14 November 2018

How to create value through merger and acquisition

There are different stories behind every merger and acquisition (M&A) deal, but all companies involved in such an undertaking has a common goal — to create value for their firms.

In a column they wrote in the Hong Kong Economic Journal, KMPG director Lau Yuhin and audit manager Cheng Tingting have cited several examples to illustrate how this could be done.

It is not surprising for companies, while in the process of expansion, to hit bottlenecks. In fact, it is sometimes both time-consuming and costly to develop projects organically. In such cases, M&A offers an alternative solution for expansion.

This is precisely why Microsoft acquired Nokia last year, Lau and Cheng explain. At present, Apple’s iOS and Google’s Android dominate the market for mobile device operating systems, a sector in which the US software giant seriously lags behind. Thus, Microsoft’s acquisition of Nokia’s handset business makes sense as it provides a ready vehicle for the US firm’s Windows Mobile operating system.  

Secondly, synergy may be unlocked when two companies join forces. The word “synergy” simply means “1+1>2”, the authors say. They cite the case of Chinese search engine giant Baidu (BIDU.US), which completed a deal to acquire 91 Wireless, the country’s leading wireless mobile internet company, last October.

Since the deal was disclosed about six months ago, Baidu has significantly increased its distribution channels through 91 Wireless, while the latter has made use of Baidu’s cloud storage system and other developing tools. Their joint efforts have enabled them to secure exclusive distribution rights from international gaming developers.

Promoting brand image is another reason for doing an M&A deal, say Lau and Cheng. Since the tainted meat scandal broke out in 2011, Chinese consumers have lost faith in domestic pork products. And this is one of the chief reasons why China’s Shuanghui International acquired Smithfield Foods.

Smithfield is the world’s largest pork products manufacturer and ranks No. 1 in the US market. The acquisition would not only help Shuanghui to feed China’s growing appetite for pork but also brush up its brand image and regain consumers’ confidence.

Finally, the most convenient way to enter a foreign market is by buying local companies, the authors say. For example, AIA Group (01299.HK), the third-largest Asia-based insurer, bought rival ING Groep NV’s insurance business in Malaysia more than a year ago to boost its operation in the Southeast Asian market. British-based insurer Prudential acquired the life assurance unit of Thailand’s Thanachart Bank, which held nearly one million insurance policies in 2012. As a result, Prudential’s market share in Thailand doubled after the deal completed.

Firms have different reasons for choosing the M&A route, but both parties must have clear objectives in order to truly create value for their companies, the authors conclude.

– Contact the writer at [email protected]



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