Mordecai Gal: mergers and acquisitions expert? 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: Horizontal merger: Merging companies are direct competitors operating in the same market and offer similar products and/or services. A note for this M&A guide 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.
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.
Acquisition of assets: A merger can be motivated by a desire to acquire certain assets that cannot be obtained using other methods. In M&A transactions, it is quite common that some companies arrange mergers to gain access to assets that are unique or to assets that usually take a long time to develop internally. For example, access to new technologies is a frequent objective in many mergers. Increase in financial capacity: Every company faces a maximum financial capacity to finance its operations through either debt or equity markets. Lacking adequate financial capacity, a company may merge with another. As a result, a consolidated entity will secure a higher financial capacity that can be employed in further business development processes.
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.
Large mergers and acquisitions (M&A) tend 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.
Success in M&A requires much more than just executing on a big amount of deals. Acquirers must articulate exactly why and where they need M&A to deliver on specific themes and objectives underlying their overarching corporate strategies. In addition, they must give careful thought as to how they plan to pursue programmatic M&A—including constructing a high-level business case and preliminary integration plans for each area in which they want to pursue M&A.
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, 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.