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Pullestueck - Post Merger Integration

5 Mistakes to Avoid During the Post Merger Integration Process

Acquiring other companies for geographic and product expansion or merging with equal competitors are the most common strategies to increase corporate growth. However, the majority of M&A (merger and acquisitions) do not succeed. Public and private investors typically point to flawed due diligence and poor strategies, but another element is often overlooked: an absence of standardized post merger integration processes. Solid planning is essential to M&A success, especially for startups that are making acquisitions for the first time. Here, company owners can learn how to avoid the most common mistakes in the M&A process.

Setting Unrealistic Expectations During the Due Diligence Phase

Despite the dangers of unattainable goals, many companies still set them only to be disappointed when they’re not met. When a company fails to meet its objectives, employees become demotivated, executives are displeased, and the firm loses its credibility. However, some executives would rather micromanage staff than revise their expectations. By setting sensible goals, company owners can maintain momentum throughout the post merger integration process.

Lacking the Resources to Manage the Integration

Before the deal is closed, both companies should plan for integration, which presents multiple challenges in the IT, financial, sales, overhead, and cultural departments. If the companies’ personnel cannot quickly adapt to their new responsibilities and work toward a common goal, the post merger integration process will not be successful. Planning should start as early as possible, and a project management and leadership team can provide valuable guidance to both companies throughout the merger and acquisition process.

Failure to Retain Top Talent

For most mergers and acquisitions, the importance of the deal lies within the people involved. Retaining knowledge of both companies’ operations, customers, markets, and technology are crucial to the success of an integration. Executives from both companies should decide who to retain during the post merger integration process, and they should consider retention bonuses a necessary expense. Perhaps more importantly, executives should schedule regular meetings with key employees to keep updated and build a rapport.

Not Communicating Openly About Corporate Intentions and Behaviors

Communication for successful Post Merger IntegrationThe time after M&A is one of challenges and changes for both sides. Despite popular opinion, an acquisition isn’t always mutually beneficial. To calm anxious workers, executives often make unrealistic promises they cannot deliver. Setting employees up for disappointment is a sure way to lose top talent and, when that happens, all other aspects of the merger process become more difficult. It’s important to be honest from the beginning because, while there may be tough times ahead, staff can count on executives’ honesty, reliability, and candor.

Delaying Difficult Decisions

Most don’t like to discuss it, but cuts are a primary driver of the rationale behind M&A. Teams and projects are re-evaluated and modified, facilities are consolidated and, in some cases, certain employees’ jobs become redundant. While it may be unpleasant, delaying such decisions can increase costs and distract people from the other tasks at hand. Cuts should be decided on during the initial phase of the integration process when there’s another activity going on. When things become more settled, it’s harder to let people go. However, most departing executives are likely to be willing to help facilitate a smooth transition and part on favorable terms.

Integrating companies after M&A is equal parts art and science. There are many ways to finesse acquisitions, combine corporate cultures, and motivate staff—and not all of these methods can be documented. During mergers and acquisitions, there are certain steps to take and many problems to avoid. By staying away from the mistakes and issues listed here, company owners can ensure a smooth merger, high staff morale, and continued profitability.

Strategic Due Diligence

A Guide to Strategic Due Diligence

While due diligence may not be the most exciting topic, being able to evaluate and understand a potential partner, buyer, or acquisition is important to all growing companies. The three primary categories of due diligence are legal, financial, and strategic. Although they have traditionally been distinct, an effective due diligence program combines elements of all three areas. In this guide, readers can learn about how legal and financial due diligence relate to strategic due diligence and how a data room can help organizations securely share important information during the due diligence process.

Legal Due Diligence

In the legal due diligence process, the goal is to examine the legal foundation of the transaction. For instance, a buyer may want to ensure the acquisition holds IP rights that are crucial to the company’s future success. Other areas to be explored include those listed in the section below.

  • Legal structure
  • Loans
  • Contracts
  • Property
  • Employment
  • Upcoming litigation

Legal due diligence and strategic due diligence are closely related because, if there’s little legal basis on which to perform the transaction, the buying company must change its assumptions about the target company.

Financial Due Diligence

During the process of financial due diligence, the buyer focuses on checking the financial information offered by the target company as a means of assessing its underlying performance. The process covers the following areas.

  • Earnings
  • Assets
  • Cash flow
  • Liabilities
  • Management
  • Debt

Again, strategic and financial due diligence are intertwined. If a target company’s assets, debts, earnings, cash flow, and liabilities aren’t what the buyer expects, that company may have to adjust its business plan to align more closely with current market conditions.

Strategizing Due Diligence

Strategizing Due Diligence

In Strategic Due Diligence, the buying company evaluates the market in which the target company exists. For instance, the buyer may interview the other company’s current customers, assess its competitors, and perform a full analysis of the assumptions behind the target company’s current business plan. All due diligence, including the strategic variety, is done to determine whether the business plan can hold up to the market’s realities.

Factors to Consider During Due Diligence

There are two main factors to consider during the strategic due diligence phase of a merger or acquisition. The first step is to determine the commercial viability of the deal, and it involves validating the target company’s financials and potential areas of compatibility. Companies can do this by assessing the target company’s position within the market and by evaluating how it may change with time. Whether the buyer is out of the market or a direct competitor, this analysis is important. However, for competitive buyers, the commercial viability issue can be more complex as it involves a calculation of the combined entity’s competitive position.

As to the second factor, the buyer must determine whether the combined management team can achieve the deal’s targeted value and whether the timeline is realistic. For in-market M&A, it is important that all associated risks in terms of competitive response and culture issues are weighed and managed. If a greater market share is the main value driver of the transaction, leaders should ensure the target company’s executives can meet customers’ needs while evading competitors who will try to win over clients and customers during the transition phase. Although compatibility testing is important during in-market mergers, financial buyers are equally well served by an in-depth analysis that provides a greater understanding of value drivers within the target company.

Using a Virtual Data Room During the Due Diligence Process

Virtual data rooms—also known as VDRs—are online repositories or warehouses where information is distributed and securely stored. This storage and sharing method is primarily designed for mergers and acquisitions and strategic due diligence as well as other applications involving the use of sensitive information. In the context of due diligence, a data room retains all information that is critical to the merger and acquisition process. Data and information related to divisions, units, and companies being bought or sold are stored in the VDR.

All parties participating in the merger or acquisition are allowed to access the information while uninvolved parties are kept out. In the recent past, traditional methods entailed using a physical storage facility—sometimes referred to as a PDR or physical data room—to store documents and information for future distribution. As time has passed and technology has evolved, many companies have transitioned from PDRs to online storage, and the virtual data room has taken center stage.

While it may look easy on television, the merger and acquisition process can be complex. Every business is unique, and all mergers have different circumstances. Anticipating and handling these developments is crucial for ensuring the acquisition is appropriate for both companies. Buyers should continually adapt their strategies and continue to work with experts who can offer solid insights into the firm’s weak areas.

financing mergers & acquisitions

6 Methods of Financing Mergers & Acquisitions

Mergers and Acquisitions are parts of the natural cycle of business. A merger or acquisition can help a business expand, gather knowledge, move into a new market segment, or improve output. However, these opportunities come with expenses for both sides. Standard merger deals typically involve administrators, lawyers, and investment bankers even before the total acquisition cost is considered. Without a virtual Data Room and a sizable amount of cash on hand, a company will have to find alternate methods of Financing M&A. Below is a detailed look at the best financing options available today as well as information on the ones to avoid.

Exchanging Stocks

financing m&aThis is the most common way to finance a merger or acquisition. If a company wishes to acquire or merge with another, it is to be assumed the company has plentiful stock and a solid balance sheet. In the average exchange, the buying company exchanges its stock for shares of the seller’s company. This financing option is relatively safe as the parties share risks equally. This payment method works to the buyer’s advantage if the stock is overvalued. Here, the buyer will receive more stock from the seller than if they’d paid in cash. However, there’s always the risk of a stock decline, especially if traders learn about the merger or acquisition before the deal is finalized.

Debt Acquisition

Agreeing to take on a seller’s debt is a viable alternative to paying in cash or stock. For many firms, debt is a driving force behind a sale, as subpar market conditions and high interest costs make it impossible to catch up on payments. In such circumstances, the debtor’s priority is to reduce the risk of additional losses by entering into a merger or acquisition with a company that can pay the debt. From a creditor’s standpoint, this is a cheap way to acquire assets. From the seller’s point of view, sale value is reduced or eliminated. When a company acquires a large quantity of another company’s debt, it has greater management capabilities during liquidation. This can be a significant incentive for a creditor who wants to restructure the company or take possession of assets such as business contacts or property.

Paying in Cash

A cash payment is an obvious alternative to paying in stock. Cash transactions are clean, instantaneous, and do not require the same high level of management as stock transactions. Cash value is less dependent on a company’s performance except in cases involving multiple currencies. Exchange rates may vary substantially, as seen in the market’s response to the British pound after the UK voted to leave the European Union. While cash is the preferred payment method, the price of a merger or acquisition can run into the billions, making the cost too high for many companies.

Initial Public Offerings

mergers & acquisitionsAn initial public offering, or IPO, is an excellent way for a company to raise funds at any time, but an impending merger or acquisition is an ideal time to carry out the process. The prospect of an M&A can make investors excited about the future of a company, as it points to a solid long-term strategy and the desire to expand. An IPO always creates excitement in the market and, by pairing it with an M&A, a company can spur investors’ interests and increase the early price of shares. Additionally, increasing an IPO’s value with a merger or acquisition can increase existing share prices. However, market volatility makes this a risky way to finance a venture. The market can drop as quickly as it rises, and a new company is more susceptible to volatility. For these reasons, the popularity of the IPO is declining with each passing fiscal year.

Issuance of Bonds

Corporate bonds are a simple, quick way to raise cash from current shareholders or the general public. A company may release time-definite bonds with a predetermined interest rate. In buying a bond, an investor loans money to the company in hopes of a return, but bonds have one big disadvantage: once they’re bought, the money can’t be used until the bond’s maturation date. The security makes bonds popular with long-term, risk-averse investors. Today, companies are taking advantage of low U.S. interest rates to fund M&A. However, the trend is tied closely to the cost of borrowing, and bond issuance is only a good value if the buyer can cheaply access credit and has a clear goal.

Loans

It can be costly to borrow money during a merger or acquisition. Lenders and owners who agree to an extended payment arrangement will expect a reasonable rate for the loans they make. Even when interest is relatively low, costs can quickly add up during a multimillion-dollar M&A. Interest rates are a primary consideration when funding a merger with debt, and a low rate can increase the number of loan-funded transactions.

In Conclusion

Where cash is not an option, there are many other ways to finance a merger or acquisition, many of which result in an effortless, lucrative, and quick transaction. The best method for a firm to use depends on the buyer and the seller, their respective share situations, asset values, and debt liabilities. Each method of funding a merger or acquisition comes with its own hidden fees, commitments, and risks, and it is the buyer’s and seller’s responsibility to practice Due Diligence during a transaction. However, for most companies, the results make all the effort worthwhile by creating a more diverse, stronger firm that can cover the cost of M&A with funds to spare.

Virtual Deal Room

The Basics of the Virtual Deal Room

With the increasing prevalence of the virtual Deal Room as a merger and acquisition tool, there’s more of a need to understand the role of Data Rooms in the M&A process. Equally important is the need for those involved in mergers and acquisitions to learn how to set them up properly and maximize their effectiveness. In this guide, potential clients can learn about setting up a virtual deal room for an M&A transaction.

The Role of the Data Room in Mergers and Acquisitions

A virtual deal room is an online repository where information is stored and accessed through documents. This method of storage and document sharing is designed mainly for mergers, acquisitions, IPOs, due diligence, and other uses involving buyers’ and sellers’ sensitive information. In the context of M&A, Virtual Data Rooms serve as a placeholder for information related to divisions, units, and companies being acquired. Everyone involved in these Mergers & Acquisitions has access to this sensitive information, while all other parties are excluded.

Virtual Deal Rooms Can Reduce Costs

Maintaining a physical deal room can be costly. Someone must be paid to keep the facility clean and provide security and to print, move, and copy documents. With a virtual Deal Room, costs can be cut because it requires a smaller maintenance crew. In a similar way, moving to and from the physical data room’s location can be expensive, especially for remotely located deal rooms. With virtual deal rooms, the expense and hassle are substantially reduced.

Data Rooms Increase Corporate Efficiency

virtual deal room increase efficiencyIn the traditional M&A environment, obtaining permission to access, view, copy, and print information can take time. It’s a tedious and time-consuming process to find the information a client needs in a room full of file cabinets, and the difficulty can be compounded when multiple parties need access to the information at the same time. Because everything is done online in a virtual Deal Room, it’s easy to disseminate important information to different parties with just a few clicks. Faster access is one of the main reasons why virtual deal rooms have become increasingly popular.

Virtual Rooms Offer Additional Security

A virtual room is designed with various security features to ensure controlled access and confidentiality. Only involved parties are allowed to access the data within the deal room, and various clearance levels are maintained. The online environment makes it easier to track and monitor viewing, logging, and other forms of access. The client has complete control over how information is shared.

Convenience and Comfort

Traveling to and from a physical location to retrieve information can be expensive and inconvenient. With a virtual Deal Room, clients can The Basics of the Virtual Deal Room with a stable broadband internet connection. The best data room companies work to protect clients’ sensitive data with state of the art technologies.

Trends in Merger and Acquisition Data Rooms

The virtual data room has progressed significantly from its initial incarnation, which was used primarily for legal due diligence. Subsequent updates have added many capabilities to deal rooms, turning them into a medium to conduct an M&A from start to finish. A 2014 report showed that there are over 240 virtual Deal Room providers available, making it a multimillion-dollar revenue stream.

A Variety of Tech-Based Features and Functions

M&A virtual data rooms are becoming more advanced with the inclusion of features geared toward higher-efficiency due diligence. Some examples are:

  • Dynamic indexing, which is useful when uploading or rearranging out-of-sequence documents.
  • Flexible file formatting accommodates formats such as Word, JPEG, GIF, PDF, and others. This saves time because it eliminates the need to convert files just for storage purposes.
  • Question and answer functions, which are useful when buyers need to verify the data room’s contents with sellers. Where inquiries over the phone or through email would take time, today’s questions can be routed through the data room to save time and money.
  • Restricted usage, which can keep certain documents under wraps while others can be accessed. Contingent restrictions can be permitted. For instance, one set of users can be allowed to view documents, but not copy or print them.

Setting Up a Virtual Data Room in a Merger or Acquisition

Virtual data rooms can be set up internally or externally. With an internal data room, the seller provides and oversees the room. External rooms are outsourced to third-party providers. Many businesses resort to full or partial outsourcing, and they must compile documents such as:

  • Financial statements and reports
  • Corporate books
  • Employee paperwork
  • Agreements and contracts
  • Insurance policies and legal documents
  • A list of assets

Whether done externally or internally, the steps to set up a data room are the same. For the purposes of this guide, however, assume that the client is hiring an external vendor to manage the storage of important data during a merger or acquisition.

Keeping it Simple

Companies should set up a virtual deal room that suits the purpose, and managers should consider that a user may not have the same level of familiarity with the system. Here, a simple interface can work to everyone’s advantage. However, it’s important to include useful functions where possible. When companies choose reliable Virtual Deal Room providers, they can be assured that their sensitive information is safe and easily accessible during mergers and acquisitions. By learning more about the process, clients can choose a provider that offers the services and security they need at a reasonable price.

Letter Of Intent

Letter of Intent: A Vital Tool in the Formal Negotiation Process

Business transactions tend to be surrounded by a number of questions and concerns, particularly in the case of mergers and acquisitions. Either party involved would be remiss to jump headlong into such a situation without some level of planning and negotiation. At the same time, neither wants to be legally bound to the other party’s terms before having a chance to voice an opinion on the conditions of the transaction. This is where a Letter of Intent comes into play.

What is a Letter of Intent?

As the title indicates, a Letter of Intent essentially states the intentions of the acquiring firm as they apply to the target company. Via this type of document, the former clues in the latter regarding plans for the deal in question. This could be considered a middle ground between the concept stage of a merger or acquisition and finalization.

Recipients of the document may agree with the terms provided, counter with an edited version or respond with a different set of conditions entirely.

Which Items Should a Letter of Intent Contain?

First off, the presenting firm should provide a brief introduction in a conventional Letter of Intent pinpointing both companies to be involved. This would be followed by information pertaining to the previously-mentioned terms and conditions of the transaction. This type of declaration should likewise dictate a time frame in which the deal is expected to be completed as well as any requirements applying to the financial aspects of the agreement.

A list of the assets and liabilities to be included in the transaction should be documented as well. Depending on the type of company to be purchased or taken over, certain clauses may also need to be included regarding current employees. These fall into the category of special warranties. Such statements are defined as conditional elements of an agreement.

How Does an LOI Differ from a Memorandum of Understanding and a Contract?

The key difference of these components is the extent to which each is legally binding. A Letter of Intent is generally not considered legally binding as it is part of the negotiation process and precedes the memorandum of understanding and the final contract. That being said, inclusion of certain binding elements in a Letter of Intent is advised, such as:

  • Non-Disclosure Agreements: Stipulations identifying details to be kept confidential throughout the course of the transaction. While each party involved has a right to obtain information about the other, neither is allowed to share these findings with parties not included in the transaction.
  • Non-Compete Agreements: In many cases, both the acquiring and target firms will agree to refrain from attempting to acquire the other’s current clientele or employees.
    Those are only two of the most common legally binding clauses stipulated in a Letter of Intent. Some may also include agreements promising reimbursement of relevant costs in the event the transaction is not completed.

When these types of statements are incorporated in an agreement, they need to be clearly identified and specified as such. The target firm has a legal right to agree or disagree with each point covered in this document and request changes as deemed fit.

Once both agree to all terms and conditions set forth, a memorandum of understanding will be drawn up followed by the final contract, each of which will be legally binding.

Why is an LOI Important in Mergers and Acquisitions?

A Letter of Intent is designed to formalize and foster business negotiation processes while offering both parties a certain degree of protection. Though terms and conditions should be outlined in this type of document, legal advisors caution against the inclusion of excessive details. Doing so could negate the overall purpose of the LOI, rendering it a legally binding agreement in court.

In short, LOI’s should succinctly describe the presenting firm, its target company, overall intentions with the merger or acquisition, financial expectations, the period of time in which the transaction is expected to be completed and conditional aspects. It is not a legally binding document though certain restrictive clauses may be included.

A Letter of Intent is a tool meant to protect the rights of those involved and allow each firm a voice in the process. Once an agreement is reached, the parties will proceed to a legally binding memorandum of understanding and, ultimately, a final contract.

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The Vital Role of Due Diligence

Information is key to the business world.

The due diligence process is the way by which businesses can accumulate the necessary information to make the best investment decisions.

The world of business has always rewarded the individuals and companies that carry out thorough due diligence on their transactions. Whether it is to buy a property, acquire a business or launch a company on the stock exchange – success has most often gone to those with the most facts and who are able to make the best informed decisions.

So what is due diligence and what must both seller and buyer consider during the process? In this article we will look at due diligence from the perspective of both sellers and buyers.

What is Due Diligence?

Let’s define “due diligence”. Investopedia states the following:

“Due diligence (DD) is an investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.”
In the business world there are many occasions when it is essential to investigate a potential transaction in the most thorough way possible before proceeding. Due diligence allows a business to confirm the facts of a situation in order to make an informed decision.

The term due diligence has particular relevance and use in industries such as real estate, mergers and acquisitions and Initial Public Offerings (IPO’s) of companies.

Due diligence is undertaken to assess risk and opportunity. The process itself is meant to be non-judgemental but to provide objective information on which a decision can be made. Discover more about the world of due diligence in this article.

The Main Types of Mergers and Acquisitions

Due Diligence in Mergers and AcquisitionsAny company merger or acquisition will rely heavily on the due diligence process.

Some might say it the most critical process as it provides the raw information for the decision to proceed or call a halt. It is important to understand the difference between a merger and an acquisition.

A merger is an agreed joining of two organisations, usually as equals but with each company bringing different strengths. A merger is seen as a friendly and co-operative exercise.

An acquisition can either be friendly or hostile.

A friendly acquisition is where one company buys another outright. There are many cases of this happening where a company such as Microsoft or Apple will acquire a smaller company for some specific technology or expertise. The smaller company is swallowed by the bigger one and disappears from the marketplace.

A hostile acquisition takes many forms but will typically involve the company to be purchased recommending that their shareholders do not accept an offer. This can be a negotiating tactic in order to achieve a higher price for a sale.

In any merger or acquisition transaction it is critical that the purchasing company has conducted thorough and full due diligence on their target purchase. The information gained will form the basis of a price they are prepared to pay for the target company.

It is critical that all aspects of a company are fully understood before an offer is made.

Click here to learn about other types of merger and acquisition such as vertical, horizontal and conglomerate.

When is the right time to sell your business?

Wann sollen Sie Ihr unternehmen verkaufen? Frau mit SmartwatchWhile each business sale is unique, there are common themes for why business owners choose to sell their business.

Retirement Planning

Many owners of small and medium sized businesses reach a point where they consider selling their business as part of their transition to retirement. They no longer wish to work the hours required to run a business and are looking for a way to realise the value that is locked within their business.

New investment

Businesses large and small all require a level of investment to continue to be viable. Whether it is in machinery, stock, staff, advertising or operating funds, all businesses thrive on new investment. One of the recognised ways of finding new investment is to sell a business to an organisation that has the funds to invest.

Change in the market

All industries are evolving and changing. The business practices that worked 2 years ago may be obsolete tomorrow. Margins that were high last year may be razor thin this year. These changing conditions may affect how current owners view the future potential of a business. It may require a new owner to bring in new skills or funding to address the changes in the market.

No matter the reason for selling your business, ensure you have all your facts organised, prepared and available for potential purchasers to review.

Click here to discover more reasons for why business owners choose to sell.

How to prepare for due diligence when selling a business

If you are considering selling your business, you will need to prepare for the due diligence process. While it is the responsibility of the purchaser to ask all the questions it is necessary for the seller to be able to answer them.

A seller who is prepared and organised will have a much better chance to sell their business. Quick answers, clear documentation and easy access to information are all the responsibility of the seller if they wish to assist the fact finding process.

A seller should take these important steps:

  • Place all the documents in one central location that is accessible by all potential purchasers
  • Assigned User IDs to restrict access to only the necessary information
  • Organise information in clear, logical categories.
  • Scan all relevant documents for easy electronic access.

A seller has to undertake a considerable amount of work to prepare for a sale. However, the more work that is completed up front will result in a quicker and more efficient due diligence process.

Find out more on how to gather, organise and store information as part of the sale of a business.

If you are buying a company are you taking these due diligence steps?

So while a seller is gathering all the relevant information relating to a sale, it is important for a purchaser to have an extensive list of questions. A detailed and methodical approach is necessary to ensure all the important questions have been asked.

There are many factors to consider when you analyse a company you plan to purchase.

Some of the key indicators you need to study include:

  • Capitalisation
  • Revenue, Profit and Margin
  • Valuation multiples
  • Industries and competition – who are the main competitors within the industry?
  • Ownership structure – who are the owners, what are their rights and obligations?

Of course, there are many more aspects that need to be covered including legal, environmental and staffing questions. Click here to discover more about this topic.

How to use a Document Management System (DMS) for Due Diligence

diagramm-unternehmensankauf-due-diligenceA common requirement of both the sellers and purchasers of an asset is the need for easy access to the information involved in a transaction. The quicker information can be shared; the quicker decisions can be made.

An Online Document Management System (DMS) is a popular solution for sharing information as it provides secure, structured, centralised storage of data that can be accessed by all parties.

It is the seller of an asset or company who will typically setup an online DMS to support the due diligence process. The seller should consider evaluating and setting up the DMS prior to the transaction so that they have the administration of data and user access already organised before engaging with potential purchasers.

The setup of an online DMS is an extremely simple process. Once an account is confirmed, extensive online help and an easy to use interface make the DMS simple to use.

Once the DMS is configured, information can be uploaded to the DMS into the relevant folders for easy searching and review.

Click here to find out more on how to use a DMS as part of a due diligence process.

In summary, due diligence is an essential process for large scale business transactions – from real estate to company mergers.

The process is critical to both sellers and buyers. Sellers must have a means by which to present all the required information to allow a transaction happen and purchasers need a means to confirm all the facts before making a decision.

An online Document Management System is seen as the best solution to meet the needs of both parties. Sellers have an easy to administrate system that helps them organise and protect their data and buyers have a single online location to analyse and review documents for a transaction.

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Mergers & Acquisitions

The Main Types of Mergers and Acquisitions

Companies merge and acquire each other for many different reasons.

From a hostile takeover to a friendly merger or a strategic alliance – there are many ways companies can combine forces.

In this article we look at four of the main types of mergers and acquisitions and provide a mini-case study of a well-known merger that did not turn out as planned.

4 Types of Mergers and Acquisitions

Companies will merge together and acquire each other for a variety of reasons. Here are four of the main ways companies join forces:

Horizontal Merger / Acquisition

Two companies come together with similar products / services. By merging they are expanding their range but are not essentially doing anything new. In 2002 Hewlett Packard took over Compaq Computers for $24.2 billion. The aim was to create the dominant personal computer supplier by combining the PC products of both companies.

Vertical Merger / Acquisition

Two companies join forces in the same industry but they are at different points on the supply chain. They become more vertically integrated by improving logistics, consolidating staff and perhaps reducing time to market for products. A clothing retailer who buys a clothing manufacturing company would be an example of a vertical merger.

Conglomerate Merger / Acquisition

Two companies in different industries join forces or one takes over the other in order to broaden their range of services and products. This approach can help reduce costs by combining back office activities as well as reduce risk by operating in a range of industries.

Concentric Merger / Acquisition

In some cases, two companies will share customers but provide different services. An example would be Sony who manufacture DVD players but who also bought the Columbia Pictures movie studio in 1989. Sony were now able to produce films to be able to be played on their DVD players. Indeed, this was a key part of the strategy to introduce Sony Blu-Ray DVD players.

Case Study – 1998 – Daimler Benz and Chrysler

Daimler Benz bought Chrysler in 1998 and combined to form Daimler Chrysler, a $37 billion automotive giant that had a massive presence both sides of the Atlantic. However, cultural clashes between the two companies were cited as a key reason for the failure that led Daimler to selling Chrysler in 2007 for $7 billion.

In this case, the “efficient, conservative and safe” culture of Daimler clashed with the “daring, diverse and creating” culture of Chrysler. The due diligence work carried up front had not properly assessed the challenge both organisations faced in working with each other.

Also, the transaction was described as a “merger of equals” and this was not the reality within the new organisation. Chrysler had obviously been taken over and there was little trust between the two organisations.

A failure on this scale shows the importance of a thorough and objective due diligence process.

 

The world of mergers and acquisitions relies heavily on the due diligence process to help assess the viability of a transaction. When billions of dollars are at stake, it makes sense to do all the information gathering and analysis that you can.