• Understand what mergers and acquisitions are
• Understand why businesses merge and acquire other businesses

Integration Strategies

When businesses acquire other businesses or operations that were previously competitors, suppliers, buyers, or sellers, they are engaging in a strategy known as integration. This strategy is based on the possibility of synergy, the idea that the sum of two entities will be greater than their individual parts. Integration can be accomplished in two primary ways: through mergers or acquisitions.

Mergers

A merger is the consolidation of two companies that, prior to the merger, were operating as independent entities. A merger usually creates one larger company, and one of the original companies ceases to exist. Mergers can be either horizontal or vertical.

Horizontal Merger

A horizontal merger occurs between companies in the same industry. This type of merger is essentially a consolidation of two or more businesses that operate in the same market space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, since competition tends to be higher, and the synergies and potential market-share gains are much greater in those industries.

Facebook + Instagram = Horizontal Merger

When Facebook acquired Instagram in 2012 for a reported $1 billion, Facebook was looking to strengthen its position in the social media and social-sharing space. Both Facebook and Instagram operated in the same industry and were in similar positions with regard to their photo-sharing services. Facebook clearly saw Instagram as an opportunity to grow its market share, increase its product line, reduce competition, and access new markets.

Vertical Merger

A vertical merger is characterized by the merger of two organizations that have a buyer-seller relationship, or, more generally, two or more firms that are operating at different levels within an industry’s supply chain. Most often, the logic behind the merger is to increase synergies by merging firms that would be more efficient operating as one.

Apple: The King of Vertical Integration

Apple Inc. is famous for perfecting the art of vertical integration. The company manufactures its custom A-series chips for its iPhones and iPads. It also manufactures its custom touch ID fingerprint sensor. Apple opened up a laboratory in Taiwan for the development of LCD and OLED screen technologies in 2015. It also paid $18.2 million for a 70,000-square-foot manufacturing facility in North San Jose in 2015. These investments (i.e., mergers) enable Apple to move along the supply chain in a backward integration, giving it flexibility and freedom in its manufacturing capabilities.^[1]

Acquisitions

An acquisition, on the other hand, occurs when a company purchases the assets of another business (such as stock, property, plants, equipment) and usually permits the acquired company to continue operating as it did prior to the acquisition. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity.

Microsoft + Activision Blizzard?

In January 2022, Microsoft announced its intent to acquire the world’s largest video game maker, Activision Blizzard, for $69 billion. Activision’s games include Warcraft, Diablo, Call of Duty, Overwatch, and Candy Crush. This move would add more users and revenue to Microsoft’s subscription and cloud gaming offerings.^[2] However, the Federal Trade Commission, the regulatory agency that serves as a watchdog for anticompetitive behavior, tried to block the acquisition. The FTC’s reasoning was that Microsoft would have so much market power that competitors who manufacture gaming consoles and offer competing subscription services would be harmed.^[3]

Microsoft finalized the deal in 2023. Despite efforts by the FTC, ultimately a federal appeals court decided the FTC was unlikely to be able to show that the acquisition would restrict competition.^[4]

 

---