Mergers & Acquisitions

Both mergers and acquisitions are attempts from companies to combine their strengths in order to achieve synergistic benefits. The reasons behind a merger or acquisition may be various, e.g. increasing market share, entering new markets, developing new products through R&D, or achieving administrative benefits.

Introduction

In a merger, two companies combine to form a new company. In an acquisition, one company takes over the other in terms of management or ownership. Mergers and acquisitions can create economies of scale, in which costs of similar functions can be reduced. Cost per unit of output can reduce as well with increased output bringing down the cost per unit to be produced. Investors are happy with the notion that the merger or acquisition will give the company added strength and benefits. In contrast, when a merger or acquisition does not work, management can choose to de-merge or dis-invest ownership in acquired companies, spinning them off to retain its inherent strengths. (Source :Investopedia, 2002)

In recent times, the world's pharmaceutical industry and automotive industry have stolen the limelight by managing a number of mergers and acquisitions. The banking industry is another example.

Scenario I: Glaxo Wellcome & Smith Kline Beecham

The merger of Glaxo Wellcome and SmithKline Beecham, completed on 27 December 2000, gave rise to the creation of the world's second largest pharmaceutical company. The newly merged company had global sales of over $22bn, with the largest share in several therapeutic areas, including anti-infectives, CNS, respiratory and alimentary & metabolic, as well as holding a leading position in the vaccine and OTC markets. In 2000, the merged GlaxoSmithKline (GSK) pharmaceutical business was ranked number two by worldwide sales, with a global market share of 6.9%, marginally behind Pfizer's 7%. Pfizer, ranked number one in the industry, itself acquired Warner Lambert in July 2000. (Source: IMS Health, 2000)

According to the pre-merger statement of its directors, the merger was expected to produce annual cost savings of £1bn by 2003, £250m of which were to be reinvested in research and development. (Source: Pharmaceutical Journal, 2000).

However in terms of its markets, GSK is considered a more "global" company than Pfizer, given that it generates a far higher proportion of its sales outside the North American market. SmithKline Beecham's presence in the Central and South American markets will be complemented by Glaxo Wellcome's strong position in Europe and Asia. (Source: IMS Health, 2002)

The world's leading markets in terms of healthcare expenditure are the USA, Japan and Germany. However the U.S market is expected to grow rapidly, given its Medicare support funding by the Government. However, subsequent studies by independent research groups in the UK have concluded that such mergers only serve to increase the company's market share and dominance. It has noted that though GSK was the world's leading company in HIV/AIDS research, the merger only served to increase its market for existing products and did not lead to further research for new drugs. The R&D expenditures did not produce any new innovations; shareholders now see the merger as a failed effort. While Glaxo had a good sales and marketing force, its merger has failed because the absence of new products did not aid in the growth effort.

GSK director Sir Richard Sykes left the company in 2002 to become Rector of London's Imperial College, subsequently trying to merge Imperial and University College, London into a super-university with Europe's largest R&D budget. That effort failed too. (Source: Bloomberg News, 2002)

Case Study II : BMW & Rover

The BMW Rover merger took place in 1994. BMW sought to increase its presence in the UK car market and solve its over capacity problems. In turn, Rover stood to benefit from the BMW name. Its total output was stalled at 2 million vehicles per year. BMW wanted to enter into the British market after its Asian and North American markets sales slowed due to their currency depreciation and recession. However the British pound remained stable and BMW did not get the currency advantage. A second reason the merger did not work was because BMW markets top of the line luxury vehicles and increasing its capacity served to reduce overall demand- its image fell due to the car being seen as less exclusive. In consequence, the market for BMW fell drastically in the UK. While BMW's core strength was technological innovation, Rover's was financial strength. Both companies were held as cultural icons of their countries, so management independence was maintained. The merger failed to use the synergistic benefits. Subsequently the companies were de-merged. (Source: BMW-A Case Study, 2003)