Is a corporate merger always good news?
A merger is the structured amalgamation of more than one business of a similar size, typically sharing equal ownership. This decision is based on mutual agreement, rather than acting on the intention to overthrow a contender.
If this was the case, an acquisition would be better suited strategically as this eliminates any possible hierarchy between you and the target business. The route of a corporate merger is typically taken when it is in the best interest of both companies to expand business operations.
A corporate merger can help improve operational efficiency, demonstrate cost savings and give you easy access to a whole new customer base. By gaining access to their share of the market, you will have greater exposure and a higher level of control.
During the early stages of a corporate merger, you will need to recruit experienced hands to negotiate on your behalf and broker the best deal possible for your business without sacrificing the company ethos and compromising on your final product or service. Following news of your merger, public perception will change due to the rapid growth of your business and share of the market.
Is it always good news?
Being able to seriously and realistically consider a merger is a step forward for any business as it’s an active move to help the company reach new heights. A merger is a strategic move which is taken to help the business reach its next milestone, allowing for the delivery of additional products into new marketplaces. A merger may be considered as a part of a strategy to restructure a business in financial distress; however, there are alternative measures which can be taken in this event which may be more feasible, such as restructuring and turnaround options.
Types of mergers
There are a few merger methods which can be used which deliver different outcomes, such as:
Horizontal merger
A horizontal merger is the combining of two companies operating in the same market to gain quicker access to a larger market share. This is a speedy, cost-efficient and feasible way of reaching your goal, and less time consuming than pumping resources, money and time into the business over a series of years.
Vertical merger
A vertical merger is the combining of two companies in the same supply chain to unite the operational journey under one roof, therefore reducing costs. For example, if you are an accounting firm who outsources bookkeeping and payroll, you may consider merging with the supplier to trim the costs incurred to your business and to expand your core service offering. A vertical merger allows for more control over the supply chain as this reduces the number of intermediaries involved, streamlining operations and therefore cutting costs.
Market extension merger
A market extension merger is the fusion of two companies dealing with the same product but in two different markets. This type of merger is used to expand the existing customer base and market share. A market extension merger speeds up the process in which a business can achieve breakthrough success in a new marketplace. If done organically, it may take years to build upon the reputation of your business to achieve the same result. By extending market reach, you can unlock a whole new customer base and increase the exposure of your services.
Product extension merger
A product extension merger is the integration of two companies trading different products in the same market.
If you’re exploring the expansion of your service to boost the pedestal on which your business stands, a product extension merger may be the answer. As an alternative to developing a new product, crafting a fresh strategy, undertaking customer trials, seeking client feedback and launching a new service offering, you can execute a product extension merger. This not only simplifies a complex process that can take years, this cuts costs and the hours of manpower required to engineer a new strategy to launch the sale of an additional product, getting you to the desired destination faster.
Kick-starting a corporate merger
The first step to acting on the decision to merge with another business is to determine a strategy which acts in the best interest of your business and to achieve the goal that you initially set out to achieve. By carrying out the necessary due diligence, here are some key factors to take into consideration:
Strategical –The route you wish to take will be determined by the goal you intend to achieve. For example, if you aim to achieve globalisation through a merger by unlocking access to international markets, you may consider a market extension merger. Plan your strategy according to the outcome to ensure that you achieve your goal. By taking a strategical approach, you can plan your finances accurately, give your staff advanced notice of the change and make the necessary arrangements to ensure a smooth transition.
Target – If you fail to carry out due diligence and target a business which is of high risk and has unreasonable and inflated expectations, this threatens the lifeline of your business. Target a business which strengthens your core specialisms by taking into consideration the following:
- Compatibility
- Location
- Company size
- Market competition
- Risks, such as operational losses and insurance
- Operational, strategical and financial history
- Structure of management and workforce
Deal structure – Once the negotiations commence, ensure that preparations are in place to broker the best deal for your business. Take into consideration the security of staff to ensure continuity, tax obligations, raising finance, possible pay-outs for management staff leaving the company following news of the merger and the future of existing stock and resources. This is to ensure that both businesses are in complete mutual agreement and that the expectations of both parties are explicitly voiced and agreed to.
Legal issues
If you are in successful agreement to merge with the target company, ensure that you carry out due diligence, such as obtaining proof of asset ownership and equity. Confirm that working capital is in order and assess the impact of the possible merger on the ownership of your business. Ensure that there is insurance and warranty in place to protect against financial losses in the event of an agreement breach. By appointing professional advisors, they will be able to guide you through the process; from preparation to integration, ensuring that each detail is taken care of and that the transition is carried out smoothly.
For better or worse
Press reaction to the announcement of your corporate merger is a strong indicator of how customers may react to your business decision. News of your merger can either strain customer and supplier relations as a result of the change in management or improve interactions due to the jump in market share, access to greater working capital and the increased valuation of your business.
Depending on the deal size, deal type and the circumstances in which the merger is executed, the advantages and disadvantages of a merger will vary. In the event of business rescue and recovery, a merger can be valuable to reduce the prospects of two similar businesses going into the red due to an upcoming stretch of economic uncertainty or sector decline, such as Brexit. By merging, the operational costs of the business will be instantly divided and manpower increased following the unification of both workforces. The integration of different creative thinkers may also help the business take a new direction or make repairs to existing strategies.
Following the integration of the two businesses, both management teams will be expected to work in harmony and consolidate their differences, as the success of the new business will require synergy between both parties. Alongside the introduction of new management, there will inevitably be a difference between the corporate cultures embodied by both teams which will need to be unified to encourage cohesive working. Communication will be challenging as staff will need time to adapt to their new corporate identity, environment and management team. To avoid the duplication of roles, you may be required to reshuffle the structure of staff members or even cut losses. The ripple effect from a merger impacts the likes of internal staff, suppliers, customers and competitors due to the shift in the hierarchy.
After careful consideration and guidance from professional advisors, if a corporate merger is the right move for your business, this gives you the opportunity and potential to experience growth and trade within markets previously out of your reach. In addition to company mergers, an acquisition or takeover bid may be an alternative solution to expand your business operations or to overtake competitors. Seek advice from seasoned and reputable professional advisors to ensure that each aspect of your move is researched, allowing for an informed decision to be taken.
Keith Tully of RBR Advisory is an experienced business rescue expert with over 25 years’ experience in the field of corporate insolvency. He joined the Real Business Rescue team, part of Begbies Traynor Group in 2013 and regularly acts on behalf of financial institutions in financial distress.
