What Makes a Merger a Success

Companies may be combined in two different ways: a merger combines two existing companies into a new one, and an acquisition is one company absorbing another. In either case, two or more companies come together to form a single entity.

The majority of change agents and essential components of any corporate strategy, mergers, and acquisitions (M & M&A) are financial transactions that occur across all business sectors. Because only the most innovative and adaptable companies survive as businesses evolve, deciding on an M&A arrangement is a critical strategic decision for any company.

Mergers and acquisitions may occur in the following ways:

  • Through acquiring assets
  • Acquiring common stock
  • Exchanging of shares for assets
  • Trading stock for stock.

Merger Benefits

A merger obtains finances or desirable assets for future development. Better manufacturing or distribution facilities are sometimes less expensive to purchase than to build. Buyers look for moderately profitable target companies but have a substantial growth capacity and may be purchased for a small premium over net asset value.

A merger reduces competition for your business because the additional resources and increased productivity enable you to grow your company faster.

Suppose you want to expand your market share with access to a broader audience, but your business’ underperformance prevents that from happening. In that case, purchasing a smaller business with reliable resources may mitigate the struggle. A thoughtfully considered and well-executed merger can help you grow organically. With your combined resources and removing duplicated facilities or departments, you can reduce costs and increase revenue.

Merger Types

Conglomerate Mergers

A merger of two or more organizations that operate in separate industries and engage in different, unconnected business activities is known as a conglomerate merger. If the worth of the merged companies exceeds the sum of each company’s value, then the merger is considered beneficial. This is commonly stated by the 2 + 2 = 5 equation.

Conglomerate mergers come in two basic types: pure conglomerate mergers and mixed conglomerate mergers. The pure merger involves two businesses that operate separately in different marketplaces. In a mixed merger, the merging companies plan to extend their product lines or target markets to ultimately no longer be involved in entirely unrelated core industries.

A conglomerate merger best suits companies that want to diversify. For companies in different businesses but in the same market, a merger can help them cross-sell their products. In addition, a merger like this attracts higher profits.

Congeneric Merger

A congeneric merger also called a concentric merger, occurs when two businesses from the same industry combine to provide clients with a broader selection of products or services. These organizations frequently share comparable technology, marketing, and distribution networks and rely on congeneric mergers to generate synergies. Congeneric mergers and acquisitions are among the most common forms of mergers and acquisitions.

Heinz and Kraft’s 2015 merger, valued at over $100 billion, is estimated to be the biggest concentric merger in history. When merging, Kraft was a prominent manufacturer of mayonnaise, salad dressing, cottage cheese, natural cheese, and lunch meat. Meanwhile, Heinz was the global leader in meat sauce, pasta sauce, and frozen appetizers. The merger established Kraft-Heinz, a food industry powerhouse with $24.97 billion in revenue in 2019.

Market Extension Merger

A market extension merger brings together two businesses that operate in distinct markets but provides the same products. The primary aspect of this type of merger is to offer similar products to separate audiences. The goal of a market extension merger is to increase market dominance. This may involve targeting markets within the same country or spread across multiple nations.

There are several reasons why a company would decide to pursue a market extension merger, but the major one is to get access to a larger market and a more extensive customer base.

Horizontal Merger

A horizontal merger occurs between organizations operating in the same industry or market niche. The organizations provide similar products or services and merge under the same ownership structure. Most companies seeking such a merger are competitors within the same sector.

Companies seek mergers for both financial and non-financial reasons. Horizontal mergers typically occur for non-financial considerations. However, these types of mergers are more thoroughly supervised by the Federal Trade Commission and the Department of Justice to deter anti-trust issues that establish de facto (if not de juro) monopolies.

Vertical Merger

Vertical mergers occur between two or more corporate units that operate at various stages of production within the same industry. In this scenario, one company produces the product, and the other provides the raw materials or services needed to produce such products.

A typical example of a vertical merger would be the 2002 combination of eBay and PayPal. eBay is a platform for online shopping and auctions, and PayPal offers money transfer and online payment services. Although eBay and PayPal were distinct companies, the merger enabled eBay to increase the number of transactions and proved to be a good option overall.

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What Makes a Successful Merger?

Shared Cultures and Values

A company’s CEO and executive leadership explicitly establish its vision and values. According to a Deloitte study, 94 percent of executives and 88 percent of workers agree that a distinct corporate culture is critical to a company’s success. The same poll also discovered a tangible link between workers who feel excited and rewarded at work and those who believe their office has a good culture.

Combining distinct corporate cultures isn’t easy, which makes combining compatible corporate cultures necessary for a successful merger. Misunderstandings, friction, and stress make it difficult or impossible for teams to operate successfully together, jeopardizing a merger’s success.

The right way to deal with this is to retain the top talent that helps you build collaboration and produces high performance. If your employees are happy with their everyday work roles and company culture, they’ll stay and help you build your company’s value.

Shared Time, Resources, and Commitment

Before consenting to any planned M&A deal, the management of both companies must analyze the ramifications of the proposed merger, which includes an evaluation of the “people issues” that may crop up.

Due diligence provides insights into the value of a property and its workforce, evaluates factors such as employee talent and corporate culture, and includes standard assessments of employee benefits plans and liabilities, compensation programs, employment contracts and policies, legal exposure, etc. Moreover, it reduces the likelihood of costly surprises post-transition.

Clean Financials

The due-diligence phase makes or breaks a decision to merge. The prospective buyer assesses the seller’s financial records, purchases, customers, liabilities, contracts, and other things necessary to the process. This assessment makes sure that the transaction is clean and no hidden issues will come back to bite them. Being transparent about your situation is the right way to convince a buyer of a transaction.

A successful merger requires sellers to keep their financial records audited and official. A buyer will closely review your quarterly and annual financial statements, which have been audited. This gives them a clear picture of what they’re getting into and any risk factors the transaction may include. Each revenue stream must be reviewed individually to calculate its value and risk factors.

The buyer’s audit team works closely with banks, is interested in knowing your assets, and will be hunting for anything undisclosed. If you want to sell your business, make sure you get its maximum selling price. Your financial records need to be clean and appeal to the buyer to achieve that.

The Ultimate Collaboration

A merger involves two organizations, their people, and their collaboration capacity. For a merger to succeed, both parties must do thorough due diligence, recognize possible obstacles, capitalize on synergies, and appreciate the value each party brings to the new company.

Both parties’ devotion of time and money to building a new brand assists everyone to align themselves with the new brand and integrated culture. Employees will embrace the changes necessary during the merger with the proper investment and emphasis on workforce and culture.

Mergers are complicated, so thorough preparation helps identify, reduce, or even remove potential issues.

Value Scout can help you with the valuation of your company. If you have any questions, connect with our experts today!

Author Summary:
Dan Doran

Dan Doran

Is the Founder of Value Scout, Quantive and the 2019 Exit Planner of the Year. He is a recognized expert and speaks frequently about M&A, valuations, and developing more deliberate value creation strategies.

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