Business mergers and acquisitions are commonplace in our economy. One of the main reasons given for a merger is that it draws on the strengths of each company, who together can offer more than they can alone. Benefits of an acquisition typically include lowering risk by avoiding the start-up period’s initial losses and less capital depreciation.
Reasons for a Merger
Consolidation is everywhere and in all industries. Mergers are being announced at an unprecedented rate, and we can expect to see many more mergers during the next few years. An increase in the size of a firm can mean greater financial resources to cover the additional costs that may be necessary for the business to succeed in today’s business environment. Some of the factors which may encourage a merger…
Buyers may be motivated to merger activity for:
• Economic Efficiency Considerations: Companies want to gain (i.e., reduce average costs) from larger-scale operations. Merged firms can also have greater specialization of equipment and operators, high-speed automation, and high-tech equipment.
• Risk Spreading Through Diversification: Reduce risk of loss and/or failure by spreading risk throughout more companies and capital.
• Growth and Personal Aggrandizement: Some managers make it their personal goal to be the largest and most powerful company and achieve this through mergers.
• Monopoly Power: Firms merge to create or enhance monopoly power. Incentive? All of the individual firms worth more as a group than as individual firms
• Perhaps as a result of a general change in business climate
• Management retirement considerations
• Business succession planning
• To gain newer technologies and methods more quickly to keep up with their industry
• Larger market share through eliminating the competition (growth)
• Access to other markets – regional or channel marketing (growth)
• Additional, complimentary products or services which “fit” with the acquiring company
Tips for companies considering a merger.
• Deal from a position of strength. Don’t wait till things are bad and you need the money.
• It’s important to find a like-minded company which is a good match in terms of culture and personality.
• Explore many possible partnerships. Whether you’re shopping for a buyer or looking to buy, establish your criteria for evaluating deals.
• You need to explain how each employee’s role will change and communicate as things evolve.
• Let employees know what you are up to. During the exploratory phase, you don’t have to give details, but once the deal is done, explain the reasons behind the merger.
• Pay attention to employees. Once the deal is done, every employee wonders, “What will happen to me?”
• Once the papers are signed, the task of integrating the two organizations should be quickly handed off to the managers. Firms considering a merger should however take considerable care. The worst form of merger is inevitably where two firms with significant difficulties merge without proper planning, potentially causing their problems to be magnified. You will want to retain an experienced, professional firm to help manage your merger. For additional information call 619-688-0007.