Mordecai Gal: M&A 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: Conglomerate merger: Merging companies offer completely different products and/or services. 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 Scale: Underpinning all of M&A activity is the promise of economies of scale. The benefits that will come from becoming bigger: Increased access to capital, lower costs as a result of higher volume, better bargaining power with distributors, and more. While buyers should always avoid the temptation to indulge in ‘empire building,’ as a general rule, bigger companies usually enjoy advantages that small companies do not.
Opportunistic Value Generation: Some of the best deals happen when a company isn’t even actively pursuing an acquisition. The hallmark of these acquisitions is that the purchase price is less than the fair market value of the target company’s net assets. Often these companies will be in some financial distress, but a deal can be made to keep the company afloat while the buyer benefits from adding immediate value as a direct consequence of the transaction.
Tax purposes: If a company generates significant taxable income, it can merge with a company with substantial carry forward tax losses. After the merger, the total tax liability of the consolidated company will be much lower than the tax liability of the independent company. Access to Talent: Ask anybody in the recruitment industry where the biggest talent shortages currently are, and the answer will invariably be a variant of ‘people that can code’. Why is this? Firstly, because of the huge demand for coders in the so-called fourth industrial revolution. But also because all of the best coders are working for large silicon valley technology companies. The biggest always have access to the best talent. That’s as true for every other industry as it is for technology.
Additionally, managers may prefer mergers because empirical evidence suggests that the size of a company and the compensation of managers are correlated. Although modern compensation packages consist of a base salary, performance bonuses, stocks, and options, the base salary still represents the largest portion of the package. Note that the bigger companies can afford to offer higher salaries and bonuses to their managers.
Big 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: Overextending : ‘Bolt on’ mergers and acquisitions when target companies which are small in size relative to the acquiring company – are usually considered to be the best type of transactions. One of the main strands of thought behind this is that they don’t require as many resources to be acquired or to be integrated. At the other side of this equation, are those transactions that require significant resources on the part of the acquiring firm. Loading up on debt to acquire any firm creates a pressure from day one to cut costs – never a good start for a deal, and often the beginning of the end.
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.