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To accelerate the growth of your company and organic growth doesn’t appeal, consider merging with or acquiring another company.
Such a move can help business owners like you to grow your top line and profitability, says the FD Centre’s FD East of England North, Lynda Connon.
A successful merger or acquisition can also give your company access to your target company’s technology, skillsets, markets, and target customers.
If the target company is in a different industry, the merger or acquisition can help to diversify and mitigate risk.
Considering a diversification strategy like this is valuable if there is any doubt about your company’s prospects for long-term profitability.
The standard form of an acquisition is when one company (the acquiring company) buys another company.
It does this by either buying all the shares in the acquired company or by purchasing its assets. The shell company is then liquidated.
Likewise, there are several types of mergers, including:
• Horizontal merger (in which you merge with a company in your industry)
• Vertical merger (in which your target company is at a different production stage or place in the value chain)
• Product-extension merger (in which your target company sells different but related products in the same market)
• Market-extension merger (in which your target company sells the same products as your own but in a separate market)
• Conglomerate merger (in which your target company is in a different industry and has different products or services).
Growing your business via a merger or an acquisition has many benefits, including the following:
• To achieve a lower cost of capital
• To improve your company’s performance and boost growth
• To achieve higher revenues
• To reduce expenses
• To achieve economies of scale
• To diversify your product or service offering in your existing markets or move into new markets
• To increase market share and positioning
• To achieve tax benefits
• To diversify risk
• To make a strategic realignment or change in technology
• To obtain new technology, more efficient production, or patents, and licenses.
Dangers of mergers and acquisitions
As beneficial as mergers and acquisitions (M&As) may be, particularly in terms of achieving fast revenue growth, they are not for the faint-hearted.
The merger or acquisition process can take anywhere from a few months to a few years depending on such factors as whether the target company is a public or private entity, the negotiations, legislation, and the involvement of financial institutions and other stakeholders.
“The actual transaction can be done very quickly if you’ve identified your target and if all parties are keen to go ahead and legals can be put in place,” says Connon.
“But typically, a merger or an acquisition takes several months.”
But you also need to factor in the time that will be involved in the identification of suitable target companies as well as the post-acquisition integration.
The post-acquisition integration can take anywhere from six to 12 months, she explains.
“So the actual transaction itself can be done very, very quickly. It’s the process of identifying the target and making sure it’s something that will work for your organisation as a combined entity and making it happen after you’ve done the deal.”
It’s estimated that of all M&As, 70% to 90% fail for various reasons.
Many failures are due to a lack of strategic planning and incomplete due diligence, according to Connon.
They also fail if there is a poor strategic fit between the two companies, a poorly managed integration or an overly optimistic projection of the target company.
The result is a failed growth strategy and a large amount of lost opportunities.
Successful merger or acquisition strategy
So, how can you be sure of being in the 10% to 30% who achieve successful acquisitions or mergers?
Before even starting your search for target companies, it’s essential that you clarify your acquisition strategy and reason for merging with or acquiring a company, says Connon.
Most successful acquisitions happen when companies have identified and understood their own acquisition strategy, says Connon.
They have clarified the company’s direction over the next two to five years, understand the market challenges for their core business, and know the gaps in their own portfolios and skillsets.
“They also take time to identify potential targets and to subtly review and understand the strengths and weaknesses of each of those target companies,” she adds.
“Post-acquisition, the ones that tend to fail are the ones where acquiring companies haven’t taken the time to really understand their own strategy or market challenges and what they want from an acquisition. Often, it’s been done for emotional reasons rather than good, sound business reasons. Those companies will typically fail.”
To develop your acquisition strategy, you’ll need to be clear about what you hope to achieve. What is your business model? What do you want to do? Do you want to grow income, to improve profitability, to enhance cash flow? Where are the market challenges in your sector and can you address them all? If you can’t, do you need to make an acquisition? Do you need to merge?
If you conclude that a merger or acquisition is desirable and will be beneficial in the long-term, then you need to develop an “identikit” of what that potential company looks like, she says.
Every company you consider should be evaluated against the metrics you’ve decided upon.
“Don’t get distracted by personal judgement. If you stick to the metrics you’re looking for, you’re more likely to make a successful acquisition,” she adds.
Due diligence
You and your team of M&A experts need to carry out due diligence and investigate the target company’s business, people (particularly crucial personnel), records and key documents.
The point of the due diligence process is to uncover any inherent risks in the target business, to question the value placed on the investment or acquisition price and to identify critical issues.
Your M&A team should ask questions and request documentation about the following areas:
• Corporate information, including the company structure, shareholders or option holders and directors
• Business and assets, including your business plan, assets and contracts with both customers and suppliers
• Finance including details of all company borrowings and loan agreements, cash flow statement, business reports, plus all tax liabilities and VAT returns
• Human Resources including details of contracts for directors and employees
• IP and IT, including information about IPs, owned or used by the target company and the software and equipment that are used
• Pension plans that are in place for directors and employees
• Litigation including details of any disputes or legal proceedings the company is involved with now or in the future along with licenses or regulatory agreements it has
• Property including information of real estate that’s owned or leased by the target business
• Insurance policy details along with recent or future claims
• Health and safety policies that are in place
• Data protection, including information about how sensitive data is stored and protected and reassurance the target company is compliant with data protection laws
Post-acquisition or merger, you should use your original strategy to measure its success, whether that’s income growth of 25% or improved profits of 2%.
“That would be the target by which you’d measure your combined entity. You’d go back to those numbers and see what have you’ve achieved compared with what you set out to achieve.”
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