Welcome to Alanis Business Academy.
I'm Matt Alanis and this is An Introduction to Mergers and Acquisitions.
Companies have a few options for achieving growth.
The first is by growing organically through the development of new products and production
capacity over time.
The other option, is through what are known as mergers and acquisitions.
A merger occurs when two companies agree to combine to form an entirely new company.
The two companies will agree on a post-merger name, like Exxon and Mobil combining to form
ExxonMobil, and determine how to structure the new organization as well as staff operations.
An acquisition occurs when one company purchases another company.
The company that is purchased is then absorbed by the purchasing company and ceases to exist
on its own.
In some situations a company will purchase another, but allow it to operate independently
and even keep its original name, such as when Disney purchased Pixar in 2006.
This can be to ease the uncertainty associated with an acquisition as well as ensure the
acquired company continues operations smoothly.
In the case of Disney and Pixar, Pixar had proven to be successful prior to the acquisition
and both companies wanted that success to continue unhindered by a new culture and even
new staff.
When classifying mergers and acquisitions we can label them as either horizontal or
vertical.
A horizontal merger or acquisition occurs when the two companies generally produce the
same products and serve similar customers.
The rationale behind such a merger is the newly merged company will be able to better
compete in their respective industry by taking advantage of economies of scale and even technological
innovation.
It's also worth noting that horizontal acquisitions and mergers can allow companies to expand
their product mix and potentially increase revenues by appealing to a wider customer
base.
Office Depot and Office Max, two retailers who sell similar products and serve similar
customers, are currently in the process of completing a merger.
This merger is meant to allow these companies the opportunity to compete more effectively
against Internet retail giant Amazon.
The joining of Office Depot and Office Max is an example of a horizontal merger.
In 2012, Facebook acquired popular photo-sharing application Instagram for $1 billion in cash
and stock.
In addition to giving Facebook access to Instagram's successful mobile platform, it also eliminated
a potential competitor while giving Facebook access to an additional group of customers.
Facebook's acquisition of Instagram is an example of a horizontal acquisition since
they both operate in a similar industry, providing a similar product to similar customers.
Now a vertical merger or acquisition occurs when the two companies operate at different
stages of the production cycle.
Because these companies operate at different stages of the production cycle, the merger
or acquisition can create increased operating efficiencies and reduce costs.
For example, Google purchased Motorola Mobility in 2012 for $12.5 billion.
Motorola Mobility is of course the manufacturer of handset devices while Google was beginning
to producing and licensing its Android Operating System.
In an effort to control both the hardware and software side of selling smartphones,
Google acquired Motorola Mobility.
This vertical acquisition allowed Google the opportunity to leverage Motorola Mobility's
knowledge of the handset market as well as its staff and operations as opposed to starting
from scratch or continuing to rely entirely on other companies for handsets.
Coffee giant Starbucks also used a vertical acquisition to expand its offering of pastries
and breads by purchasing San Francisco-based Bay Bread LLC, and its La Boulange bakery
brand for $100 million in cash in April of this year.
Although Starbucks had already sold pastries, this acquisition gave Starbucks control over
a key player in the production cycle: the producer.
Instead of purchasing pastries and other baked products from another business in the supply
chain, Starbucks is now able to produce them in-house reducing its costs in the process.
This has been An Introduction to Mergers and Acquisitions.
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