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When is M and A Right for Your Business?

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Though frequently used as though they were synonymous, the terms “mergers” and ”acquisitions” mean rather different things. Ultimately, however, the point of mergers and acquisitions is to create a larger, stronger company by joining the resources, skills and assets of two or more companies. While M & A may be all the rage among your competitors, the question is whether using this method of expanding your business is right for your organization. It's not right for everyone.

Introduction

Mergers happen when two or more, companies become one company, with the stockholders of one or more of the companies surrendering their stock in exchange for securities in the new merged company. Mergers are usually a mutual agreement arrived at between the two companies.

Acquisitions on the other hand occur when a usually larger company buys a controlling interest in another, usually smaller, company. The acquisition may be a friendly straight-up negotiated purchase, or it may be a hostile takeover bid in which the acquiring company snaps up a majority of the target company's stock.

Why Use M & A Strategies to Expand Your Company?

  1. To consolidate key resources and financial assets. The point of the merger or acquisition is to make one stronger company out of two and to position them to have a stronger competitive position.
  2. To strengthen brand names or trade-able endowments. A larger company with a weaker brand might, for instance, acquire a smaller, but more prestigious brand name to shore up consumer perception of it's own brands.
  3. To capture core competencies of merged or acquired companies. A film production company might, for example, acquire or merge with a special effects company in order to secure the special effects company’s skills for its own features and to boost consumer interest in the new products that the two companies produce together. The blended company also acquires the combined proprietary processes, patents and rights of all the merged companies.
  4. To secure or blend management, leadership, skills, processes or talents to strengthen the blended organization. Care must be taken when joining the companies to preserve the root strategic assets of the merged or acquired companies so that the distinctive strengths they bring to the organization are not lost because one company simply absorbs the other. After all, those elusive core competencies are the reason for the merger or acquisition in the first place. Most companies find it difficult to acquire all the capabilities they need to expand successfully by internal development. An M & A strategy permits companies to get around these limitations.
  5. To expand market presence and penetrate new territories. Often merger and acquisition strategies are used to permit the companies to expand into markets in new areas without the cost of starting new business, to build customer base and to acquire property to support the expansion. This type of M & A strategy, especially between two similar companies that do not necessarily compete in the same geographic markets, allows both to sell their products or services in new areas by piggybacking on the existing resources of the newly-merged partner. This strategy allows for rapid expansion with far less risk to either company.
  6. To achieve economies of scale. The truth is bigger companies can get things at a better price than smaller companies. It often makes sense to combine the resources of two or more companies in order to be able to negotiate a better price for the things the companies buy in order to do business or make their products..
  7. To gain tax advantages. Larger companies have more economic clout and often enjoy distinct tax advantages. The larger blended company may be able to afford legal, accounting and lobbying resources than its constituent companies were able to afford on their own.
  8. To shore up weaknesses. Companies may pursue an M & A strategy to shore up weaknesses in the structure of the company, to eliminate competitors or to increase the market power of the company.

Hazards of an Aggressive M & A Strategy:

While mergers and acquisitions can increase your company's financial performance, they can also dilute your earnings and reduce the value of your company's stock. Seventy percent of all mergers actually result in reducing the total value of the individual companies. The critical issues when considering an M & A strategy are:

  • Redundancies – The blended companies may find themselves with redundant staff, overlapping operations and out-of-sync operations. Reducing these often means staff cuts and a corresponding shot to company morale.
  • Executive turnover - Companies that are the target of mergers and acquisitions tend to lose critical top management and talented team leadership. Turnover rates tend to double, particularly following an acquisition that may have been less than cordial. Corporate head-hunters often pounce on executive talent following a merger.
  • Culture shock – The business culture of companies are often inconsistent. A button-downed corporate giant may acquire an energetic, creative, casual-Friday-all-week upstart. As the two organizations come together, the suits may find the polo shirt crowd a bit much. Friction can lead to a damping down of the spirit of the acquired company, effectively killing the energy that made the merger attractive in the first place.
  • Distraction – Too often recently merged companies tend to focus on the mechanics of integrating the two companies, cost cutting, layoffs and technical issues and lose the all-important focus on their daily business needs and, worse, on the customers they depend on.

When to Pull the Trigger

Obviously acquiring other companies to expand your business works spectacularly well in many cases, despite the abysmal failure rate of most mergers and acquisitions. It is important to develop a sustainable and compelling reason to adopt an M & A based expansion strategy. Before pursuing a merger or acquisition address these issues:

  1. Develop a clear vision for the future of your company. Make that vision the basis of the go/no go decisions to blend your company with another.
  2. Scout the deal. Examine all the potential operational and management issues and risks. Pre-assess all aspects of the deal before you even approach the board of directors and key stake-holders, much less start negotiations or buy-out procedures.
  3. Do Your Due Diligence. Obtain as much information as possible about the potential issues the merger may face, Hire experts and consultants to examine deliberate and accidental synergies that may be created, both positive and negative. Talk to your key people about how the merger will affect operations. Take a hard look at the impact on your customers. Challenge your blithe assumptions about the advantages of a merger or acquisition by researching future growth projections, past performances of both companies, potential culture clashes, legal, political and economic hurdles.
  4. Create a plan. The plan should address how to transition to a new organizational structure that builds on the strengths of both companies. Lay out clearly who will be in charge, how will the accounting be managed, how will the IT systems be combined for maximum efficiency, what products will be emphasized and which might be abandoned.
  5. Communicate well. Can you talk openly about integration plans with everyone in your company that will be key players in the merger? Are you able to prepare your managers and key players to participate fully in the process? Are your people psychologically prepared for the challenges? Does everyone understand the priorities for integration, the risks, the outcomes measures and problem-solving procedures?

The planning process should reveal any serious problems with the proposed deal and help you make decisions as to whether you want to pursue it or not. Don't let excited people in your company talk you into an ill-advised strategy without a thorough research process. Like a marriage, mergers and acquisitions should be carefully considered. It's sometimes best to bide your time and remain in control of your company, rather than to rush headlong into a legal relationship you will only regret later.

References

Q-Finance: Mergers and Acquisitions Best Practice

Q-Finance: Mergers and Acquisitions – Patterns, Motives and Strategic Fit

Graziado Businesss Review – Pepperdine University: Merger and Acquisition Strategies

McGladrey Financial Management: Four Steps for Ensuring a Successful Merger or Acquisition

Finding The Right Path: Harvard Business Review, July-August 2010 by Laurence Capron

 
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