Mergers and acquisitions (M&As) are two methods by which businesses consolidate. They can often be lumped under the same umbrella, but they differ in terms of structure and implications.
Mergers occur when two companies that are roughly equivalent in size, market value, or operational scale combine to become one new company. Neither company is the dominant purchasing company, and neither remains independent.
Acquisitions occur when one company purchases another. The purchasing company keeps its name and identity, while the acquired company either becomes a subsidiary or its identity is dissolved. In a small business acquisition, the purchasing entity can generally be larger or more “dominant” than the target company.
Businesses often consider an M&A as a strategic move to bolster market position, access new technologies or markets, or achieve operational efficiencies. But merging with or buying another company – or agreeing to have your company be acquired – can be much more than a financial transaction. It can require thinking about everything from meshing computer systems to sorting out sales and marketing teams. In other words, successful mergers and acquisitions necessitate a lot of hard work.
This seven-part look at the overall merger and acquisition process can help your business prep for an upcoming M&A, strengthen resilience, and promote long-term success.
1. Liquidity and financial health check
Both mergers and business acquisitions typically require sizable investments. If your business is looking to merge with or acquire another company, it’s important to first consider performing a thorough financial health check before considering any potential M&As. For example, try to ask questions, such as “Does our business have ready access to enough liquidity to successfully carry out a transaction of this scope without hurting our ability to cover short-term obligations?”
Then, try to determine whether the company’s capital structure can bear the added strain. If you won’t be able to finance overall operations and growth, it may be wise to put off a small business acquisition or business merger. Consider waiting until your company builds up enough financial strength to fund the M&A, perhaps by gaining additional capital from investors or focusing on ways to increase profit margins.
2. Transparency for the full team
For M&A success, transparency should extend beyond leadership and other key stakeholders directly involved in the transaction. When staff hears of an upcoming business merger or company acquisition, rumors can spread, and workers may begin to worry about their future prospects. All employees – from middle management to frontline employees – should therefore be kept in the loop to prevent anxiety and its knock-on effects, such as lower productivity and morale. A better understanding of the positive business impacts of this potential merger can put staff members at ease and keep everything running smoothly as the M&A process is implemented.
Managers and leaders can aim to be open and transparent about the impact and scope of any upcoming changes through communication channels like internal newsletters and Q&A sessions. If major changes are on the horizon, it can often be better to make them quickly and all at once, rather than drag them on and leave staff in the dark, wondering what’s to come. The latter situation can harm employee morale and the overall work environment. Yet, timing can also be important. Mention major changes too early and you may risk creating prolonged uncertainty; too late and you may be viewed as secretive.
Maintaining transparency can not only help create a smooth transition, but it can lay the foundation for a more cohesive and trust-based organizational culture.
A dedicated and competent transition team not only facilitates a smoother merger or acquisition process, but also lays the foundation for a harmonious and productive post-acquisition environment.
3. Well-defined goals and success factors
Businesses should consider developing their M&A approach through analysis of both their current position and their future strategic plans. To do that, consider which of the following goals you want the M&A to help achieve:
- Increase market share to solidify brand dominance, optimize pricing power, and strengthen barriers against competitors.
- Enter adjacent markets to diversify revenue sources and reduce single-market risks.
- Acquire new or expanded product lines, processes, and intellectual capital to enhance competitive advantage and diversify offerings.
- Scale the business to become a lower-cost, more competitive company.
- Eliminate a competitor and incorporate their diverse strengths to broaden reach.
- Achieve vertical integration to tighten supply chain control, reduce costs, and ensure product quality and consistency.
Every step of the merger and acquisition process, from researching prospective targets to finalizing the specifics of the deal, should align with the chosen goals and move the business closer to achieving them. If goals evolve as the process continues, previously made assumptions and financial forecasts should be updated and reassessed.
4. M&A candidate must-haves
Having clarified its merger or acquisition goals, a business can begin to identify the right target. But what factors should influence the screening process?
One of the most important factors is integration – how difficult and realistic it will be to fold in the target business’s operations and desired staff. Major differences in standard operating procedures could present challenges as the new management takes over, and existing staff on both sides of the merger may feel frustrated enough to look for other employment – even staff that management wants to retain. Beyond procedural integration, aligning organizational cultures can be equally crucial. A mismatch in company cultures can disrupt productivity and morale.
Other major factors while researching are anticipated revenue streams and potential cost synergies. An M&A should ideally lead to increased profitability, either through enhanced revenues or optimized operational costs. When the businesses consolidate, what will define success and what metrics will be used to determine whether the merger met expectations? Additionally, what size company can a business realistically acquire before it strains its capital and resources? These questions, and others catering to the business’ specific situation, can help narrow a list of potential and realistic candidates.
When identifying candidates, take care to avoid fixating on a particular target, as this can cloud judgment and obscure potential risks – risks that could lead to more costs than revenue, and undermine the anticipated benefits of the M&A.
5. Planned and executed due diligence
Evaluating a potential deal can require more than just some simple math or a light audit. Due diligence is the deep dive into the target company’s overall health to ensure that there are no hidden liabilities or discrepancies. It can be a critical part of M&As, and often the most intensive and lengthy part of the process.
During this phase, businesses should consider analyzing diverse sources to accurately assess every aspect of the prospect before finalizing the terms of the deal. Internal records and documents, as well as statements with external information, such as government liens, credit checks, and public filings, all can work to provide a comprehensive understanding of the target’s value, liabilities, workforce, and financials.
If any discrepancies arise during this period, both parties can work together to get to the truth of the matter, mitigate any risks, and ensure that everything is transparent and ready for the transition. The thoroughness of the due diligence process can spell the difference between a successful merger or acquisition and one fraught with unforeseen challenges and financial pitfalls.
6. A transition team
A dedicated and competent transition team not only can facilitate a smoother merger or acquisition process, but also can lay the foundation for a harmonious and productive post-acquisition environment. This team should be entrusted with assessing the transaction, completing the investment, predicting challenges, and resolving problems as they arise. The team may also be responsible for monitoring performance and evaluating progress against set benchmarks over time.
While some transition teams are mostly composed of internal M&A experts, others can incorporate the temporary assistance of specialized executive leaders. A balanced team typically includes line managers and leaders intimately familiar with both sides of the acquisition. Teams should encompass financial and operational expertise, as well as more specific skills in integrating IT systems and harmonizing corporate cultures.
Regardless of who is involved, businesses should make sure the team can access all relevant data throughout the process. This can help guarantee that all projected benefits and costs of the M&A are grounded in reality and that any adjustments can be made quickly and effectively. Transition teams can also answer staff questions and help both sides of the workforce adjust to the new status quo.
7. A carefully planned and performed integration
When it’s finally time to merge the operations, processes, and cultures of the two companies, businesses should revisit and, if necessary, recalibrate their original plans and goals. M&As can unfold over extended periods during which business performance, market forces, or economic conditions may evolve.
While inking the deal may grab headlines, the true value of a merger or small business acquisition is realized during the integration phase. This is when assets and operations are combined to actually create value and drive revenue growth. Therefore, businesses should take great care to ingrain integration into the core of operations by emphasizing accountability and explicitly addressing any risks or concerns uncovered during due diligence.
Still, businesses should balance this care with speed, as long delays can create complications if key employees are driven away. Clear timelines can enable staff to grasp forthcoming changes – from minor shifts, like new protocols for expense reports, to big changes, like organizational restructuring. To retain and motivate staff, some companies may even offer incentive packages that reward those who remain committed or help achieve certain benchmarks during the transition.
Quick Reference: Remember the Four Cs
These “Four Cs” can help businesses fulfill all their M&A objectives and keep the transaction on target to meet its goals:
- Compensate: To retain existing management, make their targets achievable and compensate appropriately.
- Communicate: People on both sides of the transaction should be completely aware of what’s going on to help quell rumors and paranoia. People may sometimes respond to uncertainty by assuming the worst.
- Care: How a business reacts to challenges can make all the difference. Even small inconveniences can generate ill feelings, especially for prospective targets and staff concerned for the future. Try to respond quickly, transparently, and completely.
- Cull: If any members of management aren’t being kept on, decisions should be made quickly. But take care, as these decisions can have ramifications throughout their departments – and likely can’t be undone.
The Bottom Line
Mergers and acquisitions are a major decision for any business and should not be undertaken lightly. Effectively executing an M&A can require planning that begins before the first prospect is vetted and isn’t completed until the final piece of the target business is fully integrated – with plenty to consider in between. But, with detailed preparation and proper due diligence, mergers and acquisitions can present an invaluable opportunity to expand a business’s reach, operational capacity, and long-term success.
A version of this article was originally published on February 6, 2012.
Photo: Getty Images
