Executive Summary
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Mergers and acquisitions (M&A) are two broad types of restructuring through which managers seek economies of scale, enhanced market visibility, and other efficiencies.
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A merger occurs when two companies decide to combine their assets and liabilities into one entity, or when one company purchases another.
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An acquisition describes one company’s purchase of another—for example, the absorption of a smaller target firm into a larger acquiring firm.
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The nature and scope of M&A activity has changed over time, with a growing trend to cross-border transactions.
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M&As are motivated by the expectation of financially rewarding synergies in terms of reduced fixed costs, increased market share, cross-sales, economies of scale, lower taxes, and more efficient resource distribution.
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At the individual level, executives may pursue M&As because of psychological drivers such as empire-building, hubris, fear, and mimicry.
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There are five broad types of strategic fit: overcapacity, geographic roll-up, product or market extension, research and development, and industry convergence.
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M&A execution can be hampered by incompatible corporate cultures, with failure to achieve synergies, high executive turnover, and too much focus on integration at the expense of customers.
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Before the deal, managers should formulate a clear and convincing strategy, preassess the deal, undertake extensive due diligence, formulate a workable plan, and communicate to internal and external stakeholders.
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After the deal, managers should establish leadership, manage culture and respect employees, explore new growth opportunities, exploit early wins, and focus on the customer.
Introduction
Mergers and acquisitions are two broad types of restructuring through which managers seek economies of scale, enhanced market visibility, and other efficiencies. A merger occurs when two companies decide to combine their assets and liabilities into one entity, or when one company purchases another. The term is often used to describe a merger of equals, such as that of Daimler-Benz and Chrysler, which was renamed DaimlerChrysler (see case study). The term “acquisition” simply refers to one company’s purchase of another—as when a smaller target firm is bought and absorbed into a larger acquiring firm.
Patterns
The worldwide M&A market topped US$4.3 trillion and over 40,000 deals in 2007. Figure 1 depicts the growth of M&A activity, quarter by quarter, over the last five years.
The nature and scope of M&A activity has changed substantially over time. In the United States, the Great Merger Movement (1895 to 1905) was characterized by mergers across small firms with little market share, resulting in companies such as DuPont, Nabisco, and General Electric.
More recently, globalization has increased the market for cross-border M&As. In 2007 cross-border transactions were worth US$2.1 trillion, up from US$256 billion in 1996. Transnational M&As have seen annual increases of as much as 300% in China, 68% in India, 58% in Europe, and 21% in Japan.1 The regional share of today’s M&A market is shown in Figure 2.
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