and Acquisitions.

Companies have a few options for achieving growth. The first is by growing organically

through the development of new products and production capacity over time. The other option,

is through what are known as mergers and acquisitions.

A merger occurs when two companies agree to combine to form an entirely new company. The

two companies will agree on a post-merger name, like Exxon and Mobil combining to form

ExxonMobil, and determine how to structure the new organization as well as staff operations.

An acquisition occurs when one company purchases another company. The company that is purchased

is then absorbed by the purchasing company and ceases to exist on its own. In some situations

a company will purchase another, but allow it to operate independently and even keep

its original name, such as when Disney purchased Pixar in 2006. This can be to ease the uncertainty

associated with an acquisition as well as ensure the acquired company continues operations

smoothly. In the case of Disney and Pixar, Pixar had proven to be successful prior to

the acquisition and both companies wanted that success to continue unhindered by a new

culture and even new staff.

When classifying mergers and acquisitions we can label them as either horizontal or

vertical. A horizontal merger or acquisition occurs when the two companies generally produce

the same products and serve similar customers. The rationale behind such a merger is the

newly merged company will be able to better compete in their respective industry by taking

advantage of economies of scale and even technological innovation. It's also worth noting that horizontal

acquisitions and mergers can allow companies to expand their product mix and potentially

increase revenues by appealing to a wider customer base.

Office Depot and Office Max, two retailers who sell similar products and serve similar

customers, are currently in the process of completing a merger. This merger is meant

to allow these companies the opportunity to compete more effectively against Internet

retail giant Amazon. The joining of Office Depot and Office Max is an example of a horizontal

merger. In 2012, Facebook acquired popular photo-sharing application Instagram for $1

billion in cash and stock. In addition to giving Facebook access to Instagram's successful

mobile platform, it also eliminated a potential competitor while giving Facebook access to

an additional group of customers. Facebook's acquisition of Instagram is an example of

a horizontal acquisition since they both operate in a similar industry, providing a similar

product to similar customers.

Now a vertical merger or acquisition occurs when the two companies operate at different

stages of the production cycle. Because these companies operate at different stages of the

production cycle, the merger or acquisition can create increased operating efficiencies

and reduce costs. For example, Google purchased Motorola Mobility in 2012 for $12.5 billion.

Motorola Mobility is of course the manufacturer of handset devices while Google was beginning

to producing and licensing its Android Operating System. In an effort to control both the hardware

and software side of selling smartphones, Google acquired Motorola Mobility. This vertical

acquisition allowed Google the opportunity to leverage Motorola Mobility's knowledge

of the handset market as well as its staff and operations as opposed to starting from

scratch or continuing to rely entirely on other companies for handsets. Coffee giant

Starbucks also used a vertical acquisition to expand its offering of pastries and breads

by purchasing San Francisco-based Bay Bread LLC, and its La Boulange bakery brand for

$100 million in cash in April of this year. Although Starbucks had already sold pastries,

this acquisition gave Starbucks control over a key player in the production cycle: the

producer. Instead of purchasing pastries and other baked products from another business

in the supply chain, Starbucks is now able to produce them in-house reducing its costs

in the process.

This has been An Introduction to Mergers and Acquisitions. If you have any questions or

comments please be sure leave them in the comment box below and I'l do my best to get

back to those in a timely fashion. For access to additional business videos be sure to subscribe

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Thanks for watching.