About Advantages and Disadvantages of Mergers and Acquisitions (M&a) and Demergers
As a general rule, mergers and acquisitions (M&A) are value destructive for shareholders. Demergers or spin-offs are value accretive. In simple English, that means, avoid the shares of an acquiring company. But there may be money making opportunities in the companies being demerged or spun off.
There is a difference between a merger and an acquisition. Mergers are rare, as they happen between two companies that are equal in size and reach. Both companies lose their individual identities, and a third company is formed.
An acquisition, or a takeover, happens when a bigger company buys out a smaller company, with or without the smaller company's cooperation or willingness to be acquired. The usual motivations are economies of scale, killing a competitor, gaining market share and reach.
The biggest disadvantage of acquisitions is that they fail because of cultural mismatches. Every company is shaped over the years by the vision and background of its promoters or management. This is called 'company culture' - the way they project themselves in the market place, how they treat customers, employees, suppliers and shareholders, their social responsibilities, integrity and commitment, innovating capabilities.
No two companies do business the same way, even within the same sector. When one company acquires another, the cultural differences become very difficult to overcome. This leads to key personnel of the acquired company quitting and leaving with priceless intellectual property and customer relationships built up over many years.
Reverse takeovers, when a smaller company acquires a larger one, are even worse. Like Tata Steel buying Corus or Tata Motors buying Jaguar-Land Rover. In both cases, the ambition was to become global companies in quick time. But the prices paid in both cases were too high, and the timing was wrong. The shares of both companies tanked while they scrambled to raise money to cover the huge acquisition debt.
For shareholders of the company
There is a difference between a merger and an acquisition. Mergers are rare, as they happen between two companies that are equal in size and reach. Both companies lose their individual identities, and a third company is formed.
An acquisition, or a takeover, happens when a bigger company buys out a smaller company, with or without the smaller company's cooperation or willingness to be acquired. The usual motivations are economies of scale, killing a competitor, gaining market share and reach.
The biggest disadvantage of acquisitions is that they fail because of cultural mismatches. Every company is shaped over the years by the vision and background of its promoters or management. This is called 'company culture' - the way they project themselves in the market place, how they treat customers, employees, suppliers and shareholders, their social responsibilities, integrity and commitment, innovating capabilities.
No two companies do business the same way, even within the same sector. When one company acquires another, the cultural differences become very difficult to overcome. This leads to key personnel of the acquired company quitting and leaving with priceless intellectual property and customer relationships built up over many years.
Reverse takeovers, when a smaller company acquires a larger one, are even worse. Like Tata Steel buying Corus or Tata Motors buying Jaguar-Land Rover. In both cases, the ambition was to become global companies in quick time. But the prices paid in both cases were too high, and the timing was wrong. The shares of both companies tanked while they scrambled to raise money to cover the huge acquisition debt.
For shareholders of the company