Corporate Merger and Acquisition Primer

Many communities are faced with the side effects of mergers and acquisitions each year. This primer from the Economist might be informative to you if you are one of those communities.

There are three types of mergers: 1) horizontal integration, when two similar firms tie the knot; 2) vertical integration, in which two firms at different points in the supply chain get together; and 3) diversification, when two companies with nothing in common jump into bed. These can be a voluntary merger of equals, a voluntary takeover of one firm by another; or a hostile takeover—in which the management of one firm a tries to buy a majority of shares in another.

Mergers in America are regulated by the Federal Trade Commission, and in Europe by individual countries (Europe’s competition commissioner scrutinises cross-border mergers). In both places, mergers that are deemed to be against the public interest can be vetoed.

Merger activity generally comes in waves, and is most common when shares are overvalued. The late 1990s saw fevered activity in America, Europe and Asia. Then the pace slowed in most industries, particularly after September 11th 2001. But cross-border deals continue to surge in Japan and some western companies are now eyeing up China, a potentially huge market. Four big merger announcements in June 2003 suggest that the pace is picking up once again as companies that weathered the global recession seek bargains among their battered brethren.

In theory, different sorts of mergers bring different benefits. But the damning lesson of the merger waves of the past 50 years is that, with one big exception—the spate of leveraged buy-outs in the United States during the 1980s—many mergers have failed miserably.

Source: Economist