Read and translate the text “Mergers and acquisitions”. Value creation and synergy   The purpose of any commercial company is to create value for its shareholders.

 Read and translate the text “Mergers and acquisitions”.

Value creation and synergy  

The purpose of any commercial company is to create value for its shareholders. For example, when two powerful insurance companies Norwich Union and CGU merged, they re-branded, adopting the name Aviva plc and the slogan: 'One Aviva, twice the value'. This added value, the difference between the value of the combined company and the sum of the original values of the stand-alone companies, is known as synergy. The main aim of mergers and acquisitions (M&As) is to add shareholder value through synergies which are measurable in terms of cost savings or revenue generation.

In mergers, two companies create a new entity and issue new stock to their shareholders, whereas in an acquisition one company ceases to exist and is integrated into the acquiring company or held as a subsidiary. There are various ways for companies to combine. Competitors in a market where there is overcapacity can create synergy through horizontal integration. This allows economies of scale, such as larger orders to suppliers, and cost cutting, such as closing plants. Companies may also cooperate through joint ventures and strategic alliances, agreements that do not require a change in ownership.

Companies with an existing business relationship, such as suppliers and producers, can increase value through vertical integration: for example, a car manufacturer buying a component firm or a chain of car showrooms. In market-extension mergers, companies selling the same products in different markets can merge to access more consumers, while those with related products in the same market can join in product-extension mergers. In conglomeration, companies with no common business area form a diversified group to reduce risk. 

Merger waves are periods of increased acquisition activity, often associated with a boom in the value of the stock market in a country or business sector. The recent wave of crossborder M&As may be part of a strategy for overseas market penetration, such as UK-based Vodafone's takeover of Ghana Telecom.

Implementing M&As and post-merger integration

M&As have economic effects, so many countries have competition or anti-trust laws to prevent a small number of companies from dominating the market and engaging in anti-competitive practices. Managers and their professional advisors must exercise due diligence, investigating all the risks and legal issues involved. They will check the financial health and prospects of the target business to be able to value it. In an acquisition, the buyer will usually pay a premium above the market value of the company in order to gain control representing some of the potential synergies from the deal. 

After a merger or acquisition, company operations and practices need to be re-structured.  Post-merger integration concerns not only practical aspects like pricing strategies and integrating IT systems but also retention of key people. In the knowledge economy, the 'return on talent' is an important part of value creation. Effective post-merger strategies aim for an outcome where the 'best of both' is represented, or a transformational approach, in which the two merging companies change into something much stronger than either of them had been before — the 'best of both plus'.