Merger and Acquisition (M&a) Activity.

¶ … merger and acquisition (M&a) activity. Among them are horizontal mergers, vertical mergers, conglomerations, spinoffs and carve-outs (McClure, 2010). The first three can be either a merger or an acquisition. Although the two terms of used simultaneously, they are slightly different. A merger is generally considered to be when two firms of roughly the same size and stature come together. An acquisition implies that one firm is being subsumed into the other.

With some transactions, the decision as to whether it is a merger or an acquisition is based as much on political considerations as it is on the relative size of the component companies. A horizontal merger is when a company absorbs a competitor. These firms would typically produce similar products and compete in similar markets. Occasionally, horizontal mergers take place among firms with similar products that rarely compete directly, but rather operate in complementary markets. One example from several years ago would be the Renault-Nissan alliance.

A vertical merger is when a company absorbs one of its suppliers. Vertical integration is often conducted in order to give a company better control of its supply chains. Typically, these firms will have already had a business arrangement in past. A conglomeration merger is when the two firms do not operate in the same markets and do not have a supplier-client relationship. There is no evidence of a relationship between the firms -- management of the purchasing firm is more likely motivated by diversification opportunities than strategic synergies.

A spinoff occurs when a company sells one of its divisions. This can occur in a private sale transaction, or it could also occur if a company launches an IPO for the subsidiary. When Marriott calved off its HMS Host subsidiary in the 1990s, this was an example of a spinoff. A carve-out is similar, but in the case of a carve-out, the parent company only sells a minority stake in the subsidiary. They retain ownership, perhaps even management, while earning some income from the sale.

In the past three years, one example of a horizontal merger was the combination of Anheuser-Busch with InBev. Both companies were among the top four brewing companies in the world at the time, and the merger created the number one brewer. In this situation, the predominant issues driving the merger activity were the ongoing trend towards consolidation in the industry, which brings about synergies in marketing, distribution and production.

The two companies also had somewhat complementary geographic spread, with a-B holding strong positions in the world's two largest markets (China and U.S.) and InBev holding strong positions in Europe and South America. The total value of this transaction was $52 billion (Espinoza, 2009). An example of a vertical merger is the deal that Exxon Mobil has made to purchase XTO Energy for $30 billion in stock. XTO is a major gas company.

Their gas holdings will be exploited by the company to give Exxon Mobil not only greater access to the natural gas market but also to a complementary product to Exxon Mobil's existing petroleum business. In the deal, Exxon Mobil gains access to XTO's 45 trillion cubic feet of gas reserves, which should provide Exxon Mobile with sufficient marketable product to fuel growth in the gas business for years to come. The Exxon-XTO deal, therefore, was made for strategic considerations.

It allows Exxon Mobil to diversify its energy holdings by adding a major gas component. This hedges against gas increasing its share of the world energy market. In addition, it helps Exxon Mobil develop synergies in marketing multiple energy types simultaneously, thereby providing a more comprehensive product offering to its customers. An example of a conglomerate acquisition in the past three years was the federal government's acquisition of General Motors. This deal, estimated to be worth in the range of $50 billion, saw the U.S.

government take over a 70% stake in the automaker. The deal qualifies as a conglomerate acquisition because the business in which GM operates (automobile manufacturing and marketing) is unrelated to the other businesses the federal government owns, which includes the Department of Defense, the United States Mint, Fannie Mae and Freddie Mac, and a wide range of social service agencies.

Whereas most conglomerate deals are made with diversification of risk in mind, in this situation the deal was made for strategic reasons including the preservation of jobs and the promotion of economic stability during a time of financial crisis. Many conglomerate takeovers lack opportunity for synergy, and it is hoped that there will be no synergies in this case either. An example of a spinoff currently in the works is the spinoff of mining company Vedanta's aluminum division.

The company, which trades on the London Stock Exchange, is expected to make $3 billion in the spinoff. Although the aluminum group is currently an important part of Vedanta's core mining interests, the group is attempting the spinoff because it believes that Vedanta is currently undervalued. The spinoff and the spinoffs that will follow will all Vedanta to earn for its shareholders the conglomerate's full value by increasing the market valuation of the constituent companies (Reuters, 2010).

A recent carve-out saw human resources consultant Hewitt Associates conduct a partial spin-off of Executive Compensation Consulting into a new firm, Meridian Compensation Partners LLC. This deal has been linked to strategic and political interests. In this case, the independence of compensation consultants has come under question in recent years. By creating a new company, Hewitt is able to rid itself of the burden of potential conflict of interest.

As a result, the clients of the company can continue to do business with both Hewitt and Meridian, but without any such conflict. Regulatory pressures had come onto clients to adopt exclusivity agreements that compromised Hewitt's ability to do multiple types of business with its clients; the carve-out allows the company to still do this business (Business Wire, 2010). There has been no financial evaluation attached to this deal, as Meridian will be wholly owned by its partners.

Of the five M&a transactions chosen, the $52 billion dollar merger between Anheuser-Busch and InBev is probably the largest, although the complicated nature of the GM takeover may render that deal with more expensive over time. The least valuable of the deals was the carve-out of Meridian by Hewitt. There is good reason why the horizontal merger would be the most valuable of the different transaction types exhibited. Horizontal mergers, in particular those among global giants in an industry, offer many benefits to the different firms.

While some of the smaller deals were done to shore up strategic weaknesses or to take advantage of factors in the external environment, horizontal mergers are generally conducted to take advantage of potential synergies between the firms. This is especially the case in a merger, rather than an acquisition. Synergies allow firms to derive exceptional value from their transactions. The carve-out most likely has the least value of the different transactions.

Carve-outs only involve one company, and the spinoff is partial, so that only part of the subsidiary company is involved. This inherently makes carve-outs a smaller type of corporate reorganization than any of the other types listed. Over the course of this research, it became evident that many of today's mergers and acquisitions are of exceptionally large size. Three of the five deals were worth.