Not surprisingly, these actions often make headline news as deals can be worth hundreds of millions, or even billions, of dollars. A merger means that two previously separate organizations are combined into a third new entity. An acquisition involves the purchase of one organization by the new parent firm. M&A activity is characterized in the academic literature as an “organizational marriage”. That is why we use typical marriage expressions like ‘tying the knot’.
The reasoning behind M&A is that two companies together are more valuable than two separate companies. When times become tough and companies realize they cannot survive on their own this deal proves to be particularly alluring. Strong companies that decide to buy other companies will create a more competitive, cost-efficient company. Additionally, companies will come together hoping to gain a greater market share or to achieve greater efficiency.
It’s no secret however that not all mergers are successful due to the wrong reasoning. Sometimes mergers are driven by fear. The management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. Globalization, new technology, and a fast-changing economy are powerful incentives for M&A to take place. What can also hamper the success are the differences in corporate cultures of the companies. What is acceptable in one company may be banned in the other creating resentment and shrinking productivity.
Nevertheless M&A can boost company growth and profits. However, what is more important is that they can produce substantial, long-term shareholder returns.
Word-of-the-week
