Merger Strategy

Organizations undertake strategic mergers with other companies to accelerate their growth, rather than growing organically. The aim of a merger is to create an organization that is stronger than the sum of its parts. The merged organization is then in a better position to achieve its strategic goals.

(i) Objectives

Organizations use strategic mergers to achieve a number of different objectives, including gaining access to technology or products, acquiring additional customers, creating or removing barriers to entry, and developing economies of scale.

(ii) Growth

Growth is a key factor in strategic merger decisions. Organizations recognize that growth will enable them to compete more effectively against larger competitors or reduce their costs by taking advantage of economies of scale. For example, when a law firm announced a merger with another firm in the same sector, it stated, “the move will significantly boost its presence in the commodities sector and add further weight to its global reputation for shipping and transport work.”

(iii) Extend

A strategic merger can give an organization access to products or services that are not in its current range. The new products may enable it to increase revenue by offering a wider range to existing customers or meeting the requirements of new customers. Acquiring existing products also reduces an organization’s product development costs and enables it to replace older or weaker products that are not profitable.

(iv) Integration

Organizations can use strategic mergers to strengthen their supply chain. By merging with a key supplier, the organization can protect its source of supply and potentially reduce its costs. This is an important move when a supplier is the only source of an essential raw material or component. This approach also creates barriers to entry for potential competitors, strengthening the organization’s position further.

(v) Strengths

Where an organization has a strong marketing operation or distribution network, it can use strategic mergers to acquire additional products to sell through its sales channels. For example, network company Cisco’s strategy is to acquire companies with products that complement its own. It can then use its sales strengths to sell add-on products to existing customers.

(vi) Opportunities

Research may indicate market trends that provide important strategic business opportunities. Organizations that recognize the opportunity but do not have the products to meet the need can use mergers to fill the gap. That will enable them to move quickly, rather than delay while they develop their own products.

Strategy for Successful Merger

In order to make a merger work, it is pertinent to have a sound strategic planning so that maximum benefit is taken out from the merger. Before signing on the dotted lines, the company doing the acquisition must evaluate the performance, market position, cash flows, future opportunities, technology, regulatory issues of the target company to fix the right price for the deal.  The management of the company doing the acquisition must have a clear and well-defined strategy for their specific business.

It is always advisable to take lessons from the past deals if the company has done in the past, learn from the experience of peers and look into industry benchmarks. This can help in formulating a sound strategy which will pay off in the long run. One must look into the working environment, employees and other cultural issues of the target company so that all misconceptions are sorted out at the initial stage and employees of both the companies know what is in store for them. As the deal has to make sense for both the target and the acquirer, it is important to identify synergy between the two companies.

Most prominently, the strategy must lay out the business drivers of the merger and factor in all the risks associated with the merger.  If any major restructuring is required after the buyout, it must be chalked out and shared with the target company. This will surely ensure that all those involved in the merger process like management of the merger companies, stakeholders, board members, investors, employees agree on the defined strategies set by the acquiring company. If the plan gets the consent of all these stakeholders, then it will be easy to go ahead with the merger and complete the integration process without much hassle.

At the time of chalking out the merger and acquisition strategies, one must consider the markets of the intended business, market share that the acquiring company is eyeing for in each market, the products and technologies would be required to achieve the target, the geographic locations where the business will operate and the skills and resources that you would require making the deal a success.

Once the basic strategy is in place, then the acquiring company must look at the finances. Financing the deal can be done from myriad sources like cash, own accruals, debt, public and private equities, minority investments, etc. One must evaluate the cost of the fund depending on the needs and the amount of returns that the deal can fetch in the medium to long-run.  Always build a preliminary valuation model by calculating the estimated cost of acquisition and estimated returns from the merger. It will help you in understanding the relative impacts of the acquisitions. Knowing the value drivers of the deal is the most critical element for the success of any M&A. The acquiring company must do all due-diligence earnestly and identify the sources of value like intellectual property, people, markets and brand from the deal.

Lastly, one must remember that employee turnover in target company is usually very high in the initial years after the merger. The acquiring company must put in place an effective retention programme for the key employees who drive growth and value for the company. As a substantial number of M&As fail, one must keep the acquisition strategy ready at the time of signing the deal and reap the benefits later on.  It is naive to think of an acquisition as a panacea. The work of integrating an acquired company can take anywhere from 6 months to couple of years, before you begin to realize any benefits. There will always be complications, hurdles and disappointments, but one must keep the focus on the end result.