Analyze the elements which are related to mergers and acquisitions which have taken place on the basis of a company.
The main purpose of this assessment is to analyze the elements which are related to mergers and acquisitions which have taken place on the basis of a company. The assessment will be focusing on the recent merger and acquisition which took place in the business of Amazon and Whole Foods. In order to understand the elements and purpose which are associated with the merger and acquisition, the first thing is to understand is the concept of Merger and acquisition. Merger and Acquisition is a term which is used in businesses where a company takes over the assets and ownership of another business (Ferris, Jayaraman and Sabherwal 2013). This is one of the techniques which is used by businesses for various purposes such as meeting excessive competition, strengthening the business or even for the purpose of establishing a superior position in the market (Cartwright and Cooper 2014).
Amazon is an online retail website and cloud computing company which is based in the United states. The company is known for its variety of products which the business offers to its customers and the retail giants are known to be the largest internet-based retail operation site. The performance of the business is measured by the revenue generated by the business and also by the market capitalization of the business (Amazon.in. 2018). In addition to this, the business of Amazon in terms of sales is second largest after Alibaba Group. The business of Amazon started off initially as an online bookstore and the same then slowly diversified in full scale retail business which is clear in present times.
Whole Food Market is a business which is engaged in the selling and distribution of organic food to the general people of the area. The motive of the business is to provide natural food products which are without any added preservatives to its customers. The business was merged and acquired by Amazon in 2017 and since then it plays the role of subsidiary of the online retail giants.
The reasons due to which mergers and acquisitions takes place in a business are explained below in details:
As per the analysis of the market conditions and the competitiveness in the retail market, the business of Amazon faces intense competition in various areas of business such as food products, FMCG goods, clothes and other products as well. The annual report of the Amazon company shows that the business has faced crisis which is in relation to intense competition. Another problem which the business of Amazon has been facing in recent times is due to the diversification and expansion strategy which brings about a strain in the effective management of the company. Amazon offers a large variety of products in the online sales option which are different types of products and it is usually the case in retail business that some products earns profits while some of them are not much profitable as per the market analysis (Kansal and Chandani 2014). Therefore, the management of the business needs to deal with the problems which are mentioned above.
The issues which can faced by the company can be overcome with following the strategies of merger and acquisition as which is seen in the merger and acquisition decision of Amazon and Whole Food Market which provided the retail business an opportunity to penetrate the market of organic food products. The annual report of Amazon company shows that the main concern for the business in recent times is due to the intense competition from the competitors of retail industry. As per the market analysis of the retail industry, the level of competition in the industry is quite evident as there are a lot of business who provide online retail services which is same as the services which are provided by Amazon (Brakman et al. 2013). In addition to this, there are also supermarkets like Walmart, Tesco who also provide the same variety of products under one roof and this further adds to the level of competition which already exists in the industry. The main competitors of Amazon as identified in the annual report of the company are Walmart, Flipkart, Ebay which are also engaged in the business of retailing and providing all sorts of goods to the customers.
The situation which is present in the retailing market is a scenario of perfect competition where businesses needs to be distinctive and gain competitive edges in order to survive the intense competition which is present in the market (Abbas et al. 2014). In earlier times, retail markets especially a business which is sort of a supermarket provided all kinds of products to the customers in one place as was in the case of Tesco and Walmart and this provides no chance for the small retailers who offer one or two products. This shows the level of competition which the retail industry has with the supermarkets acquiring the maximum market shares. However, with the development of technology and e-commerce system, the level of competition has intensified in the market. The online market facility which is known as e-commerce has created new competitors and therefore, it is quite natural that the main problem which the management of Amazon faces is related to the intense competition which is present in the market.
In the case of Amazon, the company was first started off as online book store option and the company has come a far way from that position as is clear from the annual report of the business. The company was founded by Jeff Bezos in 1994. As per the current scenario, Amazon is engaged in retail business, has a logistic network, has a business of book publishing, hardware maker, cloud service provider and many other services as well. As per research which was conducted to determine the efficiency of the business, a survey was conducted which revealed that in the last five years, Amazon went head to head with 129 corporations around the world in the retail sector for market dominance (Greve and Man Zhang 2017). The business is further diversifying in new areas and offering new products to the customers which is related to fashion, food and analytics. In addition to this, the business has also faced problems which are related to antitrust scrutiny from the US regulators in relation to other competitors of the business. In other countries as well, the online retail stores gives serious competition to local retail business and thereby there is always threat of regulations which can be imposed on the business by the government. An estimate shows that the business of Amazon takes about 23% of the annual income of the US residents who are engaged in shopping online and the business also enjoys a majority of market retail sales business in case of books.
As per the recent decision which the management of the Amazon ltd has taken regarding the merging with Whole Food Market is for the sole purpose of further diversifying the products of the business and also increasing the scope of the business. Therefore, the business has effectively merged with Whole Food market in 2017. This shows the intention of the business to keeping the diversification of the products applicable. The reason for diversification in the Whole food market is due to the increase in demands of organic foods. The management of the company is of the opinion that by merging with the Whole Food market, the merged business will be able to produce a synergy effect so as to ensure that the business cyan gain the advantage of attaining growth ands improve the costs which is associated with the business of producing and selling of Whole Foods. The strategy as per the annual report of the company which is adopted is adapt or die strategy which states that the business needs to adapt as per the changing business environment and competition in retail market. An article which was published shows that the day in which Amazon acquired the business of Whole Food Market, the market valuation of Amazon increased by almost $ 12 billion.
Figure 1: (Chart showing effect of the acquisition on the Grocery Market Share Price)
Source: (Cooper and Finkelstein 2014)
As per the above chart, the acquisition of Whole Food business by Amazon has greatly impacted the share prices of other competitors who are present in the retail of grocery items. The chart above shows the fall in the shares prices for companies like Walmart, Costco. The above chart clearly shows the effect which a merger and acquisition can have on the competitive pressures of the industry Piesse et al. 2013).
Thus, from the above discussions it is clear that the main problem which is faced by the business of Amazon is related to the intense competition which the business faces in the retail industry and also with the overall management of the business.
As per the analysis of the case and annual reports of Amazon, the level of competitiveness in the market is one of the major reasons due to which the overall profitability of the business has been affected. The major problem which is faced by the business is due to the intense competition which affects the sales of the company and also there is a problem which is associated with the lack of effectiveness in the overall management of the company due to the variety of products which are offered by the company. In addition to this, the management of the company is focused towards the maximization policy which allows the business to focus on increasing the overall level of sales of the business and not the profits. A graph which is shown in figure 2 shows the overall relation between sales which is achieved by the business and also profits of the business.
Figure 2: (Chart showing relation between the sales and profits)
Source: (Lee 2013)
The above chart makes it clear that the management of Amazon is not much concerned with the overall profitability of the business. The blue line shows the profitability of the business and the red lines shows the sales which the business is able to generate from operations. The overall business of Amazon does not follow the policy that puts too much emphasis on the technological advancements and ensure that the selling function of the business is carried out by the management itself so that effective risks can be identified and optimized by strategic planning process. The above chart makes it clear that the business prioritizes the maximization of sales and improving the revenues from the same instead of increasing the profitability. In addition to this, its is also to be understood that the management of Amazon has often acquired established businesses in retail industry. The main purpose of following such a strategy is to ensure that the business can achieve synergy and competitive advantage in the respective markets. Due to the policies of the management of Amazon, the business can be regarded as a monopoly in the retail business especially considering the online retail business of Amazon. There have been instances where the management of Amazon Company has effectively responded to competitive threats which can affect the business.
There was a case where Amazon lifted its minimum order for encouraging free shipping for Non-Prime members by offering a price range of $ 35 to $ 49. Walmart in order to compete with Amazon offered free two days shipping at $ 35. Following this move, the management of Amazon again lowered the price to $ 34 in order to stay competitive in the business.
Another instance can be given of Diapers.com, where the management of Amazon noticed that the sales of Diapers were falling due to the intense competition from Quidsi which owned Diaper.com. The management took measures by first trying to buy out the business but later switch to lower the prices of its products so as too stay competitive in the market. The management of Amazon was later able to acquire the business of Quidsi for a lumpsum amount of $ 545 million.
Another perfect examples which the business takes in order to control the competitive pressure on the business is by following the sophisticated pricing algorithm which is used by the management to analyze all the possible combinations. As per this, it is also shown that the business prefers to sell the products itself rather than with a third-party vendor who are in some cases the closest competitors of Amazon. The management of Amazon utilizes the algorithm to estimate the price manipulations which can be done by the business.
However, there are still some areas where the management of Amazon can still bring about changes which can help the business with the pressures which is associated with intense competition. The following measures can be adopted by the management of Amazon in order to further improve the business structure and also addresses the intense competition of issues.
Conclusion
Thus, from the above analysis it can be said that merger and acquisition can be used as one of the strategies for the purpose of dealing with the excessive competitive pressures of the business. In this case, the decision of the management of Amazon to further diversify the business by acquiring Whole food market is a sound strategy as the same will allow the business to penetrate the market of Whole Foods and also provide a synergy effect on the business. In addition to this, the acquisition can also help the Amazon company to deal with the intense competition which is present in retail industry. The various measures which are provided in the recommendation section can be adopted to further reduce the problem and also improve the overall structure of the business.
From the assessment which was given on a significant part of finance I chose to work with merger and acquisition topic due to the wide scope implications of the strategy in a business. Merger and acquisition has wide spread uses and from analyzing and completing this assessment I now understand key concepts of Synergy and the overall advantage which merger and acquisition has on a business. For completing this assessment I took the recent merger that took place between Amazon and Whole Food Market in 2017 and after analyzing the situation I realized that the company Amazon not only was able to minimize competitive pressures but also able to further diversify its product line as well as penetrate a new market which involved organic farming.
The experience which I have gained from this assessment and the concepts which I have learned will be definitely come in use in my future projects and as well as course of syllabus. Moreover, I can now understand how to extract information from annual reports and also various articles which is a handy skill which I have developed during the course of this assessment.
References
Abbas, Q., Hunjra, A.I., Azam, R.I., Ijaz, M.S. and Zahid, M., 2014. Financial performance of banks in Pakistan after Merger and Acquisition. Journal of Global Entrepreneurship Research, 4(1), p.13.
Amazon.in. (2018). Online Shopping site in India: Shop Online for Mobiles, Books, Watches, Shoes and More – Amazon.in. [online] Available at: https://www.amazon.in/ [Accessed 7 Jul. 2018].
Brakman, S., Garretsen, H., Van Marrewijk, C. and Van Witteloostuijn, A., 2013. Cross?Border Merger & Acquisition Activity and Revealed Comparative Advantage in Manufacturing Industries. Journal of Economics & Management Strategy, 22(1), pp.28-57.
Cartwright, S. and Cooper, C.L., 2014. Mergers and acquisitions: The human factor. Butterworth-Heinemann.
Cooper, C.L. and Finkelstein, S. eds., 2014. Advances in mergers and acquisitions. Emerald Group Publishing.
Dutordoir, M., Roosenboom, P. and Vasconcelos, M., 2014. Synergy disclosures in mergers and acquisitions. International Review of Financial Analysis, 31, pp.88-100.
Ferris, S.P., Jayaraman, N. and Sabherwal, S., 2013. CEO overconfidence and international merger and acquisition activity. Journal of Financial and Quantitative Analysis, 48(1), pp.137-164.
Garzella, S. and Fiorentino, R., 2014. A synergy measurement model to support the pre-deal decision making in mergers and acquisitions. Management Decision, 52(6), pp.1194-1216.
Greve, H.R. and Man Zhang, C., 2017. Institutional logics and power sources: Merger and acquisition decisions. Academy of Management Journal, 60(2), pp.671-694.
Kansal, S. and Chandani, A., 2014. Effective management of change during merger and acquisition. Procedia Economics and Finance, 11, pp.208-217.
Lee, W.S., 2013. Merger and acquisition evaluation and decision making model. The Service Industries Journal, 33(15-16), pp.1473-1494.
Piesse, J., Lee, C.F., Lin, L. and Kuo, H.C., 2013. Merger and acquisition: definitions, motives, and market responses. In Encyclopedia of Finance (pp. 411-420). Springer, Boston, MA.
Rothaermel, F.T., 2015. Strategic management. McGraw-Hill Education.
Trautwein, F., 2013. Merger motives and merger prescriptions. In Mergers & Acquisitions (pp. 14-26). Routledge.
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