1. well as to make a better competitor

1.   
Introduction

Mergers and Acquisitions are an essential component of
Strategical management of many firms and organizations all around the world. They are being used as a strategic survival tool, due
to the global competition between the companies. Managers of the acquiring
firms want to see their corporations expand as well as to make a better
competitor company in the industry and eventually gain the monopolistic power. The
main idea is that two companies together represent higher value than two
separate companies.

“The
terms merger and acquisition mean slightly different things, though they are
often used interchangeably.” (Investopedia, 2017). Some people have a
misconception about the terms being a synonym, however, they have a different
meaning. “A merger takes place when two companies combine their operations,
creating in effect, a third company. An acquisition is a situation in which one
company buys, and controls another company.” (Strategic Management: Formulation and Implementation,
2014).

There
are many risks and factors that might cause mergers and acquisitions to
fail.  Google is however one of the
companies that overcame the risks and achieved the benefits of successful
acquisitions.

2.   
General insight into M&A

There are countless motivations
behind Mergers and Acquisitions. One of the main point is that the owners of
the company desire higher position in the branch as well as growth of the firm,
in order to withstand rising competition. While using M&A strategy they
might achieve the objective. There are different varieties of Mergers depending
on whether the merging companies are in the similar or different industry. According to DePamphilis(2016) We can categorize M&A into Horizontal
Merger, Vertical Merger and Conglomerate Merger. By acquiring basic knowledge
and terminology of M&A we are then able to evaluate Google’s strategy and
its pros and cons.

 

 

2.1         
Categorization

     2.1.1    Mergers

Mergers are occurring when two or more firms are combined.
All the assets and liabilities of a target firm are then absorbed by acquiring
firm. Unlike in acquisition, the absorbed company ceases to exist. According to
Sherman (2006) Although the
buying firm may be a considerably different organization after merger, it
retains its original identity. In simple words it is a process through which
business of a firm is taken over by another firm and the target firm ceases to
exist (Pautler, 2001).

Horizontal Merger

Horizontal Merger happens when two companies from the same
industry merge together in order to sustain the competition in the same
industry as well as gaining the higher position over other competitors. The
merging companies tend to be in competition and share the same services or
products. As stated by Hassan and Ghauri (2014) It is common in sectors where
competition is higher and benefits of merging firms are greater on account of
synergies and potential gains. The example of Horizontal Merger might be the
case of Facebook acquisition of Instagram. As reported by Forbes.com (2012)
Facebook acquired Instagram for $1 billion. By purchasing Instagram, Facebook
strengthened its position in the industry and eliminated potential competition
in photo sharing area.

Vertical Merger

In contrast with Horizontal Merger, Vertical Merger takes
place between two firms that are not in the same sector. To clarify, the two
firms produce different goods or services for a specific completed product. When
merging two companies together it enables the parent company to have whole
production cycle under control. Furthermore, Hassan and Ghauri (2014) mentioned
that the goal behind, is to reduce costs or improve efficiency by merging
synergies/processes under common management and ownership. An instance of this type
of merger would be   

Conglomerate
Merger

Conglomerate mergers occur between two companies with unrelated
offers of products or services. They are both in the different sector of the
business. There are two types of Conglomerate Mergers, pure and mixed.
According to Hassan and Ghauri (2014) Pure ones involve firms with nothing in
common, while mixed conglomerate mergers relate to firms that are looking for
product extensions or market extensions. The deal of Walt Disney Company and
the American Broadcasting Company is the noticeable case for Conglomerate
merger.

     2.1.2    Acquisition

Unlike in Mergers where a process of negotiation is involved
between the two companies. There doesn’t have to be necessarily a negotiation
process In Acquisition. The Acquiring company buys the target company. There
are two possible types of Acquisition: Friendly or Hostile. In Friendly
Acquisition the target company is not against the deal of being acquired. On
the other hand, Hostile takeovers(Acquisitions) happen when the target company
does not consent the deal.

2.2         
Reasons behind M&A

There are numerous reasons why M&A happen. The main
motive of M&A is to increase profitability and strengthen position of the
dominant firm. As reported by Rompotis (2015) ”The dominant rationale behind
the activity of the companies involved in mergers and acquisitions is that
acquiring firms can significantly contribute to the improvement of financial
performance”.

Strategic Goals/Benefits

 

Synergy

Synergy is one of the common reasons for merging. The value
of the merged company is greater than 2 separate companies. The performance of
the firm increases and the fixed costs reduces by removing duplicate departments
or operations.

Eliminate
Competition

It happens when two small companies merge together in order
to stand a chance in the industry.  The
buyer absorbs target company, thus it eliminates further competition and gains
greater market share.

Market power

Managerial

Financial

Taxes

Tax benefits are another reason for merging. A firm with
large taxable income merges with company carrying tax losses. It results in
Acquiring company tax liabilities being lowered. Furthermore, Companies located
in high tax countries acquire a company in area with more favorable taxes.

Diversification

Acquiring companies from unrelated industry is called
Diversification. Diversification allows a firm to reach broader range of
products that can be offered.  The company
acquires another company from different industry that has higher grow prospects
so it can reduce the risk of having invested too much in one particular sector.
 According to DePamphilis(2016) A firm
also may attempt to achieve higher growth rates by acquiring new products with
which it is relatively unfamiliar and then selling them to familiar and less
risky current markets.