Introduction
Mergers and acquisitions are a prominent phenomenon in business. Provides additional opportunities for growth and profit. It is also often used by entrepreneurs as an exit strategy and is crucial in determining your ultimate success and financial independence. Unfortunately, things don’t always go well in executing M&A and sometimes it’s a complete failure.
Justification of mergers and acquisitions
In general, a company views a merger and acquisition as an opportunity to improve its competitive advantage and financial well-being. The rationale for mergers and acquisitions includes the following:
- Understanding shareholder value. Business management is measured by improving shareholder value. Entrepreneurs, on the other hand, want to make a substantial material profit after having successfully built their businesses.
- Expansion of markets. The growth potential of companies is enhanced through additional market niches and a wider geographic distribution.
- Increased efficiency. Economies of scale can be obtained from an increase in the size of operations and through better control of operations (for example, controlling a larger portion of the supply chain).
- Access to resources. Competitive advantage is enhanced through better access to finance, raw materials, skills, and intellectual capital.
- Manage risks. Risks can be reduced by diversifying the business and having a choice of supply chains (for example, manufacturing and purchasing in different countries).
- Listing potential. The public offering of shares of a company is enhanced by an increase in turnover and profitability.
- Political necessity. Countries have different legal requirements (for example, in South Africa there are certain Black Economic Empowerment (BEE) regulations that companies must adhere to).
- Speculative possibilities. Companies often buy another company only to sell it in the near future or to dismantle the company and sell parts of it.
- Additional products, services and facilities. Patented products and additional warehousing and distribution channels improve a company’s service levels and offering.
Why do many mergers and acquisitions fail?
Mergers and acquisitions fail for several reasons. Failure can occur prior to the physical merger and acquisition, during the implementation process, or during the operation of the newly merged entity. Possible failures are due to many factors, including:
- Failure of the negotiations. No agreement is reached between the parties due to factors such as different cultures, expectations and risk profiles.
- Legal matters. The competition laws of various countries often prohibit transactions that are considered anti-competitive.
- Implementation problems. Systems (especially IT) are often not very compatible and difficult to merge.
- Financial failure. The expected billing has not been reached and the return on investment and / or the liquidity and solvency of the company are at risk.
- Failure of the people. Cultural differences, hostility from staff, and resignations can cause serious problems.
- Planned strategic objectives are not achieved. This includes achieving synergies such as greater efficiency and market penetration.
- Risk management failure. The risks (eg legal, business, financial and operational) of the merged entity are unacceptably high.
Success criteria for a successful merger and acquisition
A successful merger and acquisition can be compared to two main factors:
- Increased value for shareholders. A sustainable increase in shareholder value must be achieved over time.
- Synergies materialized. The achievement of the expected synergies such as more efficient operations, higher profitability and increased market share.
Improve the odds of a successful merger and acquisition
Companies can increase their chances of M&A success through proper planning, working within a predefined methodology, and managing the entire M&A as one project. Specific details that need to be properly managed include the following:
- Strategy. Mergers and acquisitions are part of the broader strategy of the company and must be well thought out and planned.
- Due diligence. Risks (eg legal, business, financial and operational) are analyzed in a due diligence process. This process must be carefully planned and executed.
- Synergies. Expected synergies must be detailed and attention paid to their achievement.
- Costs Expenses can easily skyrocket during the M&A process. Expenses must be budgeted for and then monitored.
- Expectations. The false expectations of various groups often lead to disappointment. All expectations should be discussed and clarified with all relevant parties.
- Transparency. Proper communications and openness (where relevant) with employees, customers, suppliers, and other business partners are recommended. Rumors (often unsubstantiated) that are not nipped in the bud quickly can do a lot of damage to morale and role players may seek alternative opportunities.
- Systems. The merger of systems (especially IT) must be carefully planned and executed or it may lead to the downfall of the newly merged entity.
- Stay interested. Senior management commitment is essential. Your participation (when needed) can substantially increase the chances of success.
- Don’t lose sight of the ball. A merger and acquisition is a means to an end. Companies often don’t see it in perspective and then other critical aspects of the business are neglected.
- Change management. The success of any merger and acquisition often depends on the success of the merger of two different business cultures. In addition to this, people often have random resistance and experience some kind of trauma in the process. Career change management can make the difference between a successful M&A or failure.
- Trusted advisers. Mergers and acquisitions are often a unique experience for many companies. In this situation, as well as when companies do not have sufficient and qualified personnel to handle all aspects of a merger and acquisition, they must hire competent external advisers. These advisers may include attorneys, auditors, business consultants, and change management facilitators.
Summary A merger and acquisition is typically one of the most important strategies a company will embark on. Unfortunately, many mergers and acquisitions are failures (or at least in some respects). One of the best ways to increase your chances of success is to properly plan a M&A and view it as a project and manage it that way. A M&A generally has all the important characteristics of a project: it is multidisciplinary, has specific objectives, is unique, and has time and budget constraints.
Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.