Companies carry out mergers because this is a type of business that can bring some advantages to the new organization created. In the continuation of Demystifying M&A – the first part of this topic you can check here) – we will highlight the benefits that a merger or acquisition operation can bring to companies and what are the 10 steps that involve this process. Check out!
Benefits of M&E
1. Economies of Scale
Often, the ultimate goal of a merger or acquisition is economic gains and economies of scale. This becomes possible when the two companies involved are stronger, more productive and more efficient together than they are apart. Companies consolidate to reap benefits such as greater access to capital, better bargaining power in the market, lower costs resulting from high-volume production, among others.
2. Economies of scope
Economies of scope refers to reducing the cost of producing one product as a result of producing another related product. In other words, one product serves as a “backup” for the other to reduce overall costs. Economies of scope often occur when producing more products is more feasible and cost-effective than making a single product or fewer. Mergers and acquisitions can lead to economies of scope that might otherwise be impossible to achieve through organic growth.
3. Competitive advantage
In general, mergers and acquisitions mean greater financial strength for both companies involved in the transaction. Having greater economic power can lead to greater market share, more influence over customers, and reduced competitive threat. In most cases, it is more difficult to compete with larger companies.
4. Access to resources and qualified professionals
Companies in the same sector, when they come together, can gain access to materials and suppliers. For example, a company may acquire or merge with one of its suppliers to improve production cycles and ensure access to critical materials.
Talent acquisition is one of the biggest concerns of companies today, and a strong and established name has the potential to attract talented employees.
5. Portfolio diversification to minimize risk
Mergers and acquisitions can allow companies to spread risk across different revenue streams through product and service diversification. If one revenue stream falls short, the company still has other revenue streams to draw on and continue operating. By diversifying risk, the company can ensure long-term sustainability.
6. Accessing New Markets
Entering a new market can be challenging, even for established companies. While setting up a subsidiary or branch is always an option, a merger or acquisition can save companies time, effort and money compared to starting from scratch.
7. Business continuation
Some small businesses are family owned and once the founder retires, there is a risk of the business going bankrupt because there may not be a succession plan in place. Merger or acquisition is a strategy to help ensure business continuity.
8. Synergies
Synergies are commonly described as “one plus one equals three”. This means that the value of two companies working together is greater than the value of two companies working separately.
9. Increased Market
Share One of the most common reasons for conducting mergers and acquisitions is to increase market share.
Now that you know 9 benefits of M&A, let’s detail the steps of a merger and/or acquisition operation. This process can take anywhere from six months to a few years to complete, given the complexity of the business.
Stages of the mergers and acquisitions process
Generally speaking, M&A can be divided into 10 stages. Below, we detail each one so that you can understand everything that is involved in an operation:
1. Developing the Acquisition Strategy
This step revolves around the acquirer having a clear idea of what they expect to gain from the acquisition – what their business objective is for acquiring the target company.
2. Defining M&A Research Criteria
This phase will determine the main criteria for identifying potential target companies.
3. Search for potential acquisition targets
With its strategy and criteria defined, the acquiring company begins the search to identify and evaluate potential target companies for merger or acquisition.
4. Acquisition Planning
The acquirer contacts one or more companies that meet their search criteria and appear to offer good value. The purpose of initial conversations is to get more information and see how receptive the target company is to a merger or acquisition.
5. Data for Assessment
If the initial contact evolves and the target company is willing to move forward in the conversations, the acquirer asks that organization for substantial information about the business to make its assessment.
6. Negotiations
After analyzing the information provided, the acquirer must have enough data to build an offer. Once the initial offer is presented, the two companies can negotiate the terms in more detail.
7. M&A Due Diligence Due
diligence is an exhaustive process that begins when the offer is accepted, and aims to confirm or correct the acquirer’s assessment of the target company’s value. In this step, the acquirer will perform a detailed analysis of all aspects of the target company’s operations – its financial metrics, assets and liabilities, customers, human resources, etc.
8. Purchase and Sale Agreement
Assuming the due diligence is completed, the next step is to execute a final sale agreement. Here, the parties involved make a final decision on the type of purchase agreement, whether it will be an asset purchase or a share purchase.
9. Financing Strategy for the Acquisition
Prior to this point, of course, the acquirer has already explored its financing options to complete the deal, but usually the financing details are gathered after the purchase and sale agreement has been signed.
10. Acquisition Closing and Integration
The acquisition deal is completed and the management teams of the target company and the acquirer work together in the process of merging the two organizations.
