Do own a company? Are you thinking about selling out to a larger company? Or maybe you want to expand your business by buying up another company and bringing them together.
So what do you need to know if you are considering a business merger? What pitfalls will you encounter along the way and how do you avoid them? Here’s everything you need to know.
1. Two Heads Are Better Than One
What does a business merger do? All merges are about the expectation of future economic activity.
Mergers and acquisitions provide scope that would not be possible without organic growth. Buyers should resist the temptation to build empires, but larger companies usually enjoy advantages over smaller companies.
That being said, the business merger would not take place if the company buying another company out didn’t have expectations of how the smaller company can add value.
You only have to look at Facebook’s business model to understand why. After allowing users to share photos and contact friends on its platform, Facebook took over Instagram and WhatsApp. Economies of scale allow companies to meet the needs of a bigger customer base.
Another classic example is Disney’s buy-out of Lucasfilm. Lucasfilm was a huge backer of the Star Wars franchise, while Disney contributed theme parks, toys, merchandise, and customer offerings.
Synergy can be described as one to one equals three, and the understanding that two companies that work together become stronger.
2. Better Market Value
The hallmark of a good deal is a purchase price that is below the fair market value of the company’s net assets. A good deal can also happen if a company does not actively pursue an acquisition.
If the company is in financial difficulty, a deal can be concluded to keep the company afloat while the buyer benefits from the direct value-added as a direct result of the deal. One of the most common motives for an M & A is to increase market share.
A good example of this is the Spanish retail bank, Santander. They have bought out smaller banks to make it one of the biggest consumer banks in the world.
These types of retail banks see their geographical presence as key to achieving market share, which has led to a high level of consolidation of the retail banking sector in most countries with a group of four large retail banks.
One of the advantages of economies of scale is that if you are bigger, you can compete more. Theoretically, the larger a company is, the more competitive it becomes.
If you want to complete the transaction of merging your companies but aren’t sure how to do it you might want to consult an expert. They can complete the process for you very easily.
3. Spreading the Risk
The demand for programmers is enormous in the Digital Revolution. The best programmers work for big Silicon Valley technology companies. These themselves are multi-billion-dollar companies. Apple even became the first $2 trillion company in 2020, a huge milestone.
Companies with this much revenue can afford to take risks on higher capital projects that would bankrupt other companies if they failed. Remember these higher-capital companies can also employ a lot of people.
The more access to capital there is, the more good talent there should be.
This goes hand in hand with the large-scale economy that is currently being developed.
4. Diversify Your Audience and Offerings
To return to the example of Facebook, some analysts believe that teenagers are turning away from Facebook. Instead, they are incorporating other forms of social media such as Instagram, WhatsApp, and so forth.
Mergers and acquisitions are a good way of transforming a broken long-term strategy into a solid medium-term strategy. When a source of revenue falls apart, an alternative source of revenue can be retained and picked up, thereby diversifying the risk of the acquiring companies.
Suppose a company wants to enter the Canadian market, but it is building from the ground up, hoping to reach a desirable scale within five to ten years. It is a company whose customer base, sales, and brand equity will greatly benefit from completing an acquisition.
This applies to areas such as new product development (R & D) and organic strategy that is keeping pace with the pace of M & A.
5. Better Tax Options
Picture the scenario. You really want to enter the Thai market. But it’s going to be a logistical nightmare to set up a separate legal entity in the country to make it work.
You’d need connections on the ground and have to fill out a lot of paperwork. You might even have to part with some capital investment. Instead, you could purchase a local company and have this all set up for you.
Acquisitions can also bring tax benefits, especially if the target company is located in a strategic sector or a country with a favorable tax system. Countries that have a good tax system include Ireland, the Channel Islands (a UK Dependency, separate legal entity to the U.K), the Cayman Islands.
This is often referred to as tax inversion or tax avoidance but it’s totally legal and morally right if you are planning on doing business in the country in question.
Considering a Business Merger: Think Carefully
If you’re considering a business merger be sure to think very deeply about the impact it will have on your current business. You need to first understand what does a business merger does practically and legally?
Then to establish if it’s a good idea you can weigh up the benefits of a merger such as increased market value, new services vs. the negatives. The negatives include taking on a company with a different work ethic from your own.
If you’re looking for more business-related articles, you can always check out the rest of our blog.