Five reasons why mergers can be an excellent idea? 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 guide 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 Scope: Mergers and acquisitions bring economies of scope that aren’t always possible through organic growth. One only has to look at Facebook to see that this is the case. Despite providing users with the ability to share photos and contact friends within its platform, it still acquired Instagram and Whatsapp. Economies of scope thus allow companies to tap into the demand of a much larger client base.
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.
Tax purposes: If a company generates significant taxable income, it can merge with a company with substantial carry forward tax losses. After the merger, the total tax liability of the consolidated company will be much lower than the tax liability of the independent company. Access to Talent: Ask anybody in the recruitment industry where the biggest talent shortages currently are, and the answer will invariably be a variant of ‘people that can code’. Why is this? Firstly, because of the huge demand for coders in the so-called fourth industrial revolution. But also because all of the best coders are working for large silicon valley technology companies. The biggest always have access to the best talent. That’s as true for every other industry as it is for technology.
Incentives for managers: Sometimes, mergers are primarily motivated by the personal interests and goals of the top management of a company. For example, a company created as a result of a merger guarantees more power and prestige that can be viewed favorably by managers. Such a motive can also be reinforced by the managers’ ego, as well as his or her intention to build the biggest company in the industry in terms of size. Such a phenomenon can be referred to as “empire building,” which happens when the managers of a company start favoring the size of a company more than its actual performance.
Large mergers and acquisitions (M&A) tend 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 Mordechai 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.
Success in M&A requires much more than just executing on a big amount of deals. Acquirers must articulate exactly why and where they need M&A to deliver on specific themes and objectives underlying their overarching corporate strategies. In addition, they must give careful thought as to how they plan to pursue programmatic M&A—including constructing a high-level business case and preliminary integration plans for each area in which they want to pursue M&A.
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.
With a world-class management team and acquisition capital, AccessHeat Inc. is a uniquely positioned consolidation consortium ready to invest in your tech company. As a tech consolidation firm, we look for organizations that are working to push the limits and move into a space of exponential growth through the blending and reorganization of existing operations of the same business type. Our proven methodology focuses on producing financially robust outcomes for all parties involved in the consolidation process. Business owners who are looking for a profitable handoff and equitable transfer of ownership find peace of mind with our consultative methodology, knowing that the business they spent generations tirelessly building from the ground up is being moved to experienced and capable hands. Our strategic investment strategy makes us different than Private Equity Firms or Venture Capital Firms. We work to restructure and optimize all the components of your business that offer an opportunity for increased profitability various synergies.
