Leadership - Mergers and acquisitions
Mergers and acquisitions
General
Organisations may get to a position in a competitive market where they feel they can not survive alone.
The basic idea is that two companies together are better than the two as individuals.
There should be improvements in efficiency and market share and shareholder value.
The target company, because of the above, may welcome a merger or acquisition.
Acquisition
This is the acquisition of one company by another.
When one company takes over controlling interest of another company.
It is the act of one corporation acquiring a controlling interest in another corporation.
In an "unfriendly" takeover, the buying corporation may offer incentives to stockholders such as offering a price well above the current market value.
It is the control of another corporation by purchasing all or a majority of its outstanding shares, or by purchasing its assets
Investors often look for companies that are likely acquisition candidates, because the acquiring firms are often willing to pay a premium to the market price for the shares.
An "unfriendly" or "hostile" acquisition attempt is usually characterized by an offer far in excess of the market value of the shares, which is meant to induce current stockholders into selling, The target company's management may retaliate by soliciting competing offers from other companies in hope that a bidding war will frighten off the attacker
Merger
It is the statutory combination of two or more corporations in which one of the corporations survives and the other corporations cease to exist.
Two or more companies combine to achieve greater efficiencies of scale and productivity.
This is accomplished through the elimination of duplicated plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.
The assets and liabilities of the disappearing entity are absorbed into the surviving entity.
It is the combination of two or more corporations wherein the dominant unit absorbs the passive ones, the former continuing operation usually under the same name.
In a consolidation two units combine and are succeeded by a new corporation, usually with a new title.
It is the combination of two or more businesses on an equal footing that result in the creation of a new reporting entity formed from the combining businesses.
The shareholders of the combining entities mutually share the risks and rewards of the new entity and no one party to the merger obtains control over another.
Types of merger
Horizontal
This is where companies are in competition and sell very similar products.
Vertical
This is where a company merges with a customer.
Market extension
Where companies sell different products in the same market.
Product extension
This is where the same products are sold in different markets.
Conglomeration
Nothing in common. These are either a consolidation merger (a new entity is formed) or a purchase merger (using cash or other means).
Differences
Potential before and after
There is a tendency to believe that a merger or acquisition will lead to efficiency and increased profits.
This may not be the case if there is a culture clash.
How would you know?
You might suspect that two organisations would naturally have a cultural divide but how big is it?
What are the key areas of concern?
It is good practice to carry out a cultural due diligence.
This is good practice for the acquiring organisation and the target company.
The due diligence may involve easy to measure and see aspects, like dress codes, working environment design and annual reports to trickier areas to assess, for example business methods and values.
These areas are then assessed and ‘measured’ to give a value for both organisations.
The gaps are noted, risks assessed and plans put into place to narrow the gaps post a merger or acquisition.
This type of assessment is best begun during the initial assessment phase.
It is much easier to consider such cultural differences when the organisations are based in different countries.
However, if the same organisations are based in the same country these differences may be overlooked.
Most due diligence is carried out by financial experts and focuses on data that can be easily analysed.
Assessing yourself ahead of any merger can save a lot of time.
Merger versus acquisition
Mergers and acquisitions are slightly different items.
When the buyer completely takes over the new company and shows itself to be the new owner it is an acquisition.
The acquired company ceases to exist legally and shares in the purchasing company are still traded.
If both companies cease to exist, their share stock is surrendered and a new company and shares emerge, this is a merger.
If the companies are of similar size it is termed a ‘merger of equals’.
Sometimes, if one company is much larger and it is in fact an acquisition it is common for the smaller company to talk of a merger (even though it is technically an acquisition) in order for it to appear more bearable.
If both companies are happy with the ‘deal’ even if it is technically an acquisition the CEOs will refer to it as a merger.
If the purchased company is unhappy and the deal is hostile then it will be referred to as an acquisition.
The final outcome will be viewed according to the method of communication whether it was friendly or hostile and the viewpoint of the individual boards and shareholders.
Advantages
A ‘merger’ has the potential to lead to significant improvements, usually by:
Reductions in staff and consequent costs.
These will be from all levels.
Scale
There will be many opportunities to reduce costs in purchasing.
The order placing system will be improved and the larger scale affords more power for negotiation on costs.
Access to technology
For many companies it is important to remain at the leading edge of technological development.
Research costs money and time.
Purchasing a company that already has the technology is often the most cost and time effective method.
Market penetration
A merger can gain access to new markets and market research.
It is often easier for a larger company to raise capital.
If the merger is unsuccessful it will not be long before the financial experts see the truth.
An acquisition is the generic term used to describe a transfer of ownership, and Merger is a distinctive, technical term of a particular legal procedure that could or could not happen following an acquisition. It is far more common for an acquisition to occur without a following merger in today's marketplace.