What is the difference between a merger and an acquisition? The terms merger and acquisition are often used interchangeably, but there is a difference. When two companies come together cooperatively to form one company, a merger takes place. Generally, a merger implies that the companies involved are about the same size and have mutually agreed to form a new combined company. An acquisition, on the other hand, occurs when one company completely buys out another company. In some instances, companies claim a merger has occurred, but in reality, one company has acquired the other. The term merger has a better connotation than acquisition and therefore is used to allow the acquired company to “save face.” Often, the combined organization reflects the names of the individual companies, such as when Chase Manhattan Corp. acquired JPMorgan to form JPMorganChase & Company. In other situations, just one company name is kept. For example, when American Airlines and USAirways merged, the combined airline decided to operate under American Airlines. Sometimes, a completely new name is derived, such as when Bell Atlantic acquired GTE to form Verizon Communications.

Are all mergers and acquisitions mutually desired by both companies? Often, acquisitions are friendly, as was the case when Google purchased Android in 2005. At the time, Android was just a start-up but had demonstrated its ability to produce a working operating system for mobile devices. Post merger, Android continues to be run by its cofounder Andy Rubin but benefits from the significant resources that Google offers. In turn, Google benefits by having a viable mobile operating system that it uses to challenge industry giants Apple and Microsoft.

Some acquisitions are “unfriendly.” An unfriendly acquisition occurs when one company tries to purchase another company against the wishes of its shareholders or managers. Unfriendly acquisitions are referred to as hostile takeovers. In an unfriendly acquisition or hostile takeover, the acquiring firm makes a tender offer, which is an offer to buy the target company’s stock at a price higher than its current value. The higher price is offered to persuade the shareholders of the target company to sell their stock.

Another method of acquiring a company against its wishes is through a proxy fight in which the acquiring company tries to persuade the shareholders of the ­target company to vote out the firm’s existing managers and replace them with managers who are sympathetic to the goals of the acquiring company. This is the strategy Microsoft pursued when it unsuccessfully tried to take over Yahoo! in 2008.4

Some takeovers that are initiated by an outside group of investors, employees, or management are financed with debt. The acquiring group borrows as much as 90 percent of the funds necessary for the acquisition, using the assets of the acquired company as collateral. This type of transaction is called a leveraged buyout (LBO). LBOs can be either friendly or hostile, and companies of all sizes have been the targets of LBO transactions. Some of the more recent and largest LBOs involved the Hertz Corporation, Metro-Goldwyn-Mayer, and Toys “R” Us. Although LBOs may be a good strategy in some instances, the practice has received much criticism because jobs are often lost as a result of LBOs, and the companies often fail because of the high debt loads resulting from the LBO.

Why do mergers and acquisitions occur? Synergy is the business buzzword often used to justify a merger or an acquisition. Synergy is the effect achieved when two companies combine and the result is better than each company could achieve individually. Synergistic value is created when the new company can realize operating or financial economies of scale. Combined firms often lower costs by trimming redundancies in staff, sharing resources, and obtaining discounts accessible only to a larger firm.

In other instances, synergy is achieved by combining resources that could not have been created independently by either party. Such was the case with the merger of satellite radio providers Sirius and XM. Each satellite radio provider had exclusive contracts with different sports programmers. Customers were having a hard time choosing between one and the other. The merger gives customers the benefit of both.

Is competition a driving force for mergers and acquisitions? Achieving a greater competitive advantage is another reason mergers and acquisitions take place. Often, companies join to become a more dominant force in their market. For example, the merger between Office Depot and Office Max improves the new company’s ability to compete with Staples, the market leader, as well as with online and discount stores, such as Amazon.com and Walmart.8

Do companies add value to their product lines by merging? Many times, larger companies acquire smaller companies for their innovativeness, and a smaller company will agree to merge or be acquired if it feels it wouldn’t have the opportunity to go public and couldn’t survive alone otherwise. Much of Google’s growth can be attributed to their innovative creativity within the company, but some has also come from its acquisitions of small, innovative companies, such as Feedburner, Like.com, Applied Semantics, Postini,9 and drone maker Titan Aerospace.10

Are there different types of mergers? The rationale and strategy behind every merger is different. However, as Figure 6.11 shows, mergers fall into a number of categories that are distinguished by the relationship between the two companies merging:

Figure 6.11

Different Types of Mergers

• Horizontal merger. A merger in which two companies sell the same types of products and are in direct competition with each other. The merger between Exxon and Mobil and the merger between USAirways and American Airlines are examples.

• Vertical merger. A merger between two companies that have a company/customer relationship or a company/supplier relationship, such as Walt Disney and Pixar or eBay and PayPal.

• Product extension merger. A merger between two companies selling different but related products in the same market, such as the merger between Adobe and Macromedia.

• Market extension merger. A merger between two companies that sell the same products in different markets, such as when NationsBank, which had operations primarily on the East Coast and in southern areas of the United States, merged with Bank of America, whose prime business was on the West Coast.

• Conglomeration. A merger between two companies that have no common business areas but instead merge to obtain diversification. For example, Citicorp, a banking services firm, and Travelers Group Inc., an insurance underwriting company, combined to form one of the world’s largest financial services group, Citigroup Inc.

Are there disadvantages with mergers? Despite the perceived advantages of mergers, more than one-half of all mergers fail completely or don’t live up to their financial expectations.11 The primary culprit of a failed merger is poor integration following the transaction. After an exhausting process that may cause top executives to take their eyes off business, little energy or motivation may be left to plan and manage how the two companies will come together to work as one. Although cost cutting may be the initial primary focus of some mergers, revenues and profits may ultimately suffer if day-to-day activities are neglected. Additionally, the corporate cultures of the organizations may clash, and communications may break down if the new division of responsibilities is vague. Conflicts may also arise as a result of divided loyalties, hidden agendas, or power struggles within the newly combined management team. Employees may be nervous because most mergers result in the elimination of jobs; this may also cause other employees whose jobs are not being eliminated to seek employment in more stable organizations.