Mergers and Acquisitions – usually shortened to M&A – are a part of business life. Owners and leaders see them as a way to grow their businesses, with the hope of making them more profitable.
They are intense, hard work, and risky ventures. Half of them fail to deliver the returns that the analysts predict.
So, the only people who can be sure to profit from them are the professionals that move from one M&A engagement to the next, the:
- and the analysts themselves
Why Start an M&A Transaction?
There are lots of forms, but every M&A transaction has the same fundamental goal: to build a better company.
There are three primary ways that can happen, creating three major reasons for an M&A transaction:
A merger with and or acquisition of a company in a comparable business. This is a way to gain industry dominance by extending your reach across your market, or indeed, into new sectors or regions of your market. Examples include supermarket mergers. The principle benefits of these kinds of M&As are cited as:
The ability to remove costs because both companies have similar back-office services that can be merged and reduced in total
- Market Dominance
Many of the biggest US corporations, like Du Pont and General Electric, are the results of mergers back at the end of the 19th and early 20th century. It still drives many professional services practices, like law and accountancy firms, to merge today.
- Market Expansion
Why take on all the risk of creating new products or reaching into a new geographic market, when you can buy a business that has those products or a strong base in your target market already?
Supply chain is a major cost and a big risk to many businesses. The fashion pendulum swings from owning and operating as much of the value chain as you can, to outsourcing all parts of it that are not your core business. When the pendulum swings to integration, businesses trigger M&A research up and down the chain, hoping to acquire their key suppliers up the chain, and their vital distribution capacity downstream.
Diversity is security. Large corporations can stabilise their cashflow and buttress against changing market conditions by acquiring business lines that fare best under differing economic conditions. And, even if they aren’t as coldly logical, they may simply think that the best way to spend capital is on a profit-making business. There are two primary models:
- Functional Integration and Deep Control
Here, the head office function exerts a lot of control on each of its divisions and operating companies. Often there are strong functional alignments that cut through the different business lines, drawing each one into conformity with a centrally-promoted set of stipulations. A good example of this strong integration and central control, as I write, is Honeywell.
- Laissez-faire and Loose Control
The diametric opposite approach is best illustrated by Berkshire Hathaway. Each of its diverse companies is self-managing. The central business is tiny and makes absolutely minimal demands of local business leaders. Only fiduciary, governance, and reputational issues are of concern to Berkshire’s ultimate leaders, Warren Buffett and Charlie Munger. They focus their efforts on finding the right assets to bring into the portfolio. And by ‘right’, they mean companies that can run themselves profitably and ethically without central guidance.
- Functional Integration and Deep Control
What is M&A?
M&A is really one strategy for business growth. However, seen from the perspective of the advisory and financial services business, it is one approach to corporate financing. It is the transaction that buys, sells, or combines companies.
The principle behind M&A is simple. The whole is greater than the sum of the parts. In this case, the value of the two companies together will exceed that of the two separate companies. The frequency with which that is true – at least to a significant extent – is sadly lower than anyone would like. But optimism reigns, and M&As continue.
Strong companies buy weaker companies to grow. Weaker businesses agree to be bought when they fear they cannot survive alone.
Merger, or Acquisition?
In a merger, two comparably-sized or valued organisations join to become a new business. Usually it will take a new or blended name. The term ‘merger of equals’ is sometimes used but, often, this is a bit of political spin and a sop to the stakeholders in one party who know that the truth is that they will become subsumed over time. Mergers are rarely well-balanced, whatever the presentational story.
An acquisition is often more honest. One business is buying another to gain access to something of value. Often, products, markets, and staff that are not considered to be of value will shortly be shed. If the smaller company retains any autonomy, it will usually be as a subsidiary. A company that is being considered for a merger or acquisition is sometimes referred to as the ‘target’.
The Much-touted ‘Synergy Savings’ of M&A
Duplication of functions and services between the merging businesses or between the acquirer and their target, lead to duplication of costs. If you can eliminate these duplications, you can reduce costs. If you can successfully merge complementary practices, you may even be able to improve value. This is the theory of ‘synergy’.
‘Synergy’ literally means two things working together
Closing offices and outlets, firing people, decommissioning plant, merging logistics, and combining marketing campaigns can all lead to cost savings. So too can negotiating bigger discounts with suppliers when you buy larger quantities to serve a bigger corporation.
But these benefits rarely meet the predictions of analysts, and the costs of implementing are always higher. And these are not just the pure cash costs. There’s time, distraction from growing the business, morale, and reputational costs to think of too. Is it any wonder that half of the mergers and acquisitions that take place produce little or no net benefit?
The strongest reasons for M&A are always strategic. The businesses would genuinely enhance one another. As a project manager, I’d suggest that, if you cannot justify an M&A deal on those grounds, then don’t even bother to try to justify it on the basis of ‘synergy’.
What is Your experience of Mergers and Acquisitions?
This is a huge topic and we can only scratch the surface. Have you been involved in any M&As? We’d love to hear your experiences, ideas, and questions. Please leave them in the comments below.