Are M&A a good business decision?

In the world of business companies may make the decision to merge with, or acquire another company. A merger is when two companies will come together through a number of negotiated deals, with each company having a 50/50 share of the merged company, whereas an acquisition is when one company acquires more than 50% of the other company.

There are a couple of different types of mergers, these being; vertical, horizontal and conglomerate. In a vertical merger two companies at different stages in their supply chain process will merge in order to gain market power, for example a car manufacturer choosing to acquire a steel company. In a horizontal merger two companies within the same industry will merge due to synergies, for example the two companies would have the ability to combine forces in order to have a greater outcome, as well as this through a horizontal merger due to there being overall growth of the company size, they will able to gain more efficient economies of scale. In a conglomerate merger two companies from completely unrelated industries will merge. There are two different forms of conglomerate mergers, these being; mixed and pure. In a mixed conglomerate merger, companies that have the goal of product or market extensions will merge, whereas in a pure conglomerate merger, companies with absolutely nothing in common will merge, the reasoning behind this could be to increase their customer base.

One example of a company who is on the road to a horizontal acquisition is food delivery/taxi service Uber, who are looking to acquire Deliveroo. Deliveroo’s main investors T Rowe Price and Fidelity are aiming for a partnership or investment from Uber as opposed to a full sale, therefore meaning this could result in a horizontal merger instead of an acquisition. Talk on the supposed acquisition began in September 2018 and still in November 2018 they were nowhere further due to the two companies being unable to come to an agreement on the valuation of Deliveroo, with one source saying that the gap between Uber and Deliveroo’s valuation is so significant that the interest in the acquisition has now cooled. In my personal opinion I think that if Uber does decide to acquire Deliveroo, it’ll be an extremely good business decision and even though Deliveroo are asking for a larger sum than Uber is currently willing to pay, if Uber has the capital to cover it, they should 100% go for it as it will mean that they have a decreased amount of competition. As well as this it also means that Uber can put a larger amount of focus on their delivery service in the US, as they are currently battling market leader GrubHub who have market share of 34% in comparison to Uber Eats who only has a market share of 28%.

Although I’ve already mentioned a few reasons why a company will choose to either merge or acquire, there are a few others. The first of these is Diversification, as if a company decides to merge or acquire, they can diversify by acquiring a company in an unrelated industry, which will then mean the industry that they are acquiring the company from will have a lower impact on their overall profitability. The next reason behind mergers and acquisitions is the elimination of competition as it allows the company that is acquiring to remove future competition from said company, as well as also being able to gain a larger market share, which is exactly what Uber would be doing if they were to acquire Deliveroo. One more reason behind mergers and acquisitions is the prospects of company growth, as one unique feature of an acquisition is the ability to grow their market share without having to actually go through the effort of growing it themselves, for example in 2018 Uber Eats average daily users in just the UK and France alone was over 85,000 and Deliveroo was around 65,000, this then means that if Uber were to acquire Deliveroo they would be gaining more than 65,000 new customers, if you take into account of the other countries that Deliveroo operates in. The last of the reasons behind mergers and acquisitions is the ability to eliminate a certain level of costs, for example in a vertical merger the company could purchase one of their suppliers which would then mean that the cost of having to pay their suppliers would be eliminate therefore meaning they would have an increased level of profit.

However, although there are all of these benefits to mergers and acquisitions there are a few aspects that make the process difficult and could mean that a company is less likely to go ahead. For example, there are number of regulatory bodies to make sure that everything done during a merger or acquisition is above board. One regulatory body that I learnt about during a university lecture, that applies to the case of Uber Eats and Deliveroo is the Competition and Markets authority (CMA), who have the power to decide on whether or not a merger or acquisition will go ahead. The CMA applies to the case of Uber Eats and Deliveroo, as in the food delivery market they are considered to be direct competitors and if a merger or acquisition was to go ahead it could result in a market monopoly, which is illegal. As a result of this the CMA could make the decision to stop the merger or acquisition, as if a monopoly occurred Uber Eats would have the ability to charge whatever prices they want, therefore with the CMA having the consumers full interests at heart they would stop the merger/acquisition in its tracks to ensure there isn’t any absence of competition. Because of this I think that before anything is fully set in motion, Uber Eats will have to do thorough research on what is allowed and what isn’t to prevent any money and time wasted on a merger/acquisition that may be unable to go ahead.