Mergers and acquisitions (M &
Two companies joining as equal partners.
One company buying another and taking control of it e.g. the purchase of the British chocolate maker,
Cadbury, by the American food company, Kraft.
How to make M & A’s work
1. Compatible cultures
M & A’s won’t be successful, if the employees in each company have different values and attitudes (e.g. one
company is less creative).
2. Leadership and customer satisfaction
The boss of the bigger company must make sure everyone is focused on customer satisfaction, not
just the implementation of the merger or acquisition.
3. Complementary skills and core competencies
Only buy or merge with a company that has the skills and products you need to:
- improve your strengths and competitiveness.
- overcome your weaknesses.
Synergy will be hoped for, where the new business performs better than the two companies
4. Motivate people
- keep and reward the best employees.
- involve them in decisions relating to the merger or acquisition.
- deal with people's problems arising from the merger.
- explain the reasons for any redundancies.
- reassure the remaining employees that they have a great future (particularly those in the company that’s
being taken over).
5. Benefit from economies of scale
M & A’s make an organization bigger, so enabling it to benefit more from economies of
scale (the cost savings of large scale production)- for example:
- Purchasing economies – bigger discounts from bigger purchases.
- Marketing economies – if you sell more, you can spend more on advertising e.g. TV
- Production economies – greater benefits from mass production.
6. Avoid diseconomies of scale
These result in higher costs because the bigger company is more difficult to manage because of problems in
points 1 to 4 above.
The biggest difficulty is likely to be a culture clash when the two companies believe in
different things (see point 1 above).
7. Leveraged buy-outs (LBO’s)
Employees borrow money to buy their company to avoid an unwanted takeover bid.
When managers do this, it’s called a management buy-out (MbO).
Key quotes explained
“Big is beautiful”
A slogan commonly used in the 1960’s to describe the benefits of economies of scale from bigger
It contrasts with the phrase, “Small is beautiful”, coined by Fritz Schumacher.(pictured
“Success is 5% strategy, 95% execution”
Barnevik , ex-boss of the Swedish engineering company,
ABB (pictured right)
Choosing the right company to buy or merge with is much easier than making the merger or acquisition work.
“Strategy must in the long run be responsive to human
Andrews, American business professor
M & A’s don’t work, if employees’ needs aren’t satisfied.
“It’s far better to buy a wonderful company at a fair price than a fair
company at a wonderful price”
Buffett , American share investor (pictured right)
Wise advice on buying a company.
Best books and articles
Bryan Burrough (pictured
right) , Barbarians at the Gate (1990)
Best-seller about the unethical financial dealings surrounding the leveraged buy-out of
Nabisco, the makers of Shredded Wheat. Three rules apply:
(pictured right) , From Competitive Advantage to Corporate
Strategy (1987 Harvard Business Review article)
Diversification is only successful
- the business
being bought is in a profitable and less competitive industry (as indicated by Porter's five forces - see
Satisfying these three tests is so difficult that
most diversification fails.
Diversification is most successful if businesses are successfully
interrelated to achieve a common organizational purpose.