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Over the last two years there has been a phenomenal number of acquisitions and mergers among U.S. companies. Just think about it, each week we hear about multibillion dollar mergers, and how teaming-up may impact various industries.
The purpose of this article is to help us understand the various ways that businesses can bond together, whether through acquisition, merger, consolidation, or joint venture. Did you know there's a difference between the terms above? There is a big difference, but the media tends to use the terms interchangeably.
Acquisitions
Acquisitions occur when one company buys another. The dominant company now owns the passive company as an asset (or liability). The company that is bought is now "subsidiary" of the acquiring company. For example, CKE Restaurants acquired the Hardee's burger chain. CKE hasn't changed, and Hardee's is still Hardee's. The only difference is that CKE now owns the whole chain of Hardee's.
Company A + Company B = Company A Owns Company B
Mergers
Mergers occur when one or more companies are absorbed by another. The acquired company no longer exists, while the buying company remains the same. Let's take a theoretical example. Taco Town Foods has 750 taco stores, and they merge with Taco Place which has 150 stores. Taco Town absorbs Taco Place, so Taco Town now has 900 stores. All the Taco Places are turned into Taco Towns.
Company A + Company B = Bigger Company A
Consolidations
Consolidations are a complete fusion of two or more companies to form one entirely new entity. The two old companies no longer exist because their corporate structure is dissolved, while one new corporate structure is formed. A good example is that of Daimler Chrysler. Once upon a time there was Daimler Benz and Chrysler. Then they consolidated to become one new company--Daimler Chrysler. Again, neither Daimler Benz or Chrysler exist any longer.
Company A + Company B = New Company C
Joint Ventures
Joint ventures are essentially two or more entities teaming up to work on a particular project. They're an undertaking that may be as simple as selling a single lot of goods, or they may entail the execution of a complex project. In joint ventures there is typically no ownership transfer, but participating companies may contribute resources (i.e. cash) to get the project rolling. Take the example of BuckInvestor and Amazon.com. The Buck has a Joint venture with Amazon.com to provide books for our users.
When any Buck Investor buys a book from this web site, they are actually buying from Amazon. Amazon gives us a small percentage of the sale price, allowing both the Buck and Amazon to generate revenue...which helps us stay in business.
Company A + Company B = Initiative X
Hostile Takeovers
Hostile takeovers exist when one company acquires another company without the passive company's consent. The prime example is when Allied Signal attempted to buy a 13% stake in AMP. AMP didn't want to be bought, so the two companies slugged it out. Allied Signal offered AMP shareholders $44.50 per share, and AMP defended itself by offering its own shareholders a higher price of $55 cash per share. AMP was able to hold Allied Signal off with the help of strict Pennsylvania acquisition laws, but smaller companies are not always able to fend off bigger scavengers.
So why do these companies bond together? Ultimately, in business' simplest form it is to make money and increase stock price. That's the purpose of business and the objective of management. Merging companies may say they're doing it "to gain market share" or "because they have a strategic fit," but the bottom line is that they're doing it to make money and increase shareholder value.
Click here to see an extensive list of reasons for mergers and acquisitions.
There are actually thousands of mergers each year, but we only hear about a few of them. Those we do see on the news are publicly traded bellweather companies--the big ones that generate lots of media coverage. The fact is that many small, publicly traded and private companies are merging every day.
(CKE) + (Hardee's) = (CKE Owns Hardee's)
(Taco Town) + (Taco Place) = (Bigger Taco Town)
(Daimler Benz) + (Chrysler) = (Daimler Chrysler)
(BuckInvestor.com) + (Amazon.com) = Book Sales
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