Question

The target company is First Data, it was acquired by Fiserv. I need to do analysis of the First Data company. Why it was acquired by Fiserv.

The CEO of the company is looking for some expansion opportunities. He/She approaches the corporate finance division within the company for advice. Suppose you are one of the analysts in the corporate finance team. Your job is to identify a potential takeover target for the company and outline the reasons why such an acquisition is deemed to be beneficial. Complete a detailed analysis about the takeover deal. Your report should include but not limited to the brief of the target. Classify the type of the takeover deal ( eg. horizontal or vertical), describe the benefits associated with the deal and identify potential source of synergy.

Answer 1

What Is a Horizontal Merger? A horizontal merger is a merger or business consolidation that occurs between firms that operate in the same industry. Competition tends to be higher among companies operating in the same space, meaning synergies and potential gains in market share are much greater for merging firms.

Undergoing horizontal integration can be very beneficial for two companies. Typically, this happens when two companies competing in the same industry at the same stage of production decide to unify. But before considering it, businesses should weigh the pros and cons of the strategy and how becoming one large organization would play out for their bottom line.

When it is done correctly, there are many advantages to horizontal integration. These include (but are not limited to) an increase of market power or market share, reduced competition, and increases in other synergies.

Larger Market Share

The most obvious benefit is an increased market share or market power. When the two companies merge, they also combine the product base, technology, and services that are available on the market. With more products under one name, the new company can increase its foothold among consumers.

Increased Revenue

By increasing its customer base, the new company can now boost its revenue. It's typical for companies that undergo a horizontal integration to see more revenue than when they were individual entities.

Additional Benefits

Here are a few other advantages of horizontal integration:

• Reducing competition
• Increasing other synergies such as marketing
• Creating economies of scale and economies of scope
• Reducing other production costs.

When considering growth by acquisition, a lot of time is spent identifying and quantifying synergies. Synergies are advantages that come about through the integration of two companies that, individually, the two companies would be unable to achieve. There are three common types of synergies: revenue, cost, and financial.

Revenue Synergies

A revenue synergy is when, as a result of an acquisition, the combined company is able to generate more sales than the two companies would be able to separately. For example, consider LKQ and Keystone. Prior to LKQ’s acquisition of Keystone, LKQ sold primarily used parts. Keystone sold primarily aftermarket parts. However, in the combined company, LKQ could leverage its existing distribution network and sales force to sell more aftermarket parts into the industry than Keystone could sell as a stand-alone organization. Similarly, when a major consolidator acquires a smaller competitor, the consolidator often is able to leverage existing client relations to drive more sales into the new location than the stand-alone operator was able to on its own.