Mergers and Acquisitions

Mergers and Acquisitions

The impact of mergers and acquisitions on business can be minor in some cases and larger in others. Companies merge with or acquire other companies for the purpose of making money. Sometimes these deals have a sensible reason for being made and other times they are dubious in nature, done for the sole purpose of raising the stock price.

The sensible reason for merging with or acquiring a company is that it makes economic sense. Either the company is not streamlined, under-performing due to bad management, or the two companies combined compliment each other profitably. No matter the reason for the merger the end result is a financially sound benefit.

Dubious reasons for merging with or acquiring a company are made for the sole benefit of making a profit by fooling investors. The bootstrap game is a ploy where companies acquire another company when no evidence of financial gain is apparent. But because of ability to buy a company whose stock is at a lower value a company can use greater profitability divided by less shares on the market to increase the value of its stock. Therefore, even though the two companies together are no more profitable apart, the books show an increase in profits per share.

The benefits of sensible mergers depend on the type of merger. There are three types of mergers with each giving a different value to the whole of the companies. When two companies in the same field of business merge it is considered horizontal. An example would be Pizza Hut and Dominos merging into Dominos Hut. The benefit is one company with the combine assets of the two smaller companies minus the competition that previously existed.

The vertical merger happens when a company moves up or down its own product line. A company that sells widgets might merge with a company that sells widget parts. A practical example would be McDonalds buying a cattle ranch. The product McDonalds sells is made partly of beef and to own the beef production company would allow McDonalds its own private supply.

Mergers that happen between two companies from different business fields and have nothing in common are called conglomerate. Not many conglomerates exist these days but they provide stability in the company because no one area of business affects the total company as a whole. Companies like GE and DuPont are example of conglomerates as they are multiple business arenas to a drop in one product’s sales can be