Mordechai Gal: mergers and acquisitions specialist? What is a merger between two firms? A merger is referred to as a financial operation in which two companies join each other and continue business operations as one legal entity. Generally, mergers can be divided into five different categories: Vertical merger: Merging companies operate along the same supply chain line. A note for this M&A strategy is that the type of merger selected by a company primarily depends on the motives and objectives of the companies participating in a deal.
What are the Different Motives for Mergers? Companies pursue mergers and acquisitions for several reasons. The most common motives for mergers are: Economies of Scope: Mergers and acquisitions bring economies of scope that aren’t always possible through organic growth. One only has to look at Facebook to see that this is the case. Despite providing users with the ability to share photos and contact friends within its platform, it still acquired Instagram and Whatsapp. Economies of scope thus allow companies to tap into the demand of a much larger client base.
Synergies are typically described as ‘one plus one equalling three’: the value that comes from two companies working together in tandem to make something far more powerful. An example is provided by Disney acquiring Lucasfilm. Lucasfilm was already a huge cash generator through the Star Wars franchise, but Disney can add theme park rides, toys and merchandise to the customer offering. Revenue synergies: Synergies that primarily improve the company’s revenue-generating ability. For example, market expansion, production diversification, and R&D activities are only a few factors that can create revenue synergies. Cost synergies: Synergies that reduce the company’s cost structure. Generally, a successful merger may result in economies of scale, access to new technologies, and even elimination of certain costs. All these events may improve the cost structure of a company.
Higher Levels of Competition: The larger the company, in theory, the more competitive it becomes. Again, this is essentially one of the benefits of economies of scale: being bigger allows you to compete for more. To take an example: there are currently dozens of upstart companies entering the plant-based meat market, offering a range of vegetable-based ‘meats’.But when P&G or Nestle begin to focus on this market, many of the upstarts will fall away, unable to compete with these behemoths.
Incentives for managers: Sometimes, mergers are primarily motivated by the personal interests and goals of the top management of a company. For example, a company created as a result of a merger guarantees more power and prestige that can be viewed favorably by managers. Such a motive can also be reinforced by the managers’ ego, as well as his or her intention to build the biggest company in the industry in terms of size. Such a phenomenon can be referred to as “empire building,” which happens when the managers of a company start favoring the size of a company more than its actual performance.
Large mergers and acquisitions (M&A) usually to get the biggest headlines in newspapers, but research indicates that executives should be paying attention to all the smaller deals, too. These smaller transactions, when pursued as part of a deliberate and systematic M&A program, tend to yield strong returns over the long run with comparatively low risk. And, based on Mordechai Gal‘s research, companies’ ability to successfully manage these deals can be a central factor in their ability to withstand economic shocks. The execution of such a programmatic M&A strategy is not easy, however.
Know what strategic outcomes you ultimately want from engaging in M&A and consider the implications for both the buyer and seller. Is your goal to enter a new end market? Are you purchasing customers or contacts to geographically expand? To stay focused, always come back to how you answered the first three questions as you consider opportunities. Developing an M&A strategy requires knowing what makes your business successful now and what acquisitions can add to make the business even better in the future. It will help you clearly define the value proposition for both the buyer and the seller, as well as the value drivers that should guide acquisition decisions.
Why Mergers and Acquisitions Fail? There are many reasons so let’s discuss some of them: Business climate not suited or wrong time : For the myriad of reasons cited for the failure of the notorious AOL/Time Warner deal, one is seldom given: The year 2000 was not a good time for media firms to merge. The media industry was about to undergo the biggest shake-up in its history, from which it is only now beginning to show signs of recovery. The inability to see long-term shifts is a human trait (we overestimate change in the short-term and underestimate it in the long-term) and one that catches out many managers in M&A, ultimately leading to the downfall of many transactions.
With a world-class management team and acquisition capital, https://www.access-heat.com/ is a uniquely positioned consolidation consortium ready to invest in your tech company. As a tech consolidation firm, we look for organizations that are working to push the limits and move into a space of exponential growth through the blending and reorganization of existing operations of the same business type. Our proven methodology focuses on producing financially robust outcomes for all parties involved in the consolidation process. Business owners who are looking for a profitable handoff and equitable transfer of ownership find peace of mind with our consultative methodology, knowing that the business they spent generations tirelessly building from the ground up is being moved to experienced and capable hands. Our strategic investment strategy makes us different than Private Equity Firms or Venture Capital Firms. We work to restructure and optimize all the components of your business that offer an opportunity for increased profitability various synergies.