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I. Understanding Economic Systems and Business
2. The Nature of Business
3. Understanding the Business Environment
4. How Business and Economics Work
5. Macroeconomics: The Big Picture
6. Achieving Macroeconomic Goals
7. Microeconomics: Zeroing in on Businesses and Consumers
8. Competing in a Free Market
9. Trends in the Business Environment and Competition
II. Making Ethical Decisions and Managing a Socially Responsible Business
10. Introduction
11. Understanding Business Ethics
12. How Organizations Influence Ethical Conduct
13. Managing a Socially Responsible Business
14. Responsibilities to Stakeholders
15. Trends in Ethics and Corporate Social Responsibility
III. Competing in the Global Marketplace
17. Global Trade in the United States
18. Why Nations Trade
19. Barriers to Trade
20. Fostering Global Trade
21. International Economic Communities
22. Participating in the Global Marketplace
23. Threats and Opportunities in the Global Marketplace
24. The Impact of Multinational Corporations
25. Trends in Global Competition
IV. Forms of Business Ownership
27. Going It Alone: Sole Proprietorships
28. Partnerships: Sharing the Load
29. Corporations: Limiting Your Liability
30. Specialized Forms of Business Organization
31. Franchising: A Popular Trend
32. Mergers and Acquisitions
33. Trends in Business Ownership
V. Entrepreneurship: Starting and Managing Your Own Business
35. Entrepreneurship Today
36. Characteristics of Successful Entrepreneurs
37. Small Business: Driving America's Growth
38. Ready, Set, Start Your Own Business
39. Managing a Small Business
40. Small Business, Large Impact
41. The Small Business Administration
42. Trends in Entrepreneurship and Small-Business Ownership
VI. Management and Leadership in Today's Organizations
44. The Role of Management
45. Planning
46. Organizing
47. Leading, Guiding, and Motivating Others
48. Controlling
49. Managerial Roles
50. Managerial Skills
51. Trends in Management and Leadership
VII. Designing Organizational Structures
53. Building Organizational Structures
54. Contemporary Structures
55. Using Teams to Enhance Motivation and Performance
56. Authority—Establishing Organizational Relationships
57. Degree of Centralization
58. Organizational Design Considerations
59. The Informal Organization
60. Trends in Organizational Structure
VIII. Managing Human Resources and Labor Relations
62. Achieving High Performance through Human Resources Management
63. Employee Recruitment
64. Employee Selection
65. Employee Training and Development
66. Performance Planning and Evaluation
67. Employee Compensation and Benefits
68. The Labor Relations Process
69. Managing Grievances and Conflicts
70. Legal Environment of Human Resources and Labor Relations
71. Trends in Human Resource Management and Labor Relations
IX. Motivating Employees
73. Early Theories of Motivation
74. The Hawthorne Studies
75. Maslow's Hierarchy of Needs
76. McGregor's Theories X and Y
77. Herzberg's Motivator-Hygiene Theory
78. Contemporary Views on Motivation
79. From Motivation Theory to Application
80. Trends in Employee Motivation
X. Achieving World-Class Operations Management
82. Production and Operations Management—An Overview
83. The Production Process: How Do We Make It?
84. Location, Location, Location: Where Do We Make It?
85. Pulling It Together: Resource Planning
86. Production and Operations Control
87. Looking for a Better Way: Improving Production and Operations
88. Transforming the Factory Floor with Technology
89. Trends in Production and Operations Management
XI. Creating Products and Pricing Strategies to Meet Customers' Needs
91. The Marketing Concept
92. Creating a Marketing Strategy
93. Developing a Marketing Mix
94. Buyer Behavior
95. Market Segmentation
96. What Is a Product?
97. Creating Products That Deliver Value
98. The Product Life Cycle
99. Pricing Strategies and Future Trends
100. Trends in Developing Products and Pricing
XII. Distributing and Promoting Products and Services
101. Introduction
102. The Nature and Functions of Distribution (Place)
103. Wholesaling
104. The Competitive World of Retailing
105. Using Supply Chain Management to Increase Efficiency and Customer Satisfaction
106. Promotion Strategy
107. The Huge Impact of Advertising
108. The Importance of Personal Selling
109. Sales Promotion
110. Public Relations Helps Build Goodwill
111. Trends in Social Media
112. Trends in E-Commerce
XIII. Using Technology to Manage Information
114. Transforming Businesses through Information
115. Linking Up: Computer Networks
116. Management Information Systems
117. Technology Management and Planning
118. Protecting Computers and Information
119. Trends in Information Technology
XIV. Using Financial Information and Accounting
121. Accounting: More than Numbers
122. The Accounting Profession
123. Basic Accounting Procedures
124. The Balance Sheet
125. The Income Statement
126. The Statement of Cash Flows
127. Analyzing Financial Statements
128. Trends in Accounting
XV. Understanding Money and Financial Institutions
130. Show Me the Money
131. The Federal Reserve System
132. U.S. Financial Institutions
133. Insuring Bank Deposits
134. International Banking
135. Trends in Financial Institutions
XVI. Understanding Financial Management and Securities Markets
137. The Role of Finance and the Financial Manager
138. How Organizations Use Funds
139. Obtaining Short-Term Financing
140. Raising Long-Term Financing
141. Equity Financing
142. Securities Markets
143. Buying and Selling at Securities Exchanges
144. Trends in Financial Management and Securities Markets
XVII. Your Career in Business
146. Learn the Basics of Business
147. Developing Interpersonal Skills Is Key to Your Success
148. Make Your Future Happen: Learn to Plan
149. Going to College Is an Opportunity of a Lifetime—Never Drop Out
150. Get Your Career Off on the Right Track
151. Self-Test Scoring Guidelines
Understanding the Legal and Tax Environment
Introduction to Business
Forms of Business Ownership
32 Mergers and Acquisitions
Why are mergers and acquisitions important to a company's overall growth?
A merger occurs when two or more firms combine to form one new company. For example, in 2016, Johnson Controls, a leading provider of building efficiency solutions, agreed to merge with Ireland's Tyco International, a leading provider of fire and security solutions, resulting in a company that will be a leader in products, technologies, and integrated solutions for the building and energy sectors. The merger is valued at $30 billion, with new Johnson Controls PLC to be based in Ireland. Currently, AT&T and Time Warner have an $85.4 billion merger pending. "Once we complete our acquisition of Time Warner Inc., we believe there is an opportunity to build an automated advertising platform that can do for premium video and TV advertising what the search and social media companies have done for digital advertising," AT&T's CEO Randall Stephenson said in a prepared statement. Mergers such as this one, in a well-established industry, can produce winning results in terms of improved efficiency and cost savings.
Thomas Content, "With acquisition of Tyco, Johnson Controls will become global 'one-stop shop' for building controls," Journal Sentinel, January 25, 2016, http://archive.jsonline.com, (accessed August 17, 2017); Johnson Control Media Center, http://www.johnsoncontrols.com (accessed August 17, 2017); Brian Steinberg, "AT&T Opens New Advertising Unit in Advance of Time Warner Merger," Variety, August 4, 2017, (August 6, 2017).
In an acquisition, a corporation or investor group finds a target company and negotiates with its board of directors to purchase it. In Verizon's recent $4.5 billion acquisition of Yahoo, Verizon was the acquirer, and Yahoo the target company.
Christina Mercer, "We List the Most Notable Tech Acquisitions of 2017, So Far," ComputerworldUK, https://www.computeruk.com, December 12, 2017.
Worldwide merger activity in the first quarter of 2017 was mixed. The volume of deals was lower but with higher dollar value. The total number of deals fell by 17.9 percent versus the first quarter of 2016; however, the overall deal value was $678.5 billion.
Gemma Acton, "Number of Global M&A Deals Tumbles in Q1 2017 While Overall Value Rises," CNBC, https://www.cnbc.com, accessed August 6, 2017.
We will discuss the increase in international mergers later in this chapter.
Types of Mergers
The three main types of mergers are horizontal, vertical, and conglomerate. In a horizontal merger, companies at the same stage in the same industry merge to reduce costs, expand product offerings, or reduce competition. Many of the largest mergers are horizontal mergers to achieve economies of scale. Its $1.25 billion acquisition of trucking company Overnite allowed UPS, the world's largest shipping carrier, to step up expansion of its heavy freight–delivery business, thus expanding its product offerings.
Harry R. Webber, "UPS to Buy Trucking Company Overnight for $1.25 Billion to Expand Its Freight Business," USA Today, May 17, 2005, p. 6B.
In a vertical merger, a company buys a firm in its same industry, often involved in an earlier or later stage of the production or sales process. Buying a supplier of raw materials, a distribution company, or a customer gives the acquiring firm more control. A good example of this is Google's acquisition of Urchin Software Corp., a San Diego–based company that sells web analytics software and services that help companies track the effectiveness of their websites and online advertising. The move enables Google to bolster the software tools it provides to its advertisers.
Kevin J. Delaney, "Google to Buy Urchin Software, Provider of Data for Advertisers,"Wall Street Journal, March 29, 2005, p. B4.
A conglomerate merger brings together companies in unrelated businesses to reduce risk. Combining companies whose products have different seasonal patterns or respond differently to business cycles can result in more stable sales. The Philip Morris Company, now called Altria Group, started out in the tobacco industry but diversified as early as the 1960s with the acquisition of Miller Brewing Company. It diversified into the food industry with its subsequent purchase of General Foods, Kraft Foods, and Nabisco, among others. Later spinning off many businesses, current product categories include cigarettes, smokeless tobacco such as Copenhagen and Skoal, cigars, e-vapor products such as MarkTen, and wines.
A specialized, financially motivated type of merger, the leveraged buyout (LBO) became popular in the 1980s but is less common today. LBOs are corporate takeovers financed by large amounts of borrowed money—as much as 90 percent of the purchase price. LBOs can be started by outside investors or the corporation's management. For example, the private equity firm Apollo Global Management LLC agreed to buy U.S. security company ADT Corp. in the largest leveraged buyout (LBO) of 2016.
Koh Gui Qing and Greg Roumeliotis, "Apollo Global Braves LBO Rout with $7 Billion ADT Deal," Reuters, https://www.reuters.com, accessed August 6, 2017.
Often a belief that a company is worth more than the value of all its stock is what drives an LBO. They buy the stock and take the company private, expecting to increase cash flow by improving operating efficiency or selling off units for cash to pay off debt. Although some LBOs do improve efficiency, many do not live up to investor expectations or generate enough cash to pay their debt.
Merger Motives
Although headlines tend to focus on mega-mergers, "merger mania" affects small companies too, and motives for mergers and acquisitions tend to be similar regardless of the company's size. The goal is often strategic: to improve overall performance of the merged firms through cost savings, elimination of overlapping operations, improved purchasing power, increased market share, or reduced competition. Oracle Corp. paid $5.85 billion to acquire Siebel Systems, its largest competitor in the sales automation programs market.
Laurie J. Flynn, "Oracle Acquiring Another Big Rival," San Diego Union–Tribune, September 13, 2005, p. C1.
Company growth, broadening product lines, acquiring technology or management skills, and the ability to quickly acquire new markets are other motives for acquiring a company. Yahoo Inc.'s $1 billion cash purchase of a 40 percent stake in China's biggest e-commerce firm, Alibaba.com, instantly strengthened its ties to the world's second largest internet market.
Joe McDonald, "Yahoo Buys Stake in China's No. 1 Web Shopping Firm," Associated Press, San Diego Union- Tribune, August 12, 2005, p. C1.
Purchasing a company can also offer a faster, less risky, less costly option than developing products or markets in-house or expanding internationally. Amazon's 2017 purchase of Whole Foods Market, an upscale grocery chain, for $13.7 billion was a move to enter the retail grocery sector. In addition to the new product market, this move offers Amazon opportunity to sell Amazon tech products in the grocery stores as well as access to an entirely new set of data on consumers.
Greg Petro, "Amazon's Acquisition of Whole Foods Is About Two Things: Data and Product," Forbes, http://www.forbes.com, accessed March 31, 2018; Kate Taylor, "Here Are All the Changes Amazon Is Making to Whole Foods," Business Insider, www.businessinsider.com, March 2, 2018.
Another motive for acquisitions is financial restructuring—cutting costs, selling off units, laying off employees, and refinancing the company to increase its value to stockholders. Financially motivated mergers are based not on the potential to achieve economies of scale, but rather on the acquirer's belief that the target has hidden value to be unlocked through restructuring. Most financially motivated mergers involve larger companies. In January 2018, Brookfield Business Partners, a subsidiary of Canada's Brookfield Asset Management, announced that it plans to acquire Westinghouse Electric Co LLC, the bankrupt nuclear services company owned by Toshiba Corp., for $4.6 billion. Brookfield has a history of turning around distressed businesses.
Tom Hals and Jessica DiNapoli, "Brookfield Business Partners to Buy Westinghouse for $4.6 Billion," Reuters, https://www.reuters.com, January 4, 2018.
Emerging Truths
Along with the technology boom of the late 1990s, merger activity also soared. Total annual transactions averaged $1.6 trillion a year. Companies were using their stock, which had been pushed to unrealistically high levels, to buy each other. When the technology bubble burst in 2000, the level of merger activity dropped as well. It fell even further after the United States was attacked on September 11, 2001. Then massive corporate wrongdoing began to surface. Stocks plummeted in reaction to these events, and merger transactions, which generally track stock market movements, fell as a result.
Today, merger activity is once again on the rise. Propelled by a solid economy, low interest rates, good credit, rising stock prices, and stockpiles of cash, 2016's $3.84 trillion of global M&A was historically a very strong year, with several blockbuster deals.
Brad Gevurtz, "'Fasten Your Seat Belt': There's Going to Be a Dealmaking Bonanza in 2017," Business Insider, www.businessinsider.com, accessed August 6, 2017.
Size is definitely an advantage when competing in the global marketplace, but bigger does not always mean better in the merger business. Study results show that heady mega-mergers can, in fact, be a bust for investors who own those shares. So companies are wise to consider their options before stuffing their dollars in the biggest merger slot machine they can find. In their eagerness to snare a deal, many buyers pay a premium that wipes out the merger's entire potential economic gain. Often managers envision grand synergies that prove illusory or unworkable or buy a company that isn't what it seems—not fully understanding what they are getting.
Integrating acquisitions is both an art and a science. Acquirers often underestimate the costs and logistical nightmare of consolidating the operations of merged companies with very different cultures. As a result, they may fail to keep key employees aboard, sales forces selling, and customers happy.
Companies will always continue to seek out acquisition candidates, but the fundamental business case for merging will have to be strong. So what should companies look for to identify mergers with a better-than-even chance of turning out well?
A purchase price that is low enough—a 10 percent premium over market as opposed to 50 percent—so the buyer doesn't need heroic synergies to make the deal work.
A target that is significantly smaller than the buyer—and in a business the buyer understands. The more "transformational" the deal, such as entering a new business arena, the bigger the risk.
A buyer who pays in cash and not overinflated stock.
Evidence that the deal makes both business and financial sense and isn't purely the brainchild of an empire-building CEO. Mergers are tough—culturally, commercially, and logistically. The most important quality a company can bring to a merger may be humility.
Differentiate between a merger and an acquisition.
What are the most common motives for corporate mergers and acquisitions?
Describe the different types of corporate mergers.
Summary of Learning Outcomes
In a merger, two companies combine to form one company. In an acquisition, one company or investor group buys another. Companies merge for strategic reasons to improve overall performance of the merged firm through cost savings, eliminating overlapping operations, improving purchasing power, increasing market share, or reducing competition. Desired company growth, broadened product lines, and the rapid acquisition of new markets, technology, or management skills are other motives. Another motive for merging is financial restructuring—cutting costs, selling off units, laying off employees, and refinancing the company to increase its value to stockholders.
There are three types of mergers. In a horizontal merger, companies at the same stage in the same industry combine for more economic power, to diversify, or to win greater market share. A vertical merger involves the acquisition of a firm that serves an earlier or later stage of the production or sales process, such as a supplier or sales outlet. In a conglomerate merger, unrelated businesses come together to reduce risk through diversification.
The purchase of a target company by another corporation or by an investor group typically negotiated with the target company board of directors.
conglomerate merger
A merger of companies in unrelated businesses; done to reduce risk.
horizontal merger
A merger of companies at the same stage in the same industry; done to reduce costs, expand product offerings, or reduce competition.
A corporate takeover financed by large amounts of borrowed money; can be started by outside investors or the corporation's management.
The combination of two or more firms to form one new company.
vertical merger
A merger of companies at different stages in the same industry; done to gain control over supplies of resources or to gain access to different markets.
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Next: Trends in Business Ownership
Mergers and Acquisitions by Rice University is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.
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