If you want your company to enjoy fast, explosive growth, then consider merging with or buying a target company.
If you use the right merger and acquisition strategies your company could gain many competitive advantages and transform from a scale-up to a large firm.
It could also benefit from new technologies or skill sets, increased output, and more fixed assets. It could achieve an increased market share like Disney achieved with its $71.3 billion merger with 20th Century Fox in early 2019. The merger meant Disney boosted its domination of cinema with the newly merged company commanding 35% of the industry.
Your company could enter or expand into other markets or territories by merging with or acquiring a company that already has a strong presence there.
Acquiring firms can get substantial cost or revenue synergies from the merger or acquisition. For example, the company could benefit from the increased buying and negotiating power it has, thanks to the merger or acquisition.
It could achieve vertical integration, with potential cost and efficiency savings. Some of the business units within the merged firm could be consolidated.
With an expanded business, you could benefit from internal economies of scale. Your business could get access to raw materials or gain control of your supply chain.
Your business could achieve a virtual monopoly in your market through horizontal integration. That is, acquiring or merging with a company that is on the same level in the production supply chain as your own.
A successful M&A in another country could provide substantial tax benefits too. Many governments offer substantial tax benefits to companies that merge with or acquire local companies.
All of this can be achieved in the short term rather than the years it might take if you rely solely on organic growth.
However, before you start looking for target companies, it’s essential to undertake strategic planning. You and your Board of Directors need to consider your company’s goals, resource allocation, business portfolio, and plans for growth.
You can then better decide if merging with or buying another business fits with your company’s strategy and goals.
It’s far better to do this early on rather than after you’ve acquired companies.
Raising finance to fund the merger or acquisition
If you decide that a merger or acquisition will fit with your goals, then you’ll need to consider how to finance your merger and acquisition (M&A) deals.
Borrowing from third party lenders makes an acquisition or merger possible for growing SMEs. There are of course other ways to finance a merger or an acquisition. They include exchanging stocks, taking on debt, issuing an IPO, using cash, and issuing bonds. Some of these might not be feasible for SMEs.
Banks are still the main source of primary loans, but there are several alternatives to consider. They include direct lending funds and private placement markets.
You can use debt capital, equity capital, mezzanine capital, or convertible debt to complete your merger or acquisition.
The benefit of using debt capital in which you borrow against any debt-free assets is that you won’t have to give up equity in your company.
With equity capital, you sell a portion of the equity you own in your company. Private equity groups will offer to fund you in return for a stake in your company.
You could consider applying for a private placement loan. With that, you sell shares in your company to a select group of investors. The advantage of a private placement loan is that it can be a cheaper and quicker process than a public share offering. It is less regulated too.
The benefit of getting an asset-backed loan from a direct lending fund is that the fund manager may offer a more flexible deal structure than a bank. You will also keep control of your business.
Mezzanine capital is a hybrid of debt and equity capital. Lenders will look at your cash flow and your company’s future growth rather than its assets.
If your company is classified as high risk and you’re unable to get credit, you could raise funds through convertible debt. A creditor will loan you the money in return for a mix of equity in your company and debt-free assets.
Many financial and legal factors need to be considered before merging or acquiring a business. Mergers and acquisitions require analysis of the following:
- Market opportunity
- Company resources
- Company’s liquidity (to ensure it can make and sustain the investment
- Statutory and regulatory restrictions (especially linked to competition)
- The speed of the process
- Impact on customers (especially if the M&A results in market domination and a price hike)
In the medium and long term, the success of the operation depends on three things:
- The size and global scope of the resulting business
- The capacity of the management team
- The integration of strategic and operational functions.
It’s crucial that you understand the market your target company is in, identify entry barriers, and evaluate its potential for growth.
Your due diligence should include the company’s intellectual property, its contracts, balance sheet, management, staff, benefits packages, property, leases, and stock.
That’s why a successful merger or acquisition relies on the help of external M&A advisors who have expertise in this area. They can carry out due diligence, provide advice, and even negotiate on your behalf. They can also save you from making a costly mistake.
Many mergers and acquisitions fail due to factors like poor research of the target company and due diligence being carried out by buyers who have no experience in M&A transactions.
They can also suffer from too much focus on post-merger cost-cutting rather than growth, as was the case with the merged Kraft Heinz.
A mismatch of cultures or even IT systems and other technology can also result in M&A failure. This was the case when the German car manufacturer Daimler Benz bought the American Chrysler car company for $36 billion in 1998.
While the German company catered to an affluent market, Chrysler offered its cars at competitive prices.
The union didn’t work and in 2007, Daimler Benz sold Chrysler to Cerberus Capital Management for $650 million.
That’s why it is so vital to use advisors who are well-versed in M&As. They’re likely to be doing M&A deals on a day to day basis.
So, if you want your company to grow dramatically, acquire new customers, and enjoy a sustainable competitive advantage, start looking for target firms that are ripe for acquisition or a merger. But talk to the M&A experts at the CFO Centre first. Call 0800 169 1499 now.
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