Episode 119: Introduction to Mergers and Acquisitions - YouTube

Welcome to Alanis Business Academy.

I'm Matt Alanis and this is An Introduction to Mergers and Acquisitions.

Companies have a few options for achieving growth.

The first is by growing organically through the development of new products and production

capacity over time.

The other option, is through what are known as mergers and acquisitions.

A merger occurs when two companies agree to combine to form an entirely new company.

The two companies will agree on a post-merger name, like Exxon and Mobil combining to form

ExxonMobil, and determine how to structure the new organization as well as staff operations.

An acquisition occurs when one company purchases another company.

The company that is purchased is then absorbed by the purchasing company and ceases to exist

on its own.

In some situations a company will purchase another, but allow it to operate independently

and even keep its original name, such as when Disney purchased Pixar in 2006.

This can be to ease the uncertainty associated with an acquisition as well as ensure the

acquired company continues operations smoothly.

In the case of Disney and Pixar, Pixar had proven to be successful prior to the acquisition

and both companies wanted that success to continue unhindered by a new culture and even

new staff.

When classifying mergers and acquisitions we can label them as either horizontal or

vertical.

A horizontal merger or acquisition occurs when the two companies generally produce the

same products and serve similar customers.

The rationale behind such a merger is the newly merged company will be able to better

compete in their respective industry by taking advantage of economies of scale and even technological

innovation.

It's also worth noting that horizontal acquisitions and mergers can allow companies to expand

their product mix and potentially increase revenues by appealing to a wider customer

base.

Office Depot and Office Max, two retailers who sell similar products and serve similar

customers, are currently in the process of completing a merger.

This merger is meant to allow these companies the opportunity to compete more effectively

against Internet retail giant Amazon.

The joining of Office Depot and Office Max is an example of a horizontal merger.

In 2012, Facebook acquired popular photo-sharing application Instagram for $1 billion in cash

and stock.

In addition to giving Facebook access to Instagram's successful mobile platform, it also eliminated

a potential competitor while giving Facebook access to an additional group of customers.

Facebook's acquisition of Instagram is an example of a horizontal acquisition since

they both operate in a similar industry, providing a similar product to similar customers.

Now a vertical merger or acquisition occurs when the two companies operate at different

stages of the production cycle.

Because these companies operate at different stages of the production cycle, the merger

or acquisition can create increased operating efficiencies and reduce costs.

For example, Google purchased Motorola Mobility in 2012 for $12.5 billion.

Motorola Mobility is of course the manufacturer of handset devices while Google was beginning

to producing and licensing its Android Operating System.

In an effort to control both the hardware and software side of selling smartphones,

Google acquired Motorola Mobility.

This vertical acquisition allowed Google the opportunity to leverage Motorola Mobility's

knowledge of the handset market as well as its staff and operations as opposed to starting

from scratch or continuing to rely entirely on other companies for handsets.

Coffee giant Starbucks also used a vertical acquisition to expand its offering of pastries

and breads by purchasing San Francisco-based Bay Bread LLC, and its La Boulange bakery

brand for $100 million in cash in April of this year.

Although Starbucks had already sold pastries, this acquisition gave Starbucks control over

a key player in the production cycle: the producer.

Instead of purchasing pastries and other baked products from another business in the supply

chain, Starbucks is now able to produce them in-house reducing its costs in the process.

This has been An Introduction to Mergers and Acquisitions.

If you have any questions or comments please be sure leave them in the comment box below

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