5.7 Mergers & Acquisitions
The headline read, “Wanted: More than 2,000 in Google hiring spree”. The largest Web search engine in the world was disclosing its plans to grow internally and increase its workforce by more than 2,000 people, with half of the hires coming from the United States and the other half coming from other countries. The added employees will help the company expand into new markets and battle for global talent in the competitive Internet information providers industry. When properly executed, internal growth benefits the firm.
An alternative approach to growth is to merge with or acquire another company. The rationale behind growth through merger or acquisition is that 1 + 1 = 3: the combined company is more valuable than the sum of the two separate companies. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost-efficient by combining with other companies.
The Canadian Landscape
In June 2013, Shoppers Drug Mart, Canada’s biggest pharmacy chain merged with Loblaw, Canada’s largest grocery retailer, in a 12.4-billion-dollar deal. Rather than cutting into each other’s market share, the deal allows the two companies to play on each other’s strengths. Shoppers had about $1 billion in food sales annually, versus Loblaw’s $30 billion. But Loblaw’s share of the pharmacy market was only five percent, so adding Shoppers health products and services to Loblaw grocery stores allowed the food retailer to expand its services in what it sees as a growing sector: health, wellness and nutrition. (www.cbc.ca). Contrast this merger with an acquisition in that same year. Sobey’s acquired 200 Safeway stores in Western Canada under a 5.8-billion-dollar deal. According to news reports, along with 213 Safeway grocery stores — more than 60 percent of which were in Calgary, Vancouver, Edmonton and Winnipeg — Sobeys also acquired:
- 199 in-store pharmacies;
- 62 gas stations;
- 10 liquor stores;
- 4 primary distribution centres and a related wholesale business; and
- 12 manufacturing facilities.
Sobeys also gained $1.8 billion worth of real estate in the deal.
