Acquisitions and mergers are methods used to expand and build a business. Organizations utilize these techniques to achieve goals and improve their company. There are many things to consider when determining whether merging with or being acquired by another company is the right decision for your corporation. Which is the easier option? Which choice offers more resources/security, and which is best for your shareholders?
Why do Companies Undertake Mergers and Acquisitions?
There are many reasons why merging with or acquiring a business is a compelling option for corporate restructuring. Companies merge with or acquire another company:
- To gain a competitive edge
- To grow a business.
- To increase proficiency
- To diversify business processes
- To vertically integrate
- To take advantage of tax benefits
- To cut operational costs
- To survive a rapidly changing market
- To acquire new technology and skills
- To accelerate growth
- To acquire knowledge
- To gain revenue synergies (cross-selling products, supply chain efficiency, improved performance, etc.)
- To lower labour costs
- To increase market share
- To gain access to financial resources
What’s the Difference Between a Merger and an Acquisition?
A merger occurs when two or more businesses voluntarily consolidate to form a new entity, combining forces to create benefits (gain entry into new markets, expand market share, reduce operating costs, widen profit margins, increase revenues, increase operational efficiencies, improve technology, pool resources, decrease competition, etc.). The resulting company generally takes a new name and management is undertaken by employees from both businesses. New shares may be issued and distributed equitably among the shareholders of both companies. Mergers are typically friendly, mutually beneficial restructurings of corporate equals without cash exchange. There are many types of mergers:
- Horizontal mergers occur when companies merge with competitors.
- Vertical mergers involve merging with customers or suppliers.
- Market extension mergers involve companies that provide the same product but operate in separate markets.
- Product extension mergers occur when companies deal with related products and operate in the same market.
An acquisition occurs when one business buys and takes over another business by purchasing 51% or more of the target company’s stock. Large, financially strong companies typically acquire smaller, weaker entities. The larger company looks for small, fast-growing companies that complement their portfolio, intending to expand quickly and access new technologies. The acquired company ceases to exist. New shares are not issued. The purchasing company need not have consent, they gain complete control, and they decide the terms of the restructuring. Despite this, acquisitions are not always hostile. There are different types of acquisitions:
- Purchases occur when one company buys another company.
- Takeovers occur when a company takes over another company and is typically hostile.
- Equity acquisitions involve acquiring stock shares rather than cash.
What are the Benefits of Mergers and Acquisitions?
- Economics of scale: Merging with or acquiring another company increases the size of a business, improves access to capital, enhances bargaining power with distributors, and lowers costs. The added resources and/or technology help save money.
- Economics of scope: Acquisitions and mergers allow businesses to access an increased client/customer base.
- Synergies are the value created by the merger/acquisition, and the advantages of two businesses working together (cost synergies, revenue synergies, financial synergies).
- Increased opportunity for value generation often occurs due to a purchase price less than fair market value.
- Improved market share: Higher revenue and/or increased profit from the larger company created is a frequent motive for a merger or acquisition.
- Increased ability to compete: A larger company is more competitive, often causing smaller companies to fall away.
- Improved access to talent: Larger companies generally have access to the best talent.
- Decentralized risk: Acquisitions and mergers increase/diversify revenue streams, spreading the risk. If one stream falls, alternative streams may increase or hold.
- Rapid strategy implementation: Mergers and acquisitions speed product research and development and assist with achieving long-term strategies.
- Additional tax benefits are achieved by acquiring a company in a strategic industry or a business located in an area with favourable tax laws.
- Increased product lines: Mergers and acquisitions allow access to new product lines, providing options and diversifying the company portfolio.
- Improved image: The image/reputation of an acquired/merged company often improves or is altered for the better.
Tips for Effective Mergers and Acquisitions
Some actions and considerations increase the effectiveness of a merger or acquisition. Following are some tips to ensure success.
- Undertake due diligence. Evaluate the financial health, strategic fit, and potential risks of the other company.
- Develop an integration plan to encourage a smooth transition and maximize the benefits.
- Communicate clearly with stakeholders (investors, employees, customers, etc.), minimizing uncertainty and fostering trust.
- Consider cultural integration (aligning values, practices, norms, etc.).
- Monitor and evaluate the progress of the integration, making adjustments when necessary and ensuring the achievement of intended outcomes.
If your company wishes to achieve sustainable growth and drive success, consider a merger or acquisition. Be aware of the considerations and challenges associated with these strategies. Take time and evaluate the risks and advantages.
Considering a merger or acquisition? Need help with business strategy and/or risk management? Contact the experts at Cook and Company. We provide high-quality business services to a variety of privately-owned and managed companies.
