Mergers And Acquisitions Continued

For management learners globally

Rationale

A successful merger or acquisition (M or A) will increase profitability in the longer term for the parties involved in the merger or acquisition. This is often expressed as 2+2 = 5.

For example a merger is successful if before the merger, company A and company B each had a profit of 2 and after the merger their combined profit became 5.ie After the M or A, the two companies, produce a profit that is greater than the total profit from both companies before the merger.

To create an increase in profit through the M or A, the target business will have to be chosen carefully. If a business is already successful/fully utilising its strengths, the potential for growth through the M or A will be less. Instead there will be greater opportunity for profit growth if the target business has development or remedial needs including the following;

Using it’s assets ineffectively including assets in the form of staff, brand name and markets they operate in.
Has poor management which is hindering the business’ growth.

Is undervalued and you know how to exploit the fact that it is undervalued.

Has products or services which can be combined with yours to offer customers much more than the company’s could offer without the merger or acquisition.

For others a merger/acquisition may be prompted by a fear that they cannot survive in the marketplace without the support of another organisation. Mergers and acquisitions (M & As) can yield a range of benefits including:

Staff reductions leading to reduced costs, the number of jobs can be reduced to remove duplicationhe of skills, expertise and experience.

Quality skills and expertise, the company you have merged with (or acquired) may have skilled members of staff that will benefit your organisation.

Economies of scale, as a larger organisation the business will find it easier to negotiate profitable deals with suppliers. This is because the contracts involved will be larger than prior to the M & A, larger contracts give more negotiating power when dealing with suppliers.

Reduced costs and overheads, duplication (caused by organisations trading as separate entities) can now be removed in all areas of the organisation to reduce costs and overheads.

Reduced competition, as the two organisations are now part of the same business they are no longer competing with each other.

Diversification, as a part of an M & A organisation the business may have access to customers, products and services not available to them prior to the merger.

Mergers and acquisitions: What can go wrong?

M & As can lead to a variety of problems, some can be avoided through careful planning and research but others cannot be foreseen. The following is a list of problems that can be experienced by companies involved in M & A deals.

Other companies become interested in the business you want to acquire and pull you into a “bidding war”, increasing the overall cost of the deal.

The two companies involved in the deal are unable to agree the terms of the deal.

The companies merging have incompatible systems/processes and to make them compatible (to enable the companies to work together) is expensive.

Key employees are unhappy with the deal and leave the companies involved in the M & A.

The deal does not yield the profits expected or an increase in profits takes longer than expected.

The M & A cost is greater than expected, leading to financial problems that the newly formed company needs to recover from.

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