Question

Explain the following concepts:

i.                    Mergers, types of mergers and examples

ii.                  Acquisitions

Explain the following concepts:

i. What is synergy and synergistic benefits derived from M&A

ii.         Types of synergies

iii.        How to realize synergies

Answer 1

There's 5 most basic type of merger:

Conglomerate Merger: When the merger of two firms from totally unrelated activity results, such a merger is known as the conglomerate merger. Again there's two type of conglomerate mergers: pure and mixed. As the name suggests pure mergers means firms have nothing in common, while mixed mergers mean firms have something in common and looking for product extension.

Example: Chips manufacturing firm is merged with IT firm.

Horizontal Merger: When firm operating in same industry merges. such mergers are called horizontal merging.

Example: Merger of Reebok and Adidas.

Vertical Merger: When firms operating at a different level within the same industry merges to creating an entity that operates in an industry that works across the industry. A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain.

Example: Juice manufacturing company merges with a logistic distributor to improve the economies of scale.

Market Extension Mergers: When merging firms dealing with same product but operate in different geographies merged. This helps increase the market share and reach of the merging entity.

Example: Bank operating in china merged with Bank operating in Europe, this helps create the customer base and reach of the merging entity.

Product Extension Mergers: When firms dealing with the related firms operating the same market merges to create an entity to produce the same product without cannibalising and reaching more customers.

Example: Merger of Mobilink Telecom Inc. by Broadcom

Acquisition: This is refers to the purchase or takeover of one firm by another operating in the same or different market. This is the result of one firm buying the shares of another firm in order to gain control of the management of the company. Like by acquiring more than 50% in a firm, controlling stakes can be obtained and thus effectively acquiring the company.

Synergy: This is refers to the situation when merging entity is greater than two individual firms, i.e.whole is greater than the sum of its parts. Synergy achieved through the combining of companies is often the reason for the merger.

Types of synergies Major two category of synergies: Cost saving and revenue.

Cost saving: Information Technology Supply Chain Efficiencies, improved sales and marketing, Research and Development, lower salaries and wages, patents.

Revenue side: Patent, complementary products, geographies, and increased customer base.

Synergy can be realized by linking due diligence and PMI of the merging firms, forming the team that gave shape to the merger and drive the merging entity further, establishing targets to compliment each others strength, iterating the target and improving accountability, pursuing both cost and revenue synergies and tracking performance through PMI.