In some cases, mergers and acquisitions can be a shortcut to raise cash quickly and to help out with a tricky financial situation or fund short-term growth.
In others, it can be a great way for companies to expand into new markets or territories, gain a competitive advantage, or acquire new technologies, all feeding into their strategic plan for growth.
These are just some of the advantages behind a merger or acquisition, but, as with most things in business, there are challenges and risks to taking over competitors and peers. So what do you need to consider along the way?
There are two types of mergers and acquisitions, the first being financial. This type of acquisition is the ‘shortcut’ approach we mentioned earlier.
As the name suggests, financial mergers and acquisitions are instigated for financial reasons. Typically, financial buyers look for businesses that can generate a large amount of cash in a short period of time on their own after an external cash injection. Ultimately, they’re looking for a return on their investment.
Buyers looking to make a strategic acquisition, on the other hand, tend to be competitors, suppliers or customers of the firm they want to merge with.
There are various advantages of merging with another company – the positive effects of merging with a competitor or client of a competitor are perhaps obvious.
It’s not uncommon, however, for strategic buyers to merge with firms unrelated to their primary business if they want to diversify their revenue streams and strengthen the value of the business to their shareholders.
There are a number of benefits for firms that make strategic mergers and acquisitions outside of knocking out competition and opening another source of revenue.
Of particular note, a merger can create cost and revenue synergies. It might sound like a buzzword, but a ‘synergy’ is simply the interaction of two or more organisations to produce a combined effect that’s greater than the sum of their separate effects.
In other words, by pooling together your resources, your new organisation can cut costs by taking advantage of overlapping operations and resources. For instance, you could share a single workspace to save on rent or cut your staffing costs if one team could take over the responsibilities of the corresponding team in the other organisation.
With a bigger budget, you’ll also have greater buying and negotiating power to get better deals from your suppliers.
Your revenue synergy has the potential to be even more beneficial. If you’ve merged with a competitor, not only does it mean more profits to divert to your side of the business, but also a bigger safety buffer to increase your prices.
Alternatively, if you merge with an organisation that is different from your own, you essentially gain access to a huge amount of new potential customers for free, while you can cross-sell across both parts of the business.
Further, a merger can be the perfect way to expand your business into a new, maybe even foreign territory.
They are also a great way to acquire new talent and intellectual property, as well as being ideal for business owners who want to transition to a new industry but lack the experience and expertise to go it alone.
There are challenges that you need to be on the lookout for. For instance, you could end up choosing the wrong company to merge with, overestimate your synergies, or even lose the trust of some shareholders.
To overcome such challenges, be conservative in your estimations of any benefits you might see from a merger. To keep shareholders on side with the move, don’t just be transparent – you need to convince them there’s something in it for them.
You should also be careful and never rush into an acquisition. That includes turning down an offer if you are not absolutely certain about it.
You also need to make sure you’re getting good value for money when you’re looking to acquire a firm. After all, while the owner of the business you’re acquiring will be the first to tell you you’re underpaying, they probably won’t say when you’re overpaying.