Mergers and acquisitions (M&A) are the different ways companies are combined. The average value of merger and acquisition deals has risen globally for thirty years. By the beginning of 2023, South America had the highest average value of M&A deals. To facilitate these complex transactions, many companies turn to virtual data room providers to ensure secure and efficient management of sensitive documents and communications.
Understanding M&A Terms
The terms mergers and acquisitions terms usually correspond; however, they have slightly different meanings. A merger is usually used to describe the procedure of joining forces to move forward as a single new entity rather than remain separately owned and operated. An acquisition is the process of a company obtaining all or a controlling interest in another company by one of several legal means.
Types of mergers and acquisitions
Beyond core types, there are also market or product extension mergers and numerous acquisitions that are, in some sense, mergers. There are main types of acquisitions based on the relationship between the buyer and seller:
- Horizontal. It occurs when two companies operating in the same market (and selling similar products or services) unite to dominate market share.
- Vertical. It involves two companies in the same industry operating in different stages of production. Vertical mergers are ideal for consolidating operations, increasing efficiencies, and cutting costs across the supply chain.
- Congeneric. In a congeneric merger, the acquirer and target company have different products or services but operate within the same market and sell to the same customers. They are indirect opponents, although their products often complement each other.
- Conglomerate. A conglomerate merger occurs between companies whose business activities and industries may be completely unrelated. In pure conglomerate mergers, the two firms may continue to operate separately within their markets, whereas, in a mixed one, they may look to expand product or market reach.
- Consolidation. It occurs when two or more business entities combine to form brand-new businesses. The main advantage of this type of merger is efficiency.
- Market extension or product extension merger. A market extension merger describes two companies in the same industry who join forces to expand market reach. A product extension merger occurs when a specific product is added to the product line of the acquirer from the acquired company.
- Share or interest acquisition. An interest or share acquisition is when the buyer purchases shares of the target from the owners. It's usually the case that the buyer takes all of the issued shares, giving the acquirer total control of the target company.
eBay and Skype Acquisition Failure
If a merger goes well, the new company's value should be appreciated as investors anticipate synergies to be actualized, creating cost savings or increased revenues for the new entity. However, executives can face large complications after the deal is finished. Different systems and processes, dilution of a company's brand, overestimation of synergies, and a lack of understanding of the target firm's business can all occur, destroying shareholder value and decreasing the company's stock price after the transaction.
The deal's background
Today, M&A insights suggest that the main purpose of any M&A deal is to create synergies between companies that aim to achieve growth that is much faster than natural growth. It always can bring a great amount of risk, which leads to the failure of such a deal and destroys the investor value, says (Gilbert Waters, Co-founder and marketing specialist at data-rooms.org)
The eBay and Skype deal is usually mentioned as a failed acquisition example. It stands as the most well-known case of failed acquisitions in the history of M&A deals. In September 2005, eBay Inc. acquired Skype Technologies for USD 2.6 Billion.
The deal's aims
eBay saw Skype as a means to increase the number of members in eBay's business structure, as Skype has millions of active users. As Skype emerged as a popular means of communication through VOIP, eBay saw this technology as it could bring many new members into its domain and act as a strong method of communication between buyers and sellers.
eBay aimed to integrate Skype into its commerce world to enhance online users' experience as a quick way of communication. Skype was bought for eBay's users as this would help generate more customer loyalty and increase the velocity of the trade among its users.
Reasons for the deal's failure
The primary reason for the failure of the eBay-Skype acquisition was the misalignment of strategic goals. eBay's business focus was e-commerce, while Skype was a communication company. The two companies had different visions, which led to conflicts in the integration process.
eBay's management believed that Skype's technology would facilitate communication between buyers and sellers, leading to increased sales, while Skype's management aim was expanding its services beyond e-commerce.
Then comes the cultural differences between eBay and Skype. eBay was a well-established corporation that operated with a set of clear guidelines and procedures, while Skype was a start-up that had an innovative and flexible work environment. Furthermore, Skype's management team wasn't fully integrated, leading to a lack of coherence among the top-level leadership.
The next reason for the deal's failure was the valuation of Skype. eBay bought Skype for $2.6 billion in 2005, an amount that was considered by many as overpriced. The acquisition was meant to enhance eBay's competitiveness by integrating Skype's technological expertise. Still, Skype's market value was based on its potential rather than its actual financial profit.
Another reason for the failure of the eBay-Skype acquisition was the technical challenges of integration. Skype's technology was incompatible with eBay's systems, leading to operational challenges that restricted integration.
Conclusion
Late mergers and acquisitions news has confirmed that it is essential to create an integration plan and a strategy that can mitigate the risks associated with M&A deals. Before entering into a deal and developing a constructive strategy to integrate the business, various factors should be considered. It is also important to draw conclusions based on examples of failed M&A deals to avoid mistakes in the future.
