The primary objective of any business is to grow, for it is essential for long-term success. To achieve this, organizations may adopt various strategies, with Mergers and Acquisitions (M&A) being one of the most popular options. Through this, firms can expand their market reach and consolidate their position.
Mergers and acquisitions have become an increasingly popular growth strategy for companies looking to break into new markets, gain a competitive advantage, or acquire new technologies and skillsets. This is especially true in the professional services sphere, where the mass retirement of Baby Boomers and a quickly evolving economy and marketplace have created an ideal environment for M&As. The question then becomes: what are the implications of these mergers, and is an M&A an appropriate move for your business? In today’s article, we will answer all your questions to fulfil your hunger for answers.
M&As are proving to be a popular way to achieve rapid growth, and the current M&A market is the most active yet. A surge of deals has been seen across all sub-sectors, with asset management experiencing the greatest increase in M&A activity. Asset managers, family offices, and wealth managers are all participating in the growth-producing mergers and acquisitions.
M&A can be a great way for companies to rapidly expand and innovate their business models. Benefits include accessing new markets, reducing costs, increasing the customer base, enhancing profitability, agility, and flexibility, and meeting customer needs. To make the most of this opportunity, it is important for finance teams to streamline the process through automation and standardization.
M&A transactions are often essential for firms to reach the top. This is evidenced by the fact that the most successful companies in the world have teams of professionals dedicated to finding attractive potential acquisitions. When done correctly, an active strategy of mergers and acquisitions can be highly beneficial for any company. Below are the biggest benefits of such strategy.
Mergers and acquisitions (M&A) are often conducted with the aim of increasing market share. This is especially prevalent in retail banking, where geographical footprint is seen as a key factor for gaining a larger portion of the market. This has led to a lot of consolidation within the industry, with many countries having just a few major retail banks, commonly referred to as the "Big Four". The Spanish bank Santander is a prime example of this strategy, having acquired several small banks in order to become one of the biggest retail banks in the world.
Despite the difficulties posed by the modern business world, achieving growth is the main focus of CEOs. Expanding into a new market is an effective way of reaching customers who have not been accessible before. Though global expansion can be complicated due to cultural discrepancies, language issues, and foreign regulations, organizations can bypass these issues by purchasing a business already established in the target market.
Mergers and acquisitions offer a multitude of advantages, one of the most significant being the ability to expand the range of services or products available. Through a combination of forces, the combined business is able to benefit from a larger portfolio and a larger market share. This is particularly pertinent in technology-driven industries, where innovation is paramount.
Having a diverse portfolio of products and services is an important part of good business practice. Acquiring other platforms can be a great way to bring new tools, products, and services into your organization. An example of this is Facebook, whose user base was not engaging with the platform as much as desired. To reach those users, they acquired Instagram and WhatsApp, giving them access to a wider demographic.
Economies of scope (revenue streams) and diversifying risk go hand in hand. An example of this is seen with Facebook. Analysts have reported that younger users are turning away from social media platform towards other forms of social media, such as Instagram and WhatsApp. This means that if one revenue stream falls, the risk is spread across other streams, as the company has multiple sources of revenue.
When a business acquires another company or experiences a period of growth, its needs in terms of materials and supplies tend to increase. This increased demand gives the business more purchasing power, allowing it to negotiate bulk orders and thus become more cost efficient. As a result, the company's scale is improved through the acquisition of materials and supplies at higher volumes.
Mergers and acquisitions can be seen as a means of growth for both companies involved. The combination of the two businesses' incomes will provide greater financial power, enabling them to occupy a larger share of the market and have more control over customers by reducing competition.
The goal of any merger or acquisition (M&A) is to reduce expenses and increase profits. Larger scale operations can provide more access to capital, as well as more leverage when negotiating with suppliers. Additionally, larger operations can benefit from working with greater quantities of stock, allowing them to secure better deals.
The recruitment industry is always asking the same question: where are the biggest talent shortages currently? The answer is always a variation of one theme- people who can code. This is due to the large demand for coders in the digital age, as well as the fact that the best coders are working for large tech companies in Silicon Valley. The bigger companies always have access to the best talent, and this is true for all other industries, not just technology.
The concept of survival of the fittest is especially applicable to business, as evidenced during times of economic hardship. During the 2008 financial crisis, many banks merged in order to stay afloat, demonstrating how powerful pooling resources can be in times of difficulty. This merging of forces allowed the banks to protect themselves from the harsh market conditions and remain competitive. As the saying goes, it’s better to merge with another bank than become a footnote in history.
As the M&A market continues to be highly competitive, buyers must be aware of the potential risks associated with their investments. Cyber security threats, fluctuating regulations and the possibility of costly legal battles are all realities of the modern market and must be taken into account. To ensure success and safeguard against losses, it is essential that deals are carefully assessed and all potential risks are identified and mitigated.
The danger of overpaying for a company is becoming increasingly clear, as research has shown that most mergers and acquisitions fail to create value for shareholders 70-90% of the time. This is a serious problem, as it points to the underlying issue of inadequate valuation procedures. In recent years, numerous companies have been guilty of overpaying when buying other businesses. Clearly, this is one of the key risks associated with M&A today.
Dawn White, a change management expert, emphasizes the need for integration practices to take into account company culture and equip new employees with the skills to be successful. Without considering culture and providing adequate change management, the consequences can be dire. Poor culture and change management can lead to a decrease in morale, which can be detrimental to reaching company goals and strategies. Acquirers must recognize people as their biggest asset and welcome them as members of the new company, or they risk losing valuable employees to industry recruiters.
Hidden liabilities, whether unintentional or intentional, can be cause for great alarm. When a company has acquired numerous businesses in the past, identifying and mitigating the legal risks of each of these organizations can be quite difficult. Moreover, there may be liabilities that stretch back decades, such as environmental exposures. Even when the target acquired company no longer exists, the liabilities may still exist, making it hard to trace the ownership and accountability. In order to avoid complications, it is best to conduct meticulous legal due diligence prior to the deal, so that any hidden liabilities can be addressed before it is too late.
Integrating the operations of two companies can be more challenging than anticipated, making it difficult to realize the cost savings expected from synergies and economies of scale. As a result, a deal that was initially thought to be beneficial may end up being unprofitable.
Post-acquisition integration often runs into delays in the IT integration aspect. It is important to consider data security during transition and be aware of which systems to keep, as these can have an effect on the value of the deal and the intended synergies.
When it comes to change management, employee resistance is a well-documented challenge that PMI is not exempt from. Layoffs, which are often part of mergers and acquisitions, can lead to a negative attitude among staff, causing key employees to leave the organization during the integration process. Resistance is especially strong among top management, as they are unlikely to both be kept on the company's roster. This can lead to feelings of being overwhelmed and a us vs. them mentality, making it difficult to maintain talent.
Mergers and Acquisitions (M&A) can be a complex process, and is not always the best solution for every strategic goal. In such cases, it may be wiser for companies to pursue their goals with internal investments and resources, as this will help them avoid the extra costs and risks associated with acquisitions. On the other hand, those companies that can successfully manage the intricacies of M&A and use it to their advantage can reap long-term rewards.
The potential benefits of mergers and acquisitions are clear, yet a successful outcome requires an appropriate strategy that takes into account the unique circumstances and goals of the business. Post-merger integration is critical for realizing synergies, profitable growth, and deal valuation, and must be planned accordingly. Despite the rewards mergers and acquisitions can provide, the process can be complex and challenging.
The list of corporations that have suffered the consequences of making mistakes in deals is extensive. To avoid or reduce such negative effects on the success of your own business, it is essential to be vigilant and aware of the potential risks involved in mergers and acquisitions. Experienced top companies are not exempt from these risks, and must remain alert in order to protect their value.
Through our work with hundreds of companies and corporate development teams, BrandEssence Market Research has gained insights that have helped to drive their business growth through acquisitions.
Growth is a fundamental goal for all businesses, be they multi-national corporations or startups. Companies can achieve growth in two ways: organically or inorganically. While both approaches share a common goal, they differ based on the resources available and the speed of expansion. The decision between organic and inorganic growth is not a one-time choice; it requires ongoing assessment of the company, the industry, the private capital market, and the business objectives. Organic growth refers to growth that is achieved with the company’s own resources, without engaging in mergers and acquisitions (M&A). Examples of organic growth include launching new products, creating new brands, and expanding into new markets. Inorganic growth, or mergers and acquisitions, is the other growth strategy. This involves the acquisition of a competitor to bolster market share or a supplier to increase integration.
Below are just few reasons why companies decide to go for M&As.
No two outcomes of the M&A process are alike due to the numerous types of mergers and acquisitions and the intensive work required for them. Below are 3 successful M&As:
The effects of mergers on share prices may be varied. Shares of the smaller company may appreciate, while shares of the larger company may decline. Nonetheless, the newly formed company's shares often become more valuable than the two companies before the merger.
Some of the major reasons for M&A deal fails are:
Bringing finance in early to the merger and acquisition process is key to avoiding potential pitfalls. By incorporating financial risk assessment and understanding early on, you can help your company better navigate these complex transactions and unlock opportunities for corporate growth. Mergers and acquisitions can be a great asset for expanding market share, but only if the financial implications are properly taken into account.
Despite the potential benefits of Mergers and Acquisitions (M&A), such transactions are often challenging to pull off. To illustrate this point, here are three failed M&A deals and the valuable lessons we can take away from them.
Pfizer and Allergan
Under the Obama administration, new tax regulations were implemented in order to stop 'corporate inversions', which is when American companies attempt to lower their taxes by transferring profits overseas. These changes prevented Pfizer from enjoying the benefits of acquiring Allergan, which ultimately led to the deal being called off.
Kraft Heinz and Unilever
In 2017, the business world was shocked when US food giant Kraft Heinz proposed to buy Anglo-Dutch stalwart Unilever for US$143bn. However, Unilever quickly rejected the bid, resulting in Kraft Heinz withdrawing their offer only two days later.
Honeywell and United Technologies
In 2015, when United Technologies and another industrial conglomerate discussed a potential merger, the intention was to form a massive company that could produce anything from thermostats to jet engines. Unfortunately, the deal did not come to fruition.
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