Strategic Management: Formulation and Implementation

Implementing Strategies Through Mergers, Acquisitions

Mergers and acquisitions are two frequently used methods for implementing diversifications strategies. A merger takes place when two companies combine their operations, creating in effect, a third company. An acquisition is a situation in which one company buys, and controls another company.

Horizontal mergers or acquisitions are the combining of two or more organizations that are direct competitors.

Concentric merges or acquisitions are the combining of two or more organizations that have similar products or services in terms of technology, product line, distribution channels, or customer base.

Vertical merges or acquisitions are the combining of two or more organizations to extend an organization into either supplying products or services required in producing its present products or services or into distributing or selling its own product and services.

Conglomerate mergers or acquisitions involve the combining of two or more organizations that are producing products or services that are significantly different from each other.

Organizations seek mergers and acquisitions for many reasons. The primary reason for large mergers and acquisitions is the potential benefit that can accrue to the stockholders of both companies. Synergy is often cited as a rationale for mergers.

Synergy occurs as the result of a merger, when two operating units can be run more efficiently (i.e.: with lower costs) and / or more effectively (i.e.: with appropriate allocation of scarce resources given environmental constrains) together than apart.

Other reason for merging with or acquiring another company include improving or maintaining competitive position in a particular business in order to enter new markets or acquire new products rapidly, to improve financial position, or to avoid a takeover.

Mergers and acquisitions can be carried out in either a friendly or a hostile environment.

Friendly mergers and acquisitions are accomplished when the stockholders and management of both organizations agree that the combination will benefits both firms and the work together to ensure its success.

Hostile (or, as they are frequently called, takeover) mergers and acquisitions result when the organizations to be acquired (also sometimes called the target company) resist the attempt. Several methods are available for carrying out mergers and acquisitions:

Because so many terms are used in described activities involved in mergers and acquisitions, there is summary of the definitions of many of these terms.

Several factors need to be avoided to ensure a successful merger or acquisition. These factors include:

  1. Paying to much
  2. Straying too far a field
  3. Marrying disparate corporate cultures
  4. Counting on key managers staying
  5. Assuming that a boom market will not crash
  6. Leaping before looking
  7. Swallowing too large company

Numerous organizations have been able to integrate sufficiently so that the merger or acquisition becomes a successful strategy of diversification.