to do something they probably could have coded in-house for a lot less money and could have gotten the same or even a better result and instantaneous market share.

Apple acquires NeXT

The catch for this business deal is that Steve Jobs used to be part of apple and he was removed from his post. He then founded NEXT and then, with this move, he returned back to apple. This acquisition happened in 1996  and the price was $429 million dollars. Steve Jobs revolutionized the Tech industry and was seen as an icon in Silicon Valley. Everybody knows how the story ends and the success that apple has had in the last 10 to 15 years.

AOL and Time Warner

Image courtesy Thomas Belknap | Flickr

This merger is the proper example of what companies shouldn’t do when they engage in this type of deals. This was a total disaster and it is even a case study in academic institutions on what not to do in acquisitions. Time Warner, one of the biggest media and entertainment companies in the world was acquired by America Online Inc (AOL) in 2000 for an amazing $ 182 billion. The merger was registered as the “the biggest mistake in corporate history” by Time Warner Chief Jeff Bewkes. At the same time the dot-com bubble bursted, and resulted in AOL Time Warner reporting a loss of $99 billion in 2002. Their idea was to create the world’s first fully integrated media and Communication Company for the internet century. As we all know, the company did not go that way and the merger failed miserably.

AT&T and Bellsouth.

In 2006 the communication giant AT&T acquired the telephone and communication technology company BellSouth in a deal that went up to $67 billion. The deal resulted in giving AT&T a local customer base of 70 million across 22 states further strengthening its dominance in the industry. Around that time, the company aimed to achieve a combination that would create a more effective and efficient provider in the wireless, broadband, video, voice and data markets. The two companies were already joint owners of Cingular Wireless with 60% ownership with AT&T and 40% with BellSouth and the idea with this merger was to  be more innovative, nimble and efficient, providing benefits to customers by combining the Cingular, BellSouth and AT&T networks into a single fully integrated wireless and wireline Internet Protocol network offering a full range of advanced solutions.

Exxon Mobil merger

This merger was one of the most important mergers in the oil and gas sector. It happened in 1998 and the result was the Exxon Mobil Corporation (XOM), the largest company in the Oil & Gas sector was created. What they did was to bring together the fragments of Standard oil monopoly (Exxon Corporation and Mobil Corporation) in an $80 billion deal. At the time of the deal, Exxon and Mobil had a combined market capitalization of $237.53 billion.

As we can see, mergers can go wrong and can be very successful. It depends on how it is carried out. We wanted to point out some examples of very famous and well known mergers and acquisitions that have happened in the last two decades.

Here's Everything You Need to Know About Mergers and Acquisitions

Mergers and acquisitions of companies

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External development is a form of corporate growth that results from the acquisition, participation, association or control of a company, companies or assets of other companies, broadening their current businesses or venturing into new ones. The most widely used term in corporate jargon is mergers and acquisitions (M&A).

The reasons for a company to choose external development (fusions, acquisitions, alliances...) as opposite to the internal one may have its origins in:

1. Economical reasons

●       Cost reduction: through economies of scale or economies of scope by the integration of two companies whose productive and commercial systems are complementary to each other, thus creating synergies.

●       To acquire new resources and capacities by means of the union or acquisition of another company.

●       Substitution of the management team: often, when the management is substituted, a greater increase in value occurs.

●       Obtaining tax incentives that can increase the benefits of the acquisitions and mergers, thanks to the existence of exemptions or bonuses.

2. Market power reasons:

●       It can be the only way of penetrating an industry or country, due to the existence of strong barriers to entry

●       When the mergers and acquisitions occur through an horizontal integration, an increase of market power of the resulting company is pursued, and as a consequence, a reduction of the level of competition within the industry.

●       When the mergers and acquisitions occur through a vertical integration, companies who act in different stages of the productive cycle are integrated. The goal in these cases is to obtain the advantages of the vertical integration as soon as possible, both backwards and forwards.

Types of external development

Company merger: it’s the integration of two or more companies in such a way that at least one of the original ones disappears.

Acquisition of companies: trading operation of blocks of shares between two companies, keeping their legal entities.

Cooperation or partnership between companies: this is an intermediate formula, bonds and relationships are established between the companies, without losing the legal entities of any of the participants, who keep their legal and operative independence.

In terms of the type of relationship that is established between the companies, they can be classified as follows:

●       Horizontal: the companies are competitors of each other and they belong to the same industry.

●       Vertical: the companies are located in different stages of the complete product exploitation cycle.

●       Conglomerate: Companies have very different activities from each other.

Mergers

Image courtesy Kyle MacDonald on Flickr

These are unions between two or more companies, where at least one participant loses its legal entity.

1. Pure merger:

Two or more companies of an equivalent size agree to merge, creating a new company to which they bring all of their resources, dissolving the original companies (A + B = C)

2. Merger by absorption

One of the companies involved (absorbed) disappears and its patrimony is integrated into the absorbent one. The absorbent company (A) continues to exist, but it accumulates into its patrimony the corresponding to the absorbed company (B).

3. Merger with partial contribution of assets:

A society (A) contributes only a part of its patrimony (a) next to the other company with which it merges (B), be it to a new society (C) created in the merger agreement, or to another pre-existent society (B), which as a consequence increases in size (B’), it is necessary that contributes assets (A) does not dissolve.

Acquisitions

Company participations or acquisitions take place when a company buys part of another company’s capital stock, with the intention of dominating it completely or partially.

The acquisition or participation in companies will allow different levels or degrees of control according to the percentage of capital stock of the acquired company in its power and according to the way in which the rest of the bonds are distributed among the other stakeholders: large stock blocks in the hands of a few individuals or a large number of stakeholders with scarce individual participation.

The buyout of a company can be done through a conventional purchase contract, but in the past few decades, two financial formulas have been developed.

1. Leveraged buyout:

It consists in financing an important part of the purchase price of a company by the use of debt. This debt is insured, not just for the patrimony or creditworthiness of the buyer, but also for the assets of the acquired company and their future cash flows. This way, after the acquisition, the debt ratio usually reaches high values.

The purchase may be made by the company directors themselves. In this case we’ll find ourselves before a “management buyout” (MBO). The reason why they might make the decision of purchasing the company for which they work could be to lead it towards the appropriate direction.

2.  Share Acquisition Public Offer

The Share Acquisition Public Offer is produced when a company makes a purchase offer, of all or part of the capital stock, to the stakeholders of another listed company under a specific set of conditions, usually related to price, percentage of capital stock and time. 

A Marriage of Equals? The Difference Between Corporate Mergers and Acquisitions

Although both types of restructuring are intended to increase a company's value, profitability, and synergy, the concepts of a merger and acquisition are not interchangeable. The simplest difference is whether the interaction is friendly or hostile. Part of this distinction exists in how it is announced to the public and the target company's employees, shareholders, and board of directors. Friendly purchases are generally called mergers, while hostile ones are almost universally known as acquisitions.

To put it plainly, a merger occurs when two companies consolidate into one new identity, whereas an acquisition involves one company taking over another entirely, establishing itself as the new sole owner. 


What Is a Merger?
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A merger consolidates two companies into a new entity, combining their operations under a new ownership and management structure. Ostensibly, this new management structure includes key members from each firm, building a greater whole from the sum of the two (or more) parts. A merger involves complicated negotiations, rather than one company dictating terms to another. A merger of equals occurs when two CEOs heading companies of approximately the same size decide a marriage between their two companies is in the their best interests.

Upon merging, both companies surrender their stocks, issuing new stocks in the name of the newly formed entity. Depending on the relative size of the companies, shareholders of the merged companies often receive new shares at different ratios. The rate of exchange for shares is one of the important details determined by the negotiations. Once the merger is complete, a single new company exists, while the merged companies either cease to exist or become branded sub-entities of the new company.

Why Merge?
Companies may choose to merge for a number of reasons. In a merger, the combined larger entity typically results in increased resources for marketing, finance obligations, or product expansion. Alternatively, the combined entity may merge similar operations to reduce costs, creating a more streamlined company that is smaller than the two independent companies. By downsizing redundant staff and consolidating facilities, the new company often reduces payroll and overhead costs. When the merged companies previously competed directly against each other, they also reduce marketing costs due to the decrease in competition.

What Is an Acquisition?
In an acquisition, one company takes over the operational management decisions of another company. Sometimes called takeovers, acquisitions generally have a more negative connotation than mergers. In some instances, a larger company buys out a smaller one, then compels the purchased company to refer to the acquisition as a merger to avoid negativity. Unlike a merger, the purchased company's stocks are purchased before the sale rather than surrendered afterwards.


Why Acquire?
The strategic reasons for an acquisition mirror those for a merger, such as a decreased market or the desire to reduce competition. Unlike the often expensive and lengthy process of merger negotiation, an acquiring company generally has more freedom to dictate the terms of sale and purchase to the target company in a shorter time-frame. 

In some instances, companies acquire other entities to acquire rights to a specific product, allowing them to bypass the process of product creation. Similarly, a company may acquire another to gain control over a resource it requires, allowing it to bypass the market. By purchasing another company, a business can increase its size, visibility, and prestige.


Types of Mergers and Acquisitions
There are several kinds of mergers and acquisitions, distinguished primarily by the relationship of the entities involved. In a horizontal merger, the two companies exist within the same business sector. By merging, they increase marketplace visibility, combined value, and cost savings. 

In a vertical merger, one company buys a supplier or retailer, allowing it to reduce overhead operational costs and to increase its economy of scale. A conglomeration deal involves two businesses whose products or services are unrelated to one another. This allows for diversification of interests and capital investment.


Synergy
Whether friendly or hostile, horizontal or vertical, or negotiated or purchased, all mergers and acquisitions have one important goal in common: to make the value of the combined companies greater than the sum of the parts combined. Accordingly, a combined company must have more value than either individual company had on paper previous to the restructuring. This is called synergy.

Synergy often takes the form of revenue enhancement and cost savings by focusing on staff reduction, economies of scale, improved visibility, greater market reach, and development of new technologies. Success of a venture, whether merger or acquisition, depends on whether this synergy is achieved.

Increasingly, the blended Mergers and Acquisitions (or M&A) moniker is used to cover all discussion of mergers and acquisitions, regardless of the nature of the deal in question. The two kinds of corporate marriages, however, remain subtly different, especially to a business in the process of merging and creating a new identity, or being acquired and losing its identity altogether.