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A merger or acquisition is one strategy to help ensure business continuity, reduce interruptions in the operation, and provide job security for employees. Mergers and acquisitions present a cost-effective alternative to starting from scratch. Setting up production centers, buying machinery and equipment, building storage places, and initiating distribution channels are costly.
The approach of setting a price based on equipment and staffing costs would be less applicable in a service industry, where the primary assets such as people and ideas are difficult to evaluate and cultivate. In essence, other corporate entities are integrated into an existing entity. This can be beneficial for smaller companies that merge into larger companies with stronger brand recognition and greater market traction. This can be particularly useful for companies that have reached a plateau in their growth trajectory or those looking to expand into new markets.
- In addition, companies can benefit from reduced competition, which can lead to higher profit margins and increased trading power.
- Talent acquisition is one of the biggest concerns for companies that wish to excel in the market.
- The most well-documented version was a proposed $160 billion merger between Pfizer and Allergan in 2016, subsequently scuppered by US government intervention.
- This practice is particularly common when brand new technologies take markets by storm.
By diversification of risk, the company can ensure sustainability for the long run. Mergers and acquisitions mean greater financial strength for both companies involved in the transaction. Having greater economic power can lead to higher market share, more influence over customers, and reduced competitive threat. Mergers and acquisitions benefits include economy of scope, which refers to the reduction in production cost of one product due to the production of another related product. Economies of scope typically occur when producing more products is more feasible and economical than making a single or fewer products.
By hoovering up other organizations within your industry, you’re ensuring a greater slice of the total market is yours. One reason is that executives from IT and operations often aren’t included in the due-diligence process, preventing them from offering valuable input on the costs and practical realities of integration. Executives can’t hope to forecast the savings from merged supply chains, for example, without a deep understanding of what’s required to integrate two companies’ information systems. Richard V. Smith is a partner in the Silicon Valley and San Francisco offices of Orrick, Herrington & Sutcliffe, and a member of its Global Mergers & Acquisitions and Private Equity Group.
Advantages of a Merger
If the acquirer pays partly in cash and partly in its own stock, the target company’s shareholders get a stake in the acquirer, and thus have a vested interest in its long-term success. A merger is a corporate strategy to combine with another company and operate as a single legal entity. The companies agreeing to mergers are typically equal in terms of size and scale of operations. Horizontal integration and vertical integration are competitive strategies that companies use to consolidate their position among competitors. In an acquisition of assets, one company directly acquires the assets of another company.
This was combined with Hewlett-Packard’s ticker symbol (HWP) to create the current ticker symbol (HPQ). And the fact that the most successful firms in the world employ teams of professionals whose only role is to seek out attractive potential acquisitions tells its own story. Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies. Mergers can help firms deal with the threat of multinationals and compete on an international scale.
This could be for expanding market share, achieving economies of scale, diversifying operations, and gaining access to new technologies or markets. Aside from less competition, horizontal mergers often result in a spike in revenue due to the diversification of products and services and access to a new portion of the market. We’ll now explore the five types of mergers and acquisitions alongside common benefits and challenges so you’re best prepared to find the right partner for your growth. Frequently, a buyer will present the selling company with a non-binding letter of intent or term sheet that lacks detail about key deal terms. Importantly, the online data room can be established to allow access to all documents or only to a subset of documents (which can vary over time), and only to pre-approved individuals.
M&A can distract from the daily management of a business:
These new competitors include major national retail chains and tech giants, whose scale and financial resources dwarf those of even the largest health systems. When purchasing preexisting assets, it’s the seller who holds much of the information. In many cases, integrating the operations of two companies proves to be a much more difficult task in practice than it seemed in theory. This may result in the combined company being unable to reach the desired targets in terms of cost savings from synergies and economies of scale. A potentially accretive transaction could therefore well turn out to be dilutive. In a management acquisition, also known as a management-led buyout (MBO), a company’s executives purchase a controlling stake in another company, taking it private.
- Specifically, buying out a supplier, which is known as a vertical merger, lets a company save on the margins the supplier was previously adding to its costs.
- However, you may also experience a reduction in efficiency and a clash of workplace culture.
- In theory, this means change for both organizations—and the best way to get through any type of change is to show momentum.
- A business merger or acquisition presents an effective strategy for company expansion and new revenue streams that can improve bottom-line profitability.
Throughout my career, I have completed more than 20 successful deals — M&A is a strategy I have employed time and time again. These purchases have accelerated our growth, allowed us to expand into new industries and markets, and they afforded us new expertise, technologies and increased the services we are able to offer our customers. Unfriendly or hostile takeover deals, in which target companies do not wish to be purchased, are always regarded as acquisitions. A deal can be classified as a merger or an acquisition based on whether the acquisition is friendly or hostile and how it is announced.
Market extension M&A strategy is when two entities that produce the same type of product to different markets come together under one roof. Deficiencies of this kind may be so important to a buyer that it will require them to be remedied as a condition to closing. That can sometimes be problematic, such as instances where a buyer insists that ex-employees be located and required to sign confidentiality and invention assignment agreements. Avoid these problems by “doing diligence” on your own company before the buyer does it for you.
How does a company determine the value of another company in a merger or acquisition?
A common issue underlying many of the risks that come with negotiating M&A deals is the tendency to involve finance too late in the process. By acquiring a business that offers complementary products or services, a company can expand its offerings and potentially tap into new revenue streams. The acquisition of assets occurs when one company acquires the assets of another, with the approval of the target entity’s shareholders. This type of event often occurs in cases of bankruptcy, where acquiring companies bid on various assets of the liquidating company. An acquirer’s future growth prospects and profitability should ideally be enhanced by the acquisitions it makes.
As the name suggests, this kind of merger occurs when one company purchases another company. The purchase is made with cash or through the issue of some kind of debt instrument. The sale is taxable, which attracts the acquiring companies, who enjoy the tax benefits. Acquired assets can be written up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. As organizations depend increasingly on the information systems that coordinate transactions, manage operations, and aid the pursuit of new market opportunities, the role of technology in mergers becomes more critical. Companies with a keen understanding of IT’s essential role in M&A can gain an edge in completing successful mergers.
Benefits of a Merger or Acquisition
A vertical merger occurs when companies operating in the same industry, but at different levels in the supply chain, merge. Such mergers happen to increase synergies, supply chain control, and efficiency. In general, “acquisition” describes a transaction, wherein one firm absorbs another firm via a takeover. The term “merger” is used when the purchasing and target companies mutually combine to form a completely new entity.
For example, the UK government allowed a merger between Lloyds TSB and HBOS when the banking industry was in crisis. A merger can enable a firm to increase in size and gain from many of these factors. However, you don’t want to waste valuable resources vigorously investigating a merger business case if a simple run through the questions above tells you this isn’t the right opportunity to pursue. Ultimately, all organisations should be looking to find ways to drive better outcomes for their end beneficiaries.
Acquisitions
With this merger, a brand new company is formed, and both companies are bought and combined under the new entity. M&A deals generate sizable profits for the investment banking industry, but not all mergers or acquisition deals close. When one revenue stream falls, an alternative stream of revenue may hold, or even pick up, diversifying the acquiring company’s risk in the process. 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. Mergers may allow greater investment in R&D This is because the new firm will have more profit which can be used to finance risky investment.
In some cases, it makes sense to hold on to a target company’s legacy systems. A financial institution’s CRM systems, for example, may be closely tied to the new markets and customer bases that represent a significant chunk of a deal’s value. Trying to integrate those systems into existing ones geared to different types of customers could be too disruptive. Successful IT departments embrace the concept of flexibility, adopting temporary work-arounds when they make business sense. In a recent merger of two technology companies, for example, the acquiring company’s CIO collaborated with the sales force to provide an accurate projection of when an invoicing system would come on line.
By evaluating the target company’s technology, executives can determine how it complements their own IT strategy and operations, including what systems to retain and what data should migrate to the acquiring company’s platform. This step is particularly important as companies review cost and revenue synergies. Too often, forecasts are driven by financial formulas or rules of thumb provided by the merger’s advisers. Growing revenue is important for businesses and is a key motivation behind many mergers and acquisitions. In M&A, it’s vital to have an understanding of the acquiree’s available data, its location and who has access to it. Data can then drive acceleration in terms of revenue, offer better customer outcomes and optimize demand generation marketing dollars for products and services.
The online data room allows the selling company to provide valuable information in a controlled manner and in a way that helps preserve confidentiality. The online data room helps expedite an M&A process by avoiding the need to have a physical data room in which documents are placed and maintained. Companies operating in markets with benefits of mergers and acquisitions fewer such businesses merge to gain a larger market. A horizontal merger is a type of consolidation of companies selling similar products or services. It results in the elimination of competition; hence, economies of scale can be achieved. When a company faces competition, it must both cut costs and innovate at the same time.
