Speaker 1: Hello everyone, welcome to Business School 101. Big firms often use mergers and acquisitions to better expand their businesses and compete with their competitors. For example, T-Mobile and Sprint completed their merger in 2020, creating a new wireless carrier with a customer base of over 100 million subscribers. In 2014, Italian automaker Fiat completed its acquisition of American automaker Chrysler, creating Fiat Chrysler Automobiles, the world's seventh-largest automaker at the time. Amazon acquired Whole Foods in 2017 to gain access to Whole Foods' customer base and physical stores. Google acquired YouTube in 2006 to expand its reach in the online video market and gain access to YouTube's large user base and content library. So what are mergers and acquisitions? Why do firms do that? Are there some successful and failed real business examples and useful strategies? In this video, I will discuss these questions with you. Section 1. Definition. Mergers and acquisitions, or M&A, refer to the process of combining two or more companies into a single entity or acquiring one company by another. M&A deals can take various forms, such as a merger, where two companies combine to form a new entity, or an acquisition, where one company buys another. The key difference between a merger and an acquisition is the level of equality between the two companies involved. In a merger, the two companies are typically of roughly equal size and scale and come together to form a new entity. In an acquisition, one company purchases another, and the target company becomes part of the acquiring company. Here are two examples to illustrate the differences between the merger and acquisition. In 2016, Dell and EMC Corporation completed a merger in which Dell acquired EMC for $67 billion. The new company, Dell Technologies, was formed. In this case, both companies were roughly the same size and had complementary businesses, making it a good fit for a merger. In 2014, Facebook acquired WhatsApp for $19 billion. The acquisition was not a merger of equals, as Facebook was much larger than WhatsApp. In this case, Facebook was interested in WhatsApp's messaging technology and its large user base, which aligned with Facebook's strategic goals. Section 2. Benefits. Here are the major benefits of merger and acquisition. Number 1. Market Expansion. One of the main reasons firms pursue M&A deals is to expand their market share and access new markets. By acquiring or merging with another company, a firm can gain access to new customers, products, and services that it may not have had before. Number 2. Synergies and Cost Savings. M&A deals can create synergies between the two companies involved, allowing them to combine their resources and capabilities to achieve greater efficiency and cost savings. Number 3. Diversification. M&A deals can help firms diversify their operations and reduce their dependence on a single product or market. By acquiring or merging with a company in a different industry or market, a firm can spread its risk and gain exposure to new opportunities. Number 4. Acquire New Technologies or Capabilities. M&A deals can provide a firm with access to new technologies or capabilities that it may not have developed on its own. For example, a company may acquire a startup that has developed a new technology or product. Number 5. Financial Benefits. M&A deals can provide a firm with financial benefits, such as access to new sources of capital, improved credit ratings, or increased cash flow. By acquiring or merging with another company, a firm can improve its financial position and gain access to new sources of funding that it may not have had before. Section 3. Examples. Here are a few successful and failed examples of mergers and acquisitions. First, The Walt Disney Company and Pixar Animation Studios. In 2006, The Walt Disney Company acquired Pixar Animation Studios for $7.4 billion. The merger brought together two of the most successful animation studios in the world, allowing Disney to expand its animation capabilities and access Pixar's cutting-edge technology. The merger was successful in terms of financial performance, as the combined company's revenue and profits increased significantly in the years following the deal. It also produced some of the highest-grossing animated movies of all time, including Toy Story 3 and Finding Dory. Second, Exxon and Mobil. In 1999, Exxon and Mobil, two of the world's largest oil companies, merged to form Exxon Mobil. The merger created the world's largest publicly traded oil company, with a market capitalization of over $400 billion. The merger was successful in terms of operational performance, as it allowed Exxon Mobil to streamline its operations, reduce costs, and increase efficiency. The combined company also benefited from improved access to new oil reserves, which helped to boost profits. In addition, the merger allowed Exxon Mobil to weather the volatility of the oil market in the years following the deal. Third, Daimler-Benz and Chrysler. In 1998, Daimler-Benz acquired Chrysler in a deal value to $36 billion, creating Daimler-Chrysler. The merger was intended to create a global automotive powerhouse that could compete with rivals such as Toyota and General Motors. However, the two companies struggled to integrate their operations and cultures, and the merger ultimately failed. Daimler-Chrysler suffered from a lack of clear leadership, cultural clashes, and a failure to capitalize on synergies. The company's profits declined, and in 2007, Daimler sold Chrysler to a private equity firm for a fraction of its original purchase price. Fourth, Microsoft and Nokia. In 2014, Microsoft acquired Nokia's handset business for $7.2 billion, with the goal of expanding its presence in the mobile market. However, the acquisition turned out to be a failure, as Microsoft struggled to integrate Nokia's hardware business with its software and services. Microsoft's mobile business continued to decline, and in 2016, the company announced that it would sell its feature phone business to a subsidiary of Foxconn. Section 4. Failed Reasons. According to a study by the Harvard Business Review, up to 70% of M&A deals fail to deliver the intended value or benefits. Here are several reasons why mergers and acquisitions can fail. Number 1. Cultural Clash. Companies that have different cultures and ways of doing business may struggle to integrate their operations and work effectively together. Number 2. Poor Due Diligence. A lack of thorough due diligence can result in unexpected problems and hidden liabilities that can damage the success of an M&A deal. Number 3. Overpayment. Paying too much for an acquisition can result in a failure to generate a positive return on investment and put the company in a precarious financial position. Number 4. Competition Challenges. The process of integrating two companies can be complex and difficult, leading to delays, confusion, and loss of key talent. Number 5. Strategic Misalignment. Companies may fail to align their strategic goals and objectives, resulting in conflicting priorities and difficulty in achieving synergies. Number 6. Regulatory Issues. M&A deals may require regulatory approval, and failure to obtain necessary approvals can prevent the deal from going through or result in significant delays. Number 7. Failure to Communicate. Failure to communicate effectively with stakeholders, employees, and customers can lead to uncertainty and resistance to change, making it difficult to achieve post-merger integration and success. Section 5. Strategies. To avoid making the above mistakes, here are some key steps to prepare for an M&A deal. First, develop a clear strategy. Before pursuing an M&A deal, companies need to develop a clear strategy that aligns with their long-term goals and objectives. This strategy should consider factors such as the target company's industry, financial position, and potential for synergies. Second, conduct due diligence. Conducting thorough due diligence is crucial to identifying potential risks and opportunities associated with an M&A deal. This includes analyzing financial statements, legal documents, and other key information about the target company. Third, secure financing. M&A deals often require significant amounts of capital, so it's important to secure financing in advance of the deal. This may involve working with banks, investors, or other sources of funding. Fourth, plan for integration. Successful M&A deals require careful planning for post-merger integration. This includes developing a plan for integrating the target company's operations, employees, and culture with the acquiring companies. Fifth, communicate effectively. M&A deals can be unsettling for employees, customers, and other stakeholders, so it's important to communicate effectively throughout the process. This includes keeping employees and other stakeholders informed of the deal's progress and addressing any concerns or questions they may have. Sixth, seek legal and financial advice. M&A deals are complex and involve many legal and financial considerations, so it's important to seek advice from experienced professionals. This includes working with lawyers, accountants, and other advisors who can provide guidance on the legal, financial, and tax implications of the deal. Section 6. Summary Mergers and acquisitions refer to the process of combining two or more companies into a single entity or acquiring one company by another. M&A deals can be complex and involve many legal, financial, and regulatory considerations. They typically involve extensive due diligence to assess the risks and benefits of the deal, negotiation of terms and conditions, and obtaining regulatory approvals. The success of an M&A deal depends on various factors, such as strategic fit, cultural compatibility, and effective integration of the two companies. All right, that's all for today's topic. If you have any questions regarding this video, please leave your thoughts in a comment below. I hope you guys have enjoyed this video, and if you did, make sure you give it a thumbs up and subscribe to my channel. 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