Six reasons why mergers can be a good strategy? 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: Product-extension merger: Merging companies operating in the same market offer products and/or services complementary to each other. A note for this M&A 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.
Acquisition of assets: A merger can be motivated by a desire to acquire certain assets that cannot be obtained using other methods. In M&A transactions, it is quite common that some companies arrange mergers to gain access to assets that are unique or to assets that usually take a long time to develop internally. For example, access to new technologies is a frequent objective in many mergers. Increase in financial capacity: Every company faces a maximum financial capacity to finance its operations through either debt or equity markets. Lacking adequate financial capacity, a company may merge with another. As a result, a consolidated entity will secure a higher financial capacity that can be employed in further business development processes.
Increased Market Share: One of the more common motives for undertaking M&A is increased market share. Historically, retail banks have looked at geographical footprint as being key to achieving market share and as a result, there has always been a high level of industry consolidation in retail banking (most countries have a group of “Big Four” retail banks. A good example is provided by the Spanish retail bank Santander, which has made the acquisition of smaller banks an active policy, allowing it to become one of the largest retail banks in the world.
Big mergers and acquisitions (M&A) tend 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 Mordecai 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: Wrong information : Insufficient due diligence. The importance of due diligence can never be emphasized enough, partly because so many firms are evidently keen to get it over with as soon as possible. One of the major problems that arises during the process is that the acquirer is depending on the target company to provide information that isn’t always complimentary to their management. This creates obvious agency problems. By extension, the more uncomplimentary the information, the more the target company team is likely to withhold it and/or explain it away. In extreme cases, this can lead to the failure of the transaction in the long-run.
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