Mergers & Acquisitions

Mergers and acquisitions pertain to a broad range of financial transactions, such as consolidations, tender offers, asset purchases, and management acquisitions that result in the consolidation of businesses or assets. Companies are integrated through mergers and acquisitions (M&A). Generally, the rationale for mergers and acquisitions is that the combined value of two separate companies is greater than if they remained independent. 

Mergers and acquisitions (M&A) are agreements that include joining two businesses in some way. Although used interchangeably, mergers and acquisitions (M&A) have distinct legal definitions. In a merger, two firms of comparable size come together to form a single new entity. Contrarily, an acquisition occurs when a larger corporation buys a smaller company, ultimately absorbing the smaller company’s business. Depending on the target company’s board of directors’ permission, Mergers and Acquisition agreements can be friendly or hostile.

Examples of Mergers & Acquisitions

In a merger, two or more firms combine to form a single new company. Tyco International, an industry-leading provider of fire and security solutions, and Johnson Controls, an industry-leading provider of building efficiency solutions, decided to merge in 2016. As a result, a business that is a leader in building and energy goods, technology, and integrated solutions will be established. The new Johnson Controls PLC’s headquarters will be in Ireland, and the deal’s worth is $30 billion.

Similarly, the AT&T and Time Warner merger, valued at $85.4 billion, is currently under discussion. AT&T’s CEO Randall Stephenson said in a prepared statement, “Once we complete our acquisition of Time Warner Inc., we believe there is an opportunity to build an automated advertising platform that can do for premium video and TV advertising what search and social media companies have done for digital advertising.” In an established industry, mergers such as this can bring favorable effects in terms of increased efficiency and cost savings.

On the other hand, in an acquisition, a company or investor group finds a target company and approaches its board of directors to discuss the prospect of purchasing it. Yahoo was the acquirer in Verizon’s recent $4.5 billion acquisition of Yahoo; Yahoo was the target.

Finally, when the two companies merged, neither Daimler-Benz nor Chrysler existed; instead, a new company named DaimlerChrysler was created. The stocks of both companies were redeemed, and new shares of the merged company were issued in their stead. As part of a rebranding effort, the company changed its name and ticker symbol to Mercedes-Benz Group AG (MBG) in February 2022.

Potential Drawbacks of Mergers & Acquisitions

Despite the fact that mergers and acquisitions are costly endeavors, there may be perks. Additionally, there are drawbacks or reasons not to make an acquisition, such as:

Frequently, the ultimate objective of a merger or acquisition is to generate economic gains and economies of scale. When the two businesses engaging in the merger and acquisition are more successful and profitable together than independently, this becomes feasible. The benefits of business consolidation include increased access to financing, enhanced bargaining power on the market, and lower manufacturing costs due to high volume, among many others.

Greater financial sturdiness results from mergers and acquisitions for both parties engaged in the deal. Increased economic clout can result in more market share, increased customer sway, and diminished competition danger. Larger businesses are typically more difficult to compete against.

Businesses operating in the same industry may occasionally be able to increase access to suppliers, raw materials, and tangible resources through acquisition. For instance, a company might buy out or combine with one of its suppliers to enhance production processes and ensure access to essential resources.

The Importance of Merging & Acquiring

The Statistics of Mergers & Acquisitions

Every year, companies invest well over $2 trillion in acquisitions. However, numerous studies place the failure probability of mergers and acquisitions between 70 and 90 percent.

Global merger activity throughout the first quarter of 2017 was inconsistent. The number of transactions decreased, but their dollar value increased. The total number of transactions decreased by 17.9 percent compared to the first quarter of 2016, yet the total transaction value was $678.4 billion.

Global merger and acquisition activity slowed in 2020 and early 2021, with a 7% decline in overall deal volume and a 16% decline in total deal value. In 2020, the overall value of mergers and acquisitions was around $2.8 trillion across 45,700 transactions.

How Do Mergers & Acquisitions Benefit Small Businesses

Increased financial capacity

Two companies typically have more financial resources than one, which opens the door for further initiatives. Purchasing superior manufacturing or distribution infrastructure is frequently less expensive than constructing them. Look for businesses that are barely profitable and have a substantial amount of idle capacity that can be purchased at a little premium to the net asset value.

Higher talent for the job

Growth and development can be aided by increasing the workforce pool from which the new, larger company can draw. To illustrate, a business with effective management and process systems will benefit a buyer who wishes to enhance their operations. Ideally, the business you select will have systems that compliment your own and are adaptable to the management of a larger enterprise.

Promote organic growth

Since the current business plan for expansion must be expedited, businesses in the same industry or area can combine their resources to decrease expenses, eliminate redundant facilities or departments, and boost their revenue.

Reduce expenditures

Using combined marketing expenditures, improved purchasing power, and cheaper expenses to reduce costs and overheads. Getting rid of unnecessary employees also helps lower costs.

Encourage improved performance

If you struggle with regional or national expansion, it may be more cost-effective than growing organically.

Minimize competition

Purchasing new intellectual property, goods, or services may be more cost-effective than manufacturing them alone.

Increased scale economies

Costs can be decreased, for instance, by having the ability to buy raw materials in larger quantities.

Bigger market share

If two businesses are within the same sector, pooling their resources could increase their market share.

Expanded capacity for distribution

Companies may be able to increase the size of their service area or distribution network by expanding geographically.

Why Should Small Businesses Consider Mergers & Acquisitions?

Competition and growth are two of the key forces that drive capitalism. When firms face competitors, they must simultaneously cut expenses and innovate. One solution is to purchase competitors to eliminate their danger.

Likewise, companies engage in M&A to expand through the acquisition of additional product offerings, proprietary information, social resources, and client bases. Furthermore, companies may seek synergies. By integrating corporate activities, overall performance tends to improve, and overall costs tend to decrease as one company capitalizes on the capabilities of the other.

Businesses periodically monitor various opportunities for mergers and acquisitions to maximize their wealth. Even though mergers and acquisitions are common, many organisations continue to face challenges in implementing these changes efficiently. One of the struggles business owners face is the absence of an exit strategy that allows them to transition out of business ownership. 

A business owner’s exit strategy allows them to reduce or liquidate their ownership in a business and, if the business is profitable, make a substantial return. On the other hand, an exit strategy allows the entrepreneur to minimize losses if the business is unsuccessful. Ultimately, it is up to the business owner to decide whether to cease operations at a given point in their entrepreneurial journey or to enable others to carry their legacy. Through Mergers and Acquisitions (M&A) as an exit strategy, business owners can rest assured that they will be able to witness their organisation become much more than they’ve envisioned. Investors make it possible for businesses to thrive by putting effective systems and people in place to ensure that a business or organisation is sustainable and profitable. 

Mergers & Acquisitions as an Exit Strategy

The Bottom Line

M&A is a growth strategy that businesses frequently employ to instantly enhance their size, service area, talent pool, client base, and resources. However, because the procedure is expensive, firms must be certain that the benefit would be significant. Each and every merger and acquisition would be unique to its own terms, meaning a unique set of rules and regulations for each and every company that either merges or undergoes acquisition. There are a lot of benefits to merging and acquiring, but there are also several drawbacks as well.

If you are an entrepreneur, self-employed, working a job, or establishing a business, likely, you are frequently advised that you must be the one to do everything for your company. As a coach, I am aware that you do not have to do so. With more than 16 years of experience as an entrepreneur, it’s distressing to always follow everyone’s recommendations. Why? Because you’re seeking the one thing that will make you successful or strike a goal for you and make you feel like this is where you belong. 

I am actively merging and acquiring businesses to help business owners transition out of business ownership. If you are a business owner looking to execute your exit strategy, you may consult with me about business deal structuring. If you’re interested, you’re looking to sell a business, or you’re interested in being acquired, you can send an email to acquisitions@ajcultured.com or acquisitions@alleahericaclarke.com