Seven Key Reasons To Avoid A Merger

The quantity of acquisition transactions every year varies. Nonetheless, there is a steady stream of activity in the space. Why in the world are there so many? Bottom line, it's a very simple answer. There's a large amount of money involved. First, the person who sells his business to the acquiring company stands to pocket…

The quantity of acquisition transactions every year varies. Nonetheless, there is a steady stream of activity in the space.

Why in the world are there so many?

Bottom line, it's a very simple answer. There's a large amount of money involved.

First, the person who sells his business to the acquiring company stands to pocket a great deal of money.

Second, the investor believes the combined companies will produce better results. Expenses should drop dramatically due to efficiencies. All of those dynamics taken together mean the new combined entity should be worth a great deal more than each entity by itself.

So where does this money come from?

Fundamentally, there are two related dynamics going on. The first is the increase in bottom-line profitability occurring from economies of scale. In most instances, both companies have similar departments providing similar services to their respective companies.

Good illustrations of these are the accounting department, human resources department and marketing departments. Post merger Most of these supportive departments are reduced in size as they are combined. This results in savings including personnel, space, and all of the supplies and other materials needed by the departments.

Second, larger companies are typically valued at greater multiples of earnings. So, greater profitability times a greater multiple equals greater company value.

Remarkably, this can take place without any increase at all companies top line revenue.

Of course this is all math and it makes sense, but there's a problem.

While most deals take place because of this economic lure there are other considerations.

Alignment failure can help upset the apple cart. Even under circumstances where the companies are essentially identical except for revenue, they are very different in many areas. The following is a partial list:

  • Values.
  • Philosophies of doing business.
  • Mission statements.
  • Procedures and systems.
  • Basic fundamentals.
  • Systems of compensation.
  • Vision
  • Planning
  • Sweetheart arrangements with stakeholders.
  • etc.

These items could be very different. The more different they are the more difficult the merger will be in the end. You can not expect a successful outlet without alignment is obtained. When these items are not reconciled and aligned transactions fail. Sometimes the failure can be terminal.

One can do three things to increase success likelihood.

Initially, is to understand the differences prior to entering into an agreement.

Second, is to determine the specific action required to ensure alignment over time.

The last step, strategic and tactical planning meetings should have been held jointly prior to the actual closing date.

Of course sensitive information is being risked during these activities. That's fine as long as the merger actually happens. But, if it fails this leak can be of very serious concern.

So consider care and caution needs to be in place prior to any of the three remedies being implemented.