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Mergers and Acquisitions

What Are Mergers and Acquisitions?

Businesses, like the people who run them, are living and evolving entities. They are constantly responding to the events that happen around them. In this sense, change is constant. One of the more dramatic changes that can happen to a business occurs when it combines with another business to form a new entity.

Mergers and acquisitions (M&A) refer to the process of two businesses combining into one. There are many ways in which this can happen, including so-called horizontal, vertical and conglomerate acquisitions.

The reasons for M&A are also varied. One common underlying factor in all types of M&A is the desire for one or both companies involved in the change to gain some sort of competitive advantage in their marketplace.

Another common element in M&A is the need to prepare. M&A readiness refers to how well prepared an organization is for the change. Leaders must take steps to prepare strategically, operationally, and financially for the two entities to become one.

The Benefits of Mergers and Acquisitions

M&A has many benefits for the companies involved. Generally, one or more of the businesses is looking to gain an advantage through access to markets or resources that they would not otherwise have. The specifics of those advantages will vary depending on the business.

For example, a business that manufactures a finished consumer product may want to merge with another company that supplies one of the component parts of that finished product or is involved in some other way with the supply chain, such as deliveries or shipping.

By executing the merger, the parent company will gain advantages by having greater access to the product or process and greater control over how it gets done. This leads to greater efficiencies and can reduce costs, which also leads to bigger profits.

Companies also engage in M&A to gain access to a certain talent pool in the labor market to give it specialized expertise, or to expand into other new or related markets to diversify and provide a cushion in case of declining business.

Successful Strategies for Mergers and Acquisitions

Successful M&A typically involve a combination of several important strategies:

Strategic alignment involves careful planning and consideration of the goals, objectives, culture and internal processes of both companies participating in a merger or acquisition. Much of the thought should be done well before the transaction takes place.

Combining enterprises may be seen as beneficial to one of the participants, but to work effectively, both parties should gain. Thoughtful analysis should be made of the markets served, the products delivered, and how each company can benefit the other in that regard.

Analyses should extend beyond these factors and look just as carefully inward. How companies operate, are structured, make decisions and respond to market changes are key characteristics that may allow the two companies to complement one another or just as easily to clash. Diagnosing and planning for these interactions could make the difference between a successful merger and one that fails.

Proper planning and preparing for M&A also involve the performance of due diligence by the parties involved. Examining important undisclosed details can uncover potentially impactful issues before the deal is executed. For example, examining balance sheets, tax returns, and audit reports helps gather detailed information about a company's financial status.

Reviewing contracts, permits, and patents will glean important details about a company's legal obligations and authority to operate. Personnel data like job descriptions, contracts, and HR policies reveals the health and composition of a company's workforce. These reviews and others will help separate facts from the hype in a merger or acquisition.

Personnel is a valuable and sometimes overlooked resource for a company. It can also play an important role in the success of a new company after a merger or acquisition. It is important for leaders to prepare for proper cultural integration before they engage in M&A. A proper cultural assessment should be performed as part of the acquiring company's due diligence.

It entails examining and understanding several aspects of a target business including employee satisfaction, value systems, communications, structure and decision-making. This information can be gathered through various means, including interviews, surveys and digital diagnostic tools.

Once this information has been gathered, leaders can begin the process of assessing what works, what doesn't work, how the two companies are aligned, how they are not aligned, and what new set of goals and priorities should be established to bring the two companies together in a way that supports the change.

Because M&A involves dramatic change that can be disruptive for many of those affected by it, communication and transparency are essential to the process. Emotions are involved for customers as well as employees. It is important for leaders to have a consistent and clear message, to be accessible and to answer questions truthfully and candidly.

A combination of assertiveness and patience will assure that most or all concerns will be heard and addressed in a satisfactory manner. The change may be inevitable, but affected parties are more easily reassured if they feel like they are being listened to.

All the steps involving preparation for M&A will do little for the success of the transaction if leaders do not have a plan for implementing what they have learned in the process. Post-merger integration involves the process of bringing various aspects of the two companies together and making them work.

It encompasses all the various resources that feed into business success, including business processes and function, culture, values, communications and technology.

Leaders should find synergies in these areas by looking at what has worked well for the companies and can be carried forward into the new entity. A timeline and a plan for integration following the merger will help guide employees through the process. Assigning an integration team to oversee this process will also give it direction and a sense of purpose.

Why Companies Do Mergers and Acquistions

Businesses have many reasons for engaging in M&A. The primary reason is for growth. This can be achieved in many ways.

Acquiring or merging with another company can help a company increase access to markets, customers and talent. If a target company primarily serves a particular market where the acquiring company has not previously had a strong presence, the merger will help that company expand its exposure and reach.

Similarly, a company with a talented pool of employees in a specialized subject area can help another company expand and heighten its own level of experience by acquiring that talented team.

Some companies that deliver a finished product may want to acquire other companies that are involved in the supply chain, to gain more control over the process and reduce costs. This is referred to as vertical integration.

For example, a beverage company might prefer to own its bottling or trucking company. A computer company that acquires a chip manufacturer will have greater control over the process of assembling the finished product. An e-commerce company that develops its own line of products can similarly cut costs and increase sales.

Businesses also engage in M&A to achieve what are known as economies of scale. By acquiring a company that enables the parent company to expand its production of a particular product, tremendous savings can be achieved. For example, auto manufacturers can reduce costs when they acquire other car companies and expand their production output by combining the manufacturing process of the two companies.

Finally, M&A is an effective strategy for a business to grow through diversification. A business that sells a product or service that is seasonal or is otherwise prone to fluctuations may seek to obtain a greater level of stability and consistent revenue. Expanding product offerings and a new customer base by acquiring another company can help the business achieve that goal.


What Are the Different Types of Mergers and Acquisitions?

Just as M&A can happen for different reasons, there are various ways that it can occur. Most importantly, although mergers and acquisitions are often described together, they refer to two different things. A merger occurs when two companies join to form a new entity. An acquisition occurs when one company takes over ownership of another company.

M&A are also described according to the nature of the relationship between the two companies before they become one. In a horizontal integration, a company expands its presence in a particular market by acquiring another company in the same industry. Vertical integration refers to the acquisition of another smaller company in the same supply chain as the acquiring company. Conglomerate acquisitions happen when one company wants to enter into an entirely different market or industry for the purposes of expanding and diversifying. A congeric merger takes place between two companies that operate in the same market or industry but offer different products or services. They may have other similar or overlapping features, such as the same technology or production systems, which make the merger advantageous.

Mergers and acquisitions are often mutual and consensual, but in some instances, one company is acquired against its knowledge or wishes. In hostile takeovers, a company takes control of another company by acquiring more than 50 percent of its voting shares.

This can be done through a tender offer to purchase the shares at a price above the market value or through a proxy fight by persuading stockholders to vote out the current management and vote in management that is favorable to the takeover.

What Is a Real-World Example of Mergers and Acquisitions?

In 1999, the British mobile and broadband service provider, Vodafone, acquired the German conglomerate, Mannesmann, for $202.8 billion in what is considered the largest acquisition in history. The transaction helped Vodafone consolidate its position in the European market and become the world's largest mobile operator.

How BlackLine Enables M&A Success?

Mergers and acquisitions provide opportunities for organizations to accelerate growth, combine operations, and reduce costs.

Involving finance and accounting early in the deal cycle can help companies meet and even exceed expected goals. With BlackLine, F&A teams can streamline legacy accounting and realign capacity to act as strategic advisors before, during, and after a business combination.

Learn how BlackLine can help your business prepare for M&A success.