Mergers and Acquisitions stand for a series of well-known terms such as “Joint Venture”, “In- Outsourcing”, “Cooperation”, “Fusion”, “Acquisition” and similar. Companies hope to grow successfully not only internally but also organically through these transactions. Consequently, the question arises as to what is the decisive reason for mergers acquisitions for companies and investors. These reasons for M transactions can be traced back to five essential opportunities.

1. A first opportunity that presents itself to companies is the gain of know-how. This includes both the expansion of existing and the development of new patents and products, as well as the mastery of new technologies and processes.

In 2016, the company Kuka was acquired by the Midea Group for €4.5 billion. Kuka is a German robot manufacturer and thus active in automation. The Midea Group, on the other hand, is a Chinese manufacturer of household appliances. Midea CEO Fang sees the potential for his company in conquering a new market, as the Chinese market for household appliances offers only limited growth opportunities. The reason for acquiring a robot manufacturer lies in the lack of automation solutions and the resulting high labor costs in China. With automated solutions, the company wants to gain a foothold not only in the automotive industry with its new business segment. Other sectors such as logistics, hospitals, and elderly care are also in focus. The synergies for the parties involved consist, on the one hand, of the knowledge of consumer needs from the Midea Group, and on the other hand, of the understanding of the industrial business and technical implementation from Kuka.

2. The second opportunity for companies lies in restructuring. This means that low-revenue or low-profit departments or divisions are spun off.

In 2012, Volkswagen acquired Porsche’s automotive business for €4.5 billion. In addition, VW transferred one share to Porsche SE. Thus, this transaction could be reported as a restructuring measure, and the sports car manufacturer could pay off its debts from the plan to take over the VW Group. Although this trick was legal, the manner of the merger was controversial, as VW was able to avoid a billion-euro tax burden of €1.5 billion. Due to this merger, however, the car manufacturers are now saving a lot of money. Around €700 million can be saved annually through the merger. The advantages are obvious. In addition to cost savings, the companies can, among other things, improve their products and services as well as rationalize business processes, e.g., in production. The respective brand image is maintained and can be used to increase profitability.

3. The third opportunity is seen in the rationalization potential. This means that duplicate work can be saved, high costs for research and development can be avoided, or better conditions can be negotiated with suppliers. In this case, the so-called economies of scale are utilized.

In 2006, the telephone giant ATT took over BellSouth for €65 billion. This deal was the largest in the American telecommunications industry. The takeover was intended to eliminate 10,000 jobs. Thus, unnecessary costs for duplicate work were saved and competitiveness was strengthened. Approximately 40% of the total savings potential of $18 billion was attributed to job cuts. At the same time, revenue and profit could be increased. Already in 2007, in the third quarter, revenue could be increased by 92.7% to $30.1 billion. The quarterly profit in the same period rose by 41.5% to $3.1 billion. The takeover also helped ATT make a significant leap in new customer acquisition. ATT recorded about two million more users shortly after the takeover.

4. The fourth opportunity lies in the expansion of the product portfolio. A more comprehensive offer can be made to customers, allowing companies to appear on the market as full-service providers.

In September 2018, the US cable network operator Comcast acquired the British television channel Sky. The value of this transaction amounted to approximately €33 billion. Comcast’s goal is to remain competitive against Netflix in the era of streaming and thus expand its product portfolio. Sky, as a provider of live sports and movies, complements Comcast’s offerings appropriately.

5. As a last resort, companies have the option of reducing competition by eliminating competitors through acquisition. However, this requires the approval of the antitrust authority.

In 2018, Germany’s most important software company SAP acquired Qualtrics for €8 billion. Qualtrics is considered a pioneer in the software field of so-called Experience Management. This focuses on collecting experience data in the four business areas of customer, employee, product, and brand. The goal is to assess companies and their future viability in the experience economy. The IT company has thus succeeded in gaining specific know-how from a direct competitor while simultaneously minimizing competitive pressure.

Despite the high volume of MA transactions, many corporate mergers fail, as demonstrated by the reversed merger of AOL and Time Warner. Particularly the overestimation of synergies can negatively impact MA scenarios and thus the involved business partners. Conducting thorough baselining and detailed due diligence can contribute to ensuring that the transaction is successful for both buyers and sellers.

Conclusion

To keep pace with advancing information technologies, companies must adopt, adapt, and ultimately implement the developments and requirements of digitalization. For this reason, a large number of traditional industrial companies are already investing in IT companies to secure and continuously expand their competitiveness. In summary, the topics of digitalization, integration, and miniaturization in the context of Industry 4.0 already represent another important reason for MA transactions today, which will gain even more significance in the future.