4.6 Mergers and Acquisitions

The headline read, “Wanted: More than 2,000 in Google Hiring Spree” (Oreskovic, 2010). 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.

Mergers and Acquisitions

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. An example of a merger is the merging in 2013 of US Airways and American Airlines. The combined company, the largest carrier in the world, flies under the name American Airlines.

Another example of an acquisition is the purchase of Reebok by Adidas for $3.8 billion (Howard, 2005). 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

Acquiring complementary products was the motivation behind Adidas’s acquisition of Reebok. As Adidas CEO Herbert Hainer stated in a conference call, “This is a once-in- a-lifetime opportunity. This is a perfect fit for both companies, because the companies are so complementary…. Adidas is grounded in sports performance with such products as a motorized running shoe and endorsement deals with such superstars as British soccer player David Beckham. Meanwhile, Reebok plays heavily to the melding of sports and entertainment with endorsement deals and products by Nelly, Jay-Z, and 50 Cent. The combination could be deadly to Nike.” Of course, Nike has continued to thrive, but one can’t blame Hainer for his optimism (Howard, 2005).

Attain New Markets or Distribution Channels

Gaining new markets was a significant factor in the 2005 merger of US Airways and America West. US Airways was a major player on the East Coast, the Caribbean, and Europe, while America West was strong in the West. The expectations were that combining the two carriers would create an airline that could reach more markets than either carrier could do on its own (CNN, 2005).

Realize Synergies

The purchase of Pharmacia Corporation (a Swedish pharmaceutical company) by Pfizer (a research-based pharmaceutical company based in the United States) in 2003 created one of the world’s largest drug makers and pharmaceutical companies, by revenue, in every major market around the globe (Frank and Hensey, 2002). The acquisition created an industry giant with more than $48 billion in revenue and a research-and-development budget of more than $7 billion. Each day, almost forty million people around the globe are treated with Pfizer medicines (Pfizer, 2003). Its subsequent $68 billion purchase of rival drug maker Wyeth further increased its presence in the pharmaceutical market (Sorkin and Wilson, 2009).

In pursuing these acquisitions, Pfizer likely identified many synergies: quite simply, a whole that is greater than the sum of its parts. There are many examples of synergies. A merger typically results in a number of redundant positions; the combined company does not likely need two vice-presidents of marketing, two chief financial officers, and so on. Eliminating the redundant positions leads to significant cost savings that would not be realized if the two companies did not merge. Let’s say each of the companies was operating factories at 50% of capacity, and by merging, one factory could be closed and sold. That would also be an example of a synergy. Companies bring different strengths and weaknesses into the merged entity. If the newly-combined company can take advantage of the marketing capabilities of the stronger entity and the distribution capabilities of the other (assuming they are stronger), the new company can realize synergies in both of these functions.

Hostile Takeover

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 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 (CNN, 2000). 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.

Key Takeaways

  • 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.


CNN (2000). “Ben and Jerry’s Scooped Up.” CNN Money. Retrieved from: http://money.cnn.com/2000/04/12/deals/benandjerrys/

CNN (2005). “America West, US Air in Merger Deal.” CNN Money. Retrieved from: http://money.cnn.com/2005/05/19/news/midcaps/airlines/index.htm

Robert Frank and Scott Hensley (2002). “Pfizer to Buy Pharmacia for $60 Billion in Stock.” The Wall Street Journal. Retrieved from: http://www.wsj.com/articles/SB1026684057282753560

Theresa Howard (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

Alexei Oreskovic (2010). “Wanted: More than 2,000 in Google Hiring Spree.” Reuters. Retrieved from: http://www.reuters.com/article/us-google-idUSTRE6AI05820101119

Pfizer (2003). “2003: Pfizer and Pharmacia Merger.” Pfizer.com. Retrieved from: http://www.pfizer.com/about/history/pfizer_pharmacia

Andrew Ross Sorkin and Duff Wilson (2009). “Pfizer Agrees to Pay $68 Billion for Rival Drug Maker Wyeth.” The New York Times. Retrieved from: http://www.nytimes.com/2009/01/26/business/26drug.html?pagewanted=2&_r=0


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Foundations of Business by Manika Avasthi is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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