Mergers and acquisitions (M&A) guide from Mordecai Gal? What is a merger between two firms? A merger is referred to as a financial operation in which two companies join each other and continue business operations as one legal entity. Generally, mergers can be divided into five different categories: Conglomerate merger: Merging companies offer completely different products and/or services. A note for this mergers and acquisitions strategy is that the type of merger selected by a company primarily depends on the motives and objectives of the companies participating in a deal.
What are the Different Motives for Mergers? Companies pursue mergers and acquisitions for several reasons. The most common motives for mergers are: Economies of Scale: Underpinning all of M&A activity is the promise of economies of scale. The benefits that will come from becoming bigger: Increased access to capital, lower costs as a result of higher volume, better bargaining power with distributors, and more. While buyers should always avoid the temptation to indulge in ‘empire building,’ as a general rule, bigger companies usually enjoy advantages that small companies do not.
Opportunistic Value Generation: Some of the best deals happen when a company isn’t even actively pursuing an acquisition. The hallmark of these acquisitions is that the purchase price is less than the fair market value of the target company’s net assets. Often these companies will be in some financial distress, but a deal can be made to keep the company afloat while the buyer benefits from adding immediate value as a direct consequence of the transaction.
Tax purposes: If a company generates significant taxable income, it can merge with a company with substantial carry forward tax losses. After the merger, the total tax liability of the consolidated company will be much lower than the tax liability of the independent company. Access to Talent: Ask anybody in the recruitment industry where the biggest talent shortages currently are, and the answer will invariably be a variant of ‘people that can code’. Why is this? Firstly, because of the huge demand for coders in the so-called fourth industrial revolution. But also because all of the best coders are working for large silicon valley technology companies. The biggest always have access to the best talent. That’s as true for every other industry as it is for technology.
Incentives for managers: Sometimes, mergers are primarily motivated by the personal interests and goals of the top management of a company. For example, a company created as a result of a merger guarantees more power and prestige that can be viewed favorably by managers. Such a motive can also be reinforced by the managers’ ego, as well as his or her intention to build the biggest company in the industry in terms of size. Such a phenomenon can be referred to as “empire building,” which happens when the managers of a company start favoring the size of a company more than its actual performance.
High value mergers and acquisitions (M&A) usually to get the biggest headlines in newspapers, but research indicates that executives should be paying attention to all the smaller deals, too. These smaller transactions, when pursued as part of a deliberate and systematic M&A program, tend to yield strong returns over the long run with comparatively low risk. And, based on Mordechai Gal‘s research, companies’ ability to successfully manage these deals can be a central factor in their ability to withstand economic shocks. The execution of such a programmatic M&A strategy is not easy, however.
Success in M&A requires much more than just executing on a big amount of deals. Acquirers must articulate exactly why and where they need M&A to deliver on specific themes and objectives underlying their overarching corporate strategies. In addition, they must give careful thought as to how they plan to pursue programmatic M&A—including constructing a high-level business case and preliminary integration plans for each area in which they want to pursue M&A.
Why Mergers and Acquisitions Fail? There are many reasons so let’s discuss some of them: Overextending : ‘Bolt on’ mergers and acquisitions when target companies which are small in size relative to the acquiring company – are usually considered to be the best type of transactions. One of the main strands of thought behind this is that they don’t require as many resources to be acquired or to be integrated. At the other side of this equation, are those transactions that require significant resources on the part of the acquiring firm. Loading up on debt to acquire any firm creates a pressure from day one to cut costs – never a good start for a deal, and often the beginning of the end.
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