- Most businesses have growth as one of their main objectives
- Growth allows businesses to be more profitable, and influential, have a larger market share and be better able to survive and fend off their competitors
- There are several ways in which a business can grow.
- Two popular related ways for a business to grow are through a merger or through a takeover
- These two methods are related as we will discuss below but they do also have differences
Merger
- A merger is a type of business combination in which two companies combine to form a new single entity.
- Mergers can be friendly or hostile. Friendly mergers are agreed upon by both companies, while hostile mergers occur when the target company resists the merger.
- Mergers can be horizontal, vertical, or conglomerate. Horizontal mergers involve companies in the same industry, vertical mergers involve companies in different stages of the supply chain, and conglomerate mergers involve companies in unrelated industries.
- We will expand on these concepts below so you will get a good idea of what the difference between each of these methods is
- Mergers can be financed through cash, share or as is more usual by a combination of both cash and share stocks.
- A cash merger involves the acquiring company paying cash to the target company’s shareholders,
- While share stock mergers involve the acquiring company issuing shares of its own stock to the target company’s shareholders.
- Mergers can result in cost savings and increased efficiencies through economies of scale and synergies.
- Mergers can also result in cultural and operational challenges, as the two companies must combine their processes, systems, and cultures.
- Mergers can lead to increased market power and increased monopolistic power.
- This sometimes leads to some proposed mergers being rejected by the government.
- For example, if NetOne and Econet were to try to merge, the government would probably not approve such as merger as the two are the only players in the telecommunications industry.
- Before we look at horizontal, vertical and conglomerate mergers/takeovers we need to look at what a takeover is
Takeover
- A takeover is a type of business combination in which one company acquires another company.
- Takeovers can be friendly or hostile.
- Friendly takeovers occur with the agreement of both companies, while hostile takeovers occur when the target company resists the acquisition.
- Takeovers can be financed through cash, stock, or a combination of both.
- Cash takeovers involve the acquiring company paying cash to the target company’s shareholders, while stock takeovers involve the acquiring company issuing shares of its own stock to the target company’s shareholders.
- Takeovers can result in increased market share and competitiveness for the acquiring company, as well as potential cost savings and synergies through the integration of operations and resources.
- Takeovers can also result in cultural and operational challenges, as the acquiring company must integrate the target company’s processes, systems, and culture.
- Takeovers can lead to potential antitrust concerns if they result in reduced competition in the market.
- In Zimbabwe, takeovers may be subject to regulation by the Securities and Exchange Commission of Zimbabwe (SECZ) and the Competition and Tariff Commission (CTC), which oversees mergers and acquisitions in the country.
- Now it is time to discuss the minor differences between takeovers and mergers
Similarities and differences between mergers and takeovers
- Both mergers and takeovers are types of business combinations in which one or more companies combine with another company.
- Both mergers and takeovers can result in cost savings and increased efficiencies through economies of scale and synergies.
- Both mergers and takeovers can result in cultural and operational challenges, as the companies must integrate their processes, systems, and cultures.
- In a merger, two companies combine to form a new entity, while in a takeover, one company acquires another company.
- To illustrate what a merger is let us look at two historical examples:
- Standard Bank of India merged with Chartered Bank in 1969 to form a whole new entity called Standard Chartered today. Notice how the new entity uses a combination of the two names?
- Another example is when Exxon and Mobil two petroleum giants merged to form Exxon Mobil again notice how the two old companies essentially cease to exist and a new entity replaces them.
- Now let us contrast this with a takeover by using two examples involving Google (now known as Alphabet)
- Google took over Android for about US$50 million back in 2005. The Android brand continues to exist but it is a wholly owned subsidiary of Google
- Google also took over YouTube the following year. Again YouTube is now a subsidiary of Google.
- A subsidiary is a company/business that is wholly controlled and operated by a parent company
- Both mergers can be friendly or hostile, while takeovers can be friendly or hostile as well.
- In a merger, both companies’ stocks are typically exchanged for stock in the new entity, while in a takeover, the acquiring company may pay cash or issue stock to the target company’s shareholders.
- Mergers are generally subject to more regulatory scrutiny than takeovers.
- Mergers are often seen as a more collaborative and equal partnership between companies, while takeovers are often viewed as a more aggressive form of acquisition.
- Even though some texts and courses try to lump up mergers and takeovers as the same thing, it is important that you understand that these two are different
- In a merger, two entities combine to form one new larger entity and some roles are combined or even eliminated
- In a takeover, a much larger entity like Facebook swallows up a smaller entity like WhatsApp.
- Now as we promised we will discuss the fact that both mergers and takeovers can be classified as horizontal, vertical (forward/backward) or conglomerates
Horizontal takeover/merger
- Horizontal integration is a growth strategy where a company acquires or merges with another company that operates in the same industry and at the same stage of production.
- This strategy can be popular in Zimbabwe due to the relatively small size of the economy and the limited number of competitors in certain industries.
- For example, several mergers and acquisitions have occurred in the banking sector in recent years, leading to a consolidation of the market and increased market share for the larger banks.
- However, horizontal integration may also be subject to regulatory scrutiny by the Reserve Bank of Zimbabwe (RBZ) and the Competition and Tariff Commission (CTC).
Vertical Integration
- Vertical integration is a growth strategy where a company acquires or merges with another company that operates in a different stage of the production process.
- Backward integration occurs when a company acquires or merges with a supplier, while forward integration occurs when a company acquires or merges with a distributor or retailer.
- This strategy can be particularly important for companies operating in Zimbabwe due to challenges in the supply chain and distribution channels.
- For example, a food processing company may choose to acquire a farm to secure a stable source of raw materials, or a retail company may choose to acquire a logistics company to improve delivery times and reduce costs.
- However, vertical integration can also be challenging in Zimbabwe due to limited infrastructure and high costs of transportation and logistics.
- Delta Corporation is a well-known beverage making company in zimbabwe
- Delta Corporation has implemented vertical integration.
- They control key suppliers in their value chain, such as maize and barley farmers, and packaging and distribution companies.
- They own and operate their own distribution networks, such as depots and delivery trucks.
- This helps them to achieve greater efficiency, reduce costs, and improve their supply chain management.
- It allows them to maintain their position as a leading player in the Zimbabwean beverage market.
- There are two forms of vertical integration: backwards and forward integration
Backward Integration
- Backward integration is a growth strategy where a company acquires or merges with a supplier.
- This strategy can be particularly important for companies in Zimbabwe that rely on imports for raw materials or inputs.
- For example, a furniture manufacturing company may choose to acquire a timber company to secure a stable source of wood, or a pharmaceutical company may choose to acquire a chemical company to secure a stable source of active ingredients.
- However, backward integration can also be challenging in Zimbabwe due to the limited domestic supply of certain inputs and raw materials.
Forward Integration
- Forward integration is a growth strategy where a company acquires or merges with a distributor or retailer.
- This strategy can be particularly important for companies in Zimbabwe that rely on a strong distribution network.
- For example, a beverage company may choose to acquire a retail chain to improve its market access and distribution capabilities, or a telecommunications company may choose to acquire a mobile payments company to improve its digital offerings.
- However, forward integration can also be challenging in Zimbabwe due to limited infrastructure and high costs of distribution and logistics.
See our post on the advantages and disadvantages of mergers and takeovers
