Track how quickly you can match some of the more recent, larger mergers or major corporations.
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The headline read, “Wanted: More than 2,000 in Google hiring spree”. The largest Web search engine in the world was disclosing its plans to grow internally and increase its workforce by more than 2,000 people, with half of the hires coming from the United States and the other half coming from other countries. The added employees will help the company expand into new markets and battle for global talent in the competitive Internet information providers industry. When properly executed, internal growth benefits the firm.
An alternative approach to growth is to merge with or acquire another company. The rationale behind growth through merger or acquisition is that 1 + 1 = 3: the combined company is more valuable than the sum of the two separate companies. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost efficient by combining with other companies.
Though they are often used as if they’re synonymous, the terms merger and acquisition mean slightly different things. A merger occurs when two companies combine to form a new company. An acquisition is the purchase of one company by another.
The Canadian Landscape
In June 2013, Shoppers Drug Mart, Canada’s biggest pharmacy chain merged with Loblaw, Canada’s largest grocery retailer, in a 12.4 billion dollar deal. Rather than cutting into each other’s market share, the deal allows the two companies to play on each other’s strengths. Shoppers has about $1 billion in food sales annually, versus Loblaw’s $30 billion. But Loblaw’s share of the pharmacy market is only five per cent, so adding Shoppers health products and services to Loblaw grocery stores allows the food retailer to expand its services in what it sees as a growing sector: health, wellness and nutrition. Contrast this merger with an acquisition in that same year. Sobey’s acquired 200 Safeway stores in Western Canada under a 5.8 billion dollar deal. According to news reports, along with 213 Safeway grocery stores — more than 60 percent of which are in Calgary, Vancouver, Edmonton and Winnipeg — Sobeys will also acquire:
- 199 in-store pharmacies;
- 62 gas stations;
- 10 liquor stores;
- 4 primary distribution centres and a related wholesale business; and
- 12 manufacturing facilities.
Sobeys will also get $1.8 billion worth of real estate in the deal.
Another example of an acquisition is the purchase of Reebok by Adidas for $3.8 billion. The deal was expected to give Adidas a stronger presence in North America and help the company compete with rival Nike. Once this acquisition was completed, Reebok as a company ceased to exist, though Adidas still sells shoes under the Reebok brand.
Motives Behind Mergers and Acquisitions
Companies are motivated to merge or acquire other companies for a number of reasons, including the following.
Gain Complementary Products
- Shoppers Drug Mart began to sell President’s Choice products in its merger with Loblaw.
- Loblaw is able to add Shoppers health care products to its shelves.
- Sobey’s gains Safeway’s gas stations and liquors stores in its acquisition.
Attain New Markets or Distribution Channels
- Sobey’s acquired access to 12 manufacturing facilities, 4 distribution centres, and a related wholesale business.
- Loblaw increases access to urban centres where Shoppers are already located, bringing a wider variety of products to customers in densely populated areas.
- Integration of the companies’ loyalty programs will provide the two with a vast knowledge base of consumers’ buying habits and provide economies of scale — which, the companies estimate, will translate into savings of about $300 million annually.
- Loblaw’s share of the pharmacy market is only five per cent so adding Shoppers health products and services to its grocery stores will allow the food retailer to expand its services in what it sees as a growing sector: health, wellness and nutrition.
The Less-Friendly Option
Hostile Takeovers: Ben and Jerry’s
What happens, though, if one company wants to acquire another company, but that company doesn’t want to be acquired? The outcome could be a hostile takeover—an act of assuming control that’s resisted by the targeted company’s management and its board of directors. Ben Cohen and Jerry Greenfield, the Ice Cream Men from above, found themselves in one of these situations: Unilever—a very large Dutch/British company that owns three ice cream brands—wanted to buy Ben & Jerry’s, against the founders’ wishes. Most of the Ben & Jerry’s stockholders sided with Unilever. They had little confidence in the ability of Ben Cohen and Jerry Greenfield to continue managing the company and were frustrated with the firm’s social-mission focus. The stockholders liked Unilever’s offer to buy their Ben & Jerry’s stock at almost twice its current market price and wanted to take their profits. In the end, Unilever won; Ben & Jerry’s was acquired by Unilever in a hostile takeover.
Despite fears that the company’s social mission would end, it didn’t happen. Though neither Ben Cohen nor Jerry Greenfield are involved in the current management of the company, they have returned to their social activism roots and are heavily involved in numerous social initiatives sponsored by the company.
Solidifying the Vocabulary
Use this quick activity to ensure you understand the vocabulary related to mergers and acquisitions.
- A sole proprietorship is a business owned by only one person.
- Advantages include: complete control for the owner, easy and inexpensive to form, and owner gets to keep all of the profits.
- Disadvantages include: unlimited liability for the owner, complete responsibility for talent and financing, and business dissolves if the owner dies.
- A general partnership is a business owned jointly by two or more people.
- Advantages include: more resources and talents come with an increase in partners, and the business can continue even after the death of a partner.
- Disadvantages include: partnership disputes, unlimited liability, and shared profits.
- A limited partnership has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.
- A corporation is a legal entity that’s separate from the parties who own it, the shareholders who invest by buying shares of stock. Corporations are governed by a Board of Directors, elected by the shareholders.
- Advantages include: limited liability, easier access to financing, and unlimited life for the corporation.
- Disadvantages include: the agency problem, double taxation, and incorporation expenses and regulations.
- A limited liability company (LLC) is similar to an C-corporation, but it has fewer rules and restrictions than an C-corporation. For example, an LLC can have any number of members.
- A cooperative is a business owned and controlled by those who use its services. Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members.
- A not-for-profit corporation is an organization formed to serve some public purpose rather than for financial gain. It enjoys favorable tax treatment.
- A merger occurs when two companies combine to form a new company.
- An acquisition is the purchase of one company by another with no new company being formed. A hostile takeover occurs when a company is purchased even though the company’s management and Board of Directors do not want to be acquired.
- Oreskovic, A. (2010). Wanted: More than 2,000 in Google Hiring Spree. Reuters. Retrieved from: http://www.reuters.com/article/us-google-idUSTRE6AI05820101119 ↵
- The Canadian Press & Patel, N.(2013, July 15). Loblaw to buy Shoppers Drug Mart for $12.4B. CBC News. https://www.cbc.ca/news/business/loblaw-to-buy-shoppers-drug-mart-for-12-4b-1.1342108 ↵
- CBC News. ( 2013, June 13). Sobeys to acquire Canada Safeway stores for $5.8B. https://www.cbc.ca/news/business/sobeys-to-acquire-canada-safeway-stores-for-5-8b-1.1302212 ↵
- Howard, T. (2005). Adidas, Reebok Lace up for a Run Against Nike. USAToday. Retrieved from: http://usatoday30.usatoday.com/money/industries/manufacturing/2005-08-02-adidas-usat_x.htm ↵
- CNN. (2000). Ben and Jerry’s Scooped Up. CNN Money. Retrieved from: http://money.cnn.com/2000/04/12/deals/benandjerrys/ ↵