Jeffrey Cohen Evaluates the Trends in Mergers and Acquisitions

Mergers and acquisitions are an important aspect of doing business in today’s competitive environment. All businesses should understand the principles behind mergers and acquisitions as this may help evaluate the role of local businesses in the larger business landscape.

Through mergers and acquisitions, companies can position themselves more aggressively toward competition, increase their cash flow and holdings, and gain advantages over other companies. Jeffrey Cohen of the Cohen Management Group explains mergers and acquisitions and lays out the most important factors driving them.

Mergers

A merger is when two companies become one. One of these companies ceases to exist, with the structure of the company completely absorbed by the purchasing firm. In this case, the boards of directors must agree to the merger and gain approval from their shareholders.

Acquisitions

Acquisitions happen when a company buys a majority stake in another firm. The target firm retains its integrity and legal structure but operates as a subsidiary of the purchaser.

Consolidations

A consolidation takes two separate companies and merges them into one new entity, where stockholders approve of the consolidation and each receives common shares in the new company.

Factors Driving Mergers and Acquisitions

One of the major factors driving mergers and acquisitions is the desire to combine business activities. This can reduce the duplication of efforts and make the resulting company more efficient. When companies are merged or acquired, they tend to become more efficient and cost-effective. This allows both companies to leverage the other’s strengths.

Another major reason to acquire or merge with a company is to produce growth. When a company buys out a competitor, they gain access to their competitor’s customers, supply chain, and infrastructure. This enables them to gain market share without a major effort. This is most often present in a horizontal merger, where, for example, a large candy company may buy a small company, enabling the small company to reach more customers.

Supply-chain considerations are another important factor in driving mergers and acquisitions. By purchasing a supplier or distributor can cut down on costs. Buying out a supplier is known as a vertical merger. This allows the company to receive raw materials without the markup previously charged by the supplier. Another type of vertical merger, purchasing a distributor or customer, gives the company an advantage of being able to ship products at a lower cost. This model plays off the concept of “economies of scale.”

The elimination of competition is one of the strongest reasons for mergers and acquisitions. Many deals allow the acquiring company to take care of their competition while gaining access to the purchased company’s market share. This can be a more difficult deal to negotiate since the selling company often requires a premium to encourage the shareholders to accept.

Examples of Mergers and Acquisitions

Amazon and Whole Foods

One of the most well-known mergers and acquisitions in recent years is the 2017 acquisition of Whole Foods by Amazon. Whole Foods retained its corporate structure and kept all of its stores open, but Amazon took over in a supervisory capacity. It also folded Whole Foods into its delivery and supply chain. This acquisition has benefited both companies.

Whole Foods had been struggling in same-store profits and price competition with growing chains. Amazon provided a much-needed cash infusion while providing the loyalty program standard that Whole Foods had been lacking. Amazon also began offering same-day delivery of Whole Foods’ groceries. Amazon was able to create beneficial synergy with its Prime program, enabling Prime members to receive special discounts at Whole Foods.

Chevron and Anadarko Petroleum

Another major acquisition was the purchase of Anadarko Petroleum by Chevron in 2019. This $47.5 billion transaction allowed Chevron to buy all of the outstanding shares of the company. The shareholders agreed to a 37% premium over the stock closing price.

Chevron, the second-largest US energy company, receives the competitive advantage of Anadarko’s holdings in US shale oil and gas. Since the sector has become fragmented, many analysts believe that more acquisitions may be forthcoming among energy companies.

T-Mobile and Sprint

T-Mobile has been attempting to buy Sprint, but their efforts toward an acquisition have been stymied by regulators who believe this would violate anti-trust laws. This merger would create a $26.5 billion company. The Federal Communication Commission and the Department of Justice have already approved the merger, but the attorneys general of several states, including Massachusetts’ Maura Healey, are holding it up.

Understanding Mergers and Acquisitions

All business owners should understand mergers and acquisitions. Learning about mergers and acquisitions will allow business owners to understand whether acquiring another company, or being acquired themselves, would result in greater business reach and better profit margins.

When companies merge, they can frequently expect to receive many advantages. Not all mergers work out, as the example of T-Mobile and Sprint shows. Jeffrey Cohen encourages all companies to keep a close eye on this sector of the economy.