Mergers and Acquisitions: A New Perspective

The nature of mergers and acquisition activity has drastically changed over the past few years. Earlier, most of the mergers and acquisitions happened because companies wanted to do horizontal or vertical integration. They either wanted to team up with their competitors and enjoy economies of scale, or they wanted to team up with their suppliers and control the entire supply chain.

However, of late, technology has changed everything. So much so that the motto and reasoning behind mergers and acquisitions have also changed completely. For instance, in most of the M&A’s which are happening in the retail sector, brick and mortar companies are not buying other brick and mortar companies. The trend is that a well-established but declining brick and mortar retailer is buying an online e-commerce company.

Similarly, in the United States, chains of pharmacy stores are buying out health insurance companies. The reality is that businesses are no longer stable. Instead, they continuously change. Therefore whenever an established player finds itself lagging in some space, it used mergers and acquisitions to become competitive.

Mergers and acquisitions are no longer strengthening the underlying core business. Instead, they are a mechanism to ensure that the company does not get left behind as rapidly changing technology changes the marketplace.

Some of the major reasons behind modern mergers and acquisitions have been listed in this article.

• Lack of Targets: Mergers and acquisitions are not really new. In mature industries, they have been happening for many decades. As a result, these mature industries are already quite consolidated. There are relatively few players who are willing to sell.

  Hence, the number of acquisition targets is also low. This low number of potential targets is one of the major reasons that companies are looking at other newer sectors when they look at inorganic growth.

  Mature industries are known for having stable businesses with single-digit rates of growth. It is no surprise that many investors aren’t willing to pay a premium to be a part of this action.

• Acquiring Technological Capabilities: Mergers and acquisitions are the simplest and most cost-effective manner in which a company can upgrade its technological capabilities.

  It is a known fact that many incumbents in traditional industries like car manufacturing and banking are taking over start-ups that have a technologically advanced product. For instance, companies which make advanced software for driverless vehicles are being taken over by traditional car companies.

  Similarly, fintech start-ups are being taken over banks and insurance companies. Mergers and acquisitions are being used as a shortcut to acquiring technological prowess, which is both difficult and expensive to build.

  Apple is amongst the companies which has used an acquisition to quickly shore up their technical capability. They have no skill or experience in building modems. This is the reason they acquired Intel and their 2200 employees. The acquisition enabled Apple to compete with the like of Qualcomm almost overnight!

• Financial Capabilities: The availability of funding is also one of the biggest reasons that cross-industry mergers and acquisitions take place. Whenever an M&A activity takes place, it is often because the target company is short of funds whereas the acquirer is flush with funds.

  It has been observed that the speed of M&A activity increases drastically during the recession period when funding from venture capitalists and other traditional sources dries up.

  Smaller companies no longer have to worry about funding constantly. After the merger, these companies are constantly provided funding by the senior member of the alliance as long as they continue to do cutting-edge research.

• Logistical Capabilities: Building distribution networks is a very time-consuming task. They often take years to build and perfect. In many industries, similar distribution networks are used.

  For instance, consumer goods industries, as well as pharmaceutical industries, use very similar supply chains. Hence, the distribution network of one company can be used by another company even though it operates in a different industry. There are also many professional third party logistics companies which possess such assets. Hence, they are also routinely targeted by companies looking to undertake mergers and acquisitions.

• Acquiring People: Modern technology start-ups are only as good as the people that work in them. Hence, a lot of times, big companies acquire smaller ones with the explicating intention of importing rare talent into their company.

  It is a known fact that companies such as Google acquire competitors only to get a hand on their best talent. The problem with acquiring for talent is that the acquirer is expected to pay a premium, but there is no surety in return.

  It is not possible to buy people, and they could simply find another job and quit the company. This is the reason why companies create agreements and trusts which provide financial incentives to entice employees to stay longer.

  In traditional M&A settings, the focus was on hard capital assets like plant and machinery. However, now, the focus has subtly changed to employees as they are the engines of growth for companies nowadays.

The bottom line is that the mergers and acquisitions game has changed drastically. The targets, reasons as well as the amount paid for the acquisitions are quite different than what they used to be a couple of decades ago.