Mergers are a well-known and popular way to grow a business. Many of the largest corporations in the world were built through acquisitions. However, there are many pitfalls and are not always a good idea. Here are things to consider.
The advantages of merger and acquisition activity are there. A business can expand its reach and gain market share. Often, synergies are realized, and operational costs are lessened. What’s not to like?
At least, that’s what the investment bankers say. They get their hefty fees regardless if it’s a success or failure. Although bankers can be very convincing, a merger is by no means a guaranteed success.
You must do your research properly. Will some sales be cannibalized? Are cost savings exaggerated? How much of the staff is likely to jump ship? Discuss the topic extensively with management and even some staff. You might even want to hire a consultant.
Some mergers and acquisitions are funded at least partially with a loan. Many corporate empires have fallen due to being overburdened with debt. Even if it doesn’t lead to a collapse, too much debt can cripple a company.
Additionally, in a merger, the cultures need to be integrated well. This can be difficult if they’re very different. One might have a go-getter culture while the other taking a laid-back approach. One might prize the sales team and the other being an engineering-focused company. Without strong leadership and a good plan, infighting could result.
Acquisitions are often easier to integrate because they’re purchases of a business. They’re not a merger of equals. The larger company is firmly in control and can dictate the terms. Only the purchased part is affected by the deal.
However, when mergers and acquisitions succeed, they can be an excellent source of growth. With the combined revenue and profit, the new company grows its income. Marketshare is increased. Sometimes a merged company is greater than the sum of its parts. The new firm will be able to survive competition better.
Often overlooked, a merger or acquisition takes out a competitor. This might reduce pressure on prices and allow profit margins to expand. There are now fewer companies competing for talent.
Mergers are a popular way to grow a company. They’re sometimes a good idea. Executive leadership should tread carefully before organizing one.