Mergers and Acquisitions refer to the process where two companies combine to form a single entity. Strictly speaking, a merger refers to the process where two companies of comparatively equal strengths combine to form a completely new company. A recent example of a merger is that of XM Satellite Radio with Sirius, which formed the new merged entity SiriusXM. In theory a merger is a unification of equals, however, in reality this rarely the case. Usually, one company absorbs the other, even if the absorbed company’s name still exists. Within an acquisition, a dominant company completely absorbs the other, and assumes all the privileges, rights, and liabilities. Successful senior executives spend up to 1/3 of their time looking for new M&A deals.
Types of Mergers and Acquisitions
There are three basic forms of mergers depending on the competitive relationship between the concerned companies:
- Horizontal Mergers: refer to the process where companies acquire other companies that deal with similar products within the same geographic location.
- Vertical Mergers: refer to the case where companies acquire either their suppliers or customers.
- Conglomerate Mergers: refer to all other types of acquisitions, even where there is no clear relationship between the concerned companies.
Reasons for Mergers and Acquisitions
Companies generally undergo a Mergers and Acquisitions to:
- Achieve economies of scale
- Achieve growth and diversification
- Mitigate cash-flow risk via diversification
Benefits of Mergers and Acquisitions
Mergers have a number of benefits that make them attractive to businesses, including:
- Cost Efficiency: By combining two companies, it makes it possible to benefit from economies of scale, which leads to improved cost efficiency. For example, a manufacturing company can get raw materials in bulk at lower prices, increase production, and consequently lower its cost of production.
- Value Generation: The shareholder value following a merger is usually expected to be higher than the combined values of the two former companies.
- Weathering Storms: A company that finds it difficult to overcome the problems it faces will be better off with an acquisition than being forced to fold.
- Greater Competitiveness: In addition to expanding the new business, a merger reduces competition.
- Greater market share: By being acquired by a financially healthy firm, the company can better serve its customers and grow.
- Tax benefits
Challenging areas for Corporations
Mergers and Acquisitions can be very challenging for corporations. Key areas that affect corporations are:
- Whom to acquire
- The timing of the acquisition
- The financial viability of the deal
- The integration of the two companies
- Developing a strategy
- Addressing the cultural aspects and differing management styles
- Integrating the technology and supply chain
- Product integration
- Sales integration
- Valuation analysis
- Marketing harmonization
Importance of Seeking Professional Assistance
Mergers and acquisitions have a lot of complexities, each of which can make things go wrong. A recent Harvard Business Review article stated, that between 70% to 90% of all mergers and acquisitions have failed. Many corporations go into a merger or acquisition lacking a cohesive strategy that benefits the organization in the long-term. Corporations tend to heavily invest in the legal aspects of the mergers or acquisitions, yet leave behind the business and post-acquisition integration of the corporation. Businesses seldom ask themselves if the cultures of the merging entities are harmonious and how the post acquisition integration with increase real organizational value. It is therefore important that companies seek the services of an expert in the field. HafeziCapital, can help your organization develop a cohesive mergers and acquisitions strategy, find M&A targets, structure the M&A, structure the organization for sale, obtaining leveraged capital, developing the entire M&A team, post-acquisition integration, and restructuring the merged entities to ensure post-acquisition success.