Mergers and acquisitions (M&A) strategy guide by Mordechai Gal? What is a merger between two firms? A merger is referred to as a financial operation in which two companies join each other and continue business operations as one legal entity. Generally, mergers can be divided into five different categories: Vertical merger: Merging companies operate along the same supply chain line. A note for this M&A strategy is that the type of merger selected by a company primarily depends on the motives and objectives of the companies participating in a deal.
What are the Different Motives for Mergers? Companies pursue mergers and acquisitions for several reasons. The most common motives for mergers are: Economies of Scale: Underpinning all of M&A activity is the promise of economies of scale. The benefits that will come from becoming bigger: Increased access to capital, lower costs as a result of higher volume, better bargaining power with distributors, and more. While buyers should always avoid the temptation to indulge in ‘empire building,’ as a general rule, bigger companies usually enjoy advantages that small companies do not.
Opportunistic Value Generation: Some of the best deals happen when a company isn’t even actively pursuing an acquisition. The hallmark of these acquisitions is that the purchase price is less than the fair market value of the target company’s net assets. Often these companies will be in some financial distress, but a deal can be made to keep the company afloat while the buyer benefits from adding immediate value as a direct consequence of the transaction.
Acquisition of assets: A merger can be motivated by a desire to acquire certain assets that cannot be obtained using other methods. In M&A transactions, it is quite common that some companies arrange mergers to gain access to assets that are unique or to assets that usually take a long time to develop internally. For example, access to new technologies is a frequent objective in many mergers. Increase in financial capacity: Every company faces a maximum financial capacity to finance its operations through either debt or equity markets. Lacking adequate financial capacity, a company may merge with another. As a result, a consolidated entity will secure a higher financial capacity that can be employed in further business development processes.
Additionally, managers may prefer mergers because empirical evidence suggests that the size of a company and the compensation of managers are correlated. Although modern compensation packages consist of a base salary, performance bonuses, stocks, and options, the base salary still represents the largest portion of the package. Note that the bigger companies can afford to offer higher salaries and bonuses to their managers.
Large mergers and acquisitions (M&A) usually to get the biggest headlines in newspapers, but research indicates that executives should be paying attention to all the smaller deals, too. These smaller transactions, when pursued as part of a deliberate and systematic M&A program, tend to yield strong returns over the long run with comparatively low risk. And, based on Mordecai Gal‘s research, companies’ ability to successfully manage these deals can be a central factor in their ability to withstand economic shocks. The execution of such a programmatic M&A strategy is not easy, however.
Know what strategic outcomes you ultimately want from engaging in M&A and consider the implications for both the buyer and seller. Is your goal to enter a new end market? Are you purchasing customers or contacts to geographically expand? To stay focused, always come back to how you answered the first three questions as you consider opportunities. Developing an M&A strategy requires knowing what makes your business successful now and what acquisitions can add to make the business even better in the future. It will help you clearly define the value proposition for both the buyer and the seller, as well as the value drivers that should guide acquisition decisions.
Why Mergers and Acquisitions Fail? There are many reasons so let’s discuss some of them: Misunderstanding the target company : Even due diligence doesn’t guarantee that you’ll fully understand the target company. It gives you the best opportunity to do so, but there are plenty of cases where even a lengthy period of due diligence doesn’t let you know what makes a company tick. The example of British grocery retailer Morrisson’s acquiring rival company Safeway in 2003 is testament to this. What looked on paper like a great deal for Morrisson’s – expanding their footprint all over the UK – turned into a nightmare, essentially because the two firms served completely different types of customers.
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