Is M&A, i.e. mergers and acquisitions beneficial for brands? The acquiring firms often fail to evaluate the brand value of the firms being acquired. This happens because they focus more on the financial metrics than the brand metrics. The brand value of a target firm can be assessed through its customer satisfaction, which is vital in ROI and pursuit of growth. “A brand empowers a business to translate the strong financial and strategic rationale of the transaction into a value proposition for employees and customers.”
Are mergers and acquisitions always successful? Do two companies, successful on their own, continue to bring value to their clients after becoming a single entity? Isn’t it too risky to place all eggs in the same basket?
When two companies unite, and one of the companies ceases to exist after becoming absorbed by the other, it is called a merger. Whereas, when a majority stake is obtained in the target firm by a company, it is called an acquisition. Here, the target firm retains its name and legal structure. The bigger the deal, the greater are the risks that the buyer is overpaying for the company. However, on the brighter side, this risk also has chances that the company will create a new impetus in its industry.
The aim of M&A can be to increase market share, expand geographical reach, reduce competition, influence supply chains, diversify service and product offerings and gain competitive advantages. An acquisition of assets can occur only with the approval of the shareholders of the target company. M&A can often be affected by the political scenario of a country, as laws affect foreign investment. There has also been an increase in competition due to the rise of the e-commerce industry, which has led to a higher number of M&A.
Flipkart’s acquisition of Myntra is said to be a “win-win for both.” Flipkart was able to venture into the fashion space after this acquisition, and acquiring the fashion market leader was a cost-efficient move for Flipkart, rather than building its own fashion industry. Myntra was in a “cash burn phase” then and its market share jumped from 30% to 50% after the acquisition. However, even after the acquisition, the party’s existence remained unaffected and they continue to operate independently.
In order to make an appearance in the new market, large companies usually tend to take over small companies. Here, reluctant small companies sometimes tend to use tactics which make them look less attractive to the potential hostile acquirer. This is known as Poison Pill. In 2012, days after investor Carl Icahn acquired a 10% stake of Netflix, it announced a new plan which stipulated that “with any new acquisition of 10% or more, any Netflix merger, sales, or transfer of more than 50% of assets, allows for existing shareholders to purchase two shares for the price of one.”
M&A can often prove to be a disaster, as in the case of HDFC and Max Life, Flipkart and Snapdeal, and many more. The reasons behind this failure can be a country’s poor economy: as in Airtel’s acquisition of Zain, a Kuwait based telecom company’s assets; taxation and structuring issues, work culture differences, opposition by stakeholders, disappointment among employees, no consensus among founders, etc.