A successful merger or acquisition will increase profitability in the longer term for the parties involved in the merger or acquisition. This is often expressed as 2+2 = 5. A merger/acquisition is successful if after the merger or acquisition the two companies, produce a profit that is greater than the total profit from both companies before the merger. For example if before the merger, company A and company B each had a profit of 2 and after the merger their combined profit became 5 this is a successful merger. In our example a profit less than 5 would be unsuccessful as the profit would be the same or less than before the merger/acquisition.
Choosing the Right Business
To create an increase in profit through a merger/acquisition, the target business will have to be chosen carefully. If a business is already successful/fully utilising its strengths, the potential for growth through the merger/acquisition will be less. There is a greater opportunity for profit growth if the target business has development needs including the following;
Using its assets ineffectively including assets in the form of staff, brand name and markets they operate in.
Poor management is hindering business growth.
Is undervalued and you know how to exploit the fact that it is undervalued.
Has products or services which can be combined with yours to offer customers much more than each company could offer without the merger or acquisition.
Mergers and Acquisitions Benefits
Mergers and acquisitions can yield a range of benefits including:
Reduced Employee Costs
Staff reductions leading to reduced costs, the number of jobs can be reduced to remove duplication of skills, expertise and experience.
Quality Employee Skills and Expertise
The company you have merged with (or acquired) may have skilled members of staff that will benefit your organisation.
Economies of Scale
As a larger organisation the business will find it easier to negotiate profitable deals with suppliers. This is because new contracts are likely to be larger than prior to the merger/acquisition, larger contracts give more negotiating power when dealing with suppliers.
Reduced Costs and Overheads
Duplication (caused by organisations trading as separate entities) can now be removed in all areas of the new organisation; this will reduce costs and overheads.
As the two organisations are now part of the same business they are no longer competing with each other.
After the merger/acquisition the business may have access to customers, products and services not available to them prior to the merger.
Mergers and Acquisitions: What can go wrong?
Mergers and acquisitions can lead to a variety of problems, some can be avoided through careful planning and research but others cannot be foreseen. The following is a list of problems that can be experienced by companies involved in mergers and acquisitions.
Other companies become interested in the business you want to acquire and pull you into a “bidding war”, increasing the overall cost of the deal.
The two companies involved in the deal are unable to agree the terms of the deal.
The companies merging have incompatible systems/processes and to make them compatible is expensive.
Key employees are unhappy with the deal and leave the companies involved in the merger/acquisition.
The deal does not yield the profits expected or an increase in profits takes longer than expected.
The merger/acquisition cost is greater than expected, leading to financial problems that the newly formed company needs to recover from.
Some businesses will undertake a merger/acquisition because they want to grow quickly whilst others may do it because they feel that they cannot survive in the marketplace without the support of another organisation. Whatever the reason the company chose for the merger/acquisition should be selected carefully to ensure that it will fit well with the existing business as mergers/acquisitions have both pitfalls and benefits.