5 Key Information You Should Know About the Merger and Acquisition Process

Posted by cetwin on March 10th, 2015

Businesses grow either through internal expansion or external expansion. The first option is rather slow and tedious while the second one is faster, although more complicated.

Business Growth through Mergers and Acquisitions

Most of the big companies today were able to grow through the merger and acquisition process. For instance, Ford Motors acquired Mazda and these two companies are now giving Toyota a stiff competition in passenger vehicles in the Asia Pacific region.

In the international as well as in local banking circles, mergers and acquisitions are the repair tools by which bigger banks save smaller and ailing banks from going belly up.

Important Information about the Process of Merger and Acquisition

Merger and acquisition is not a scattershot approach that a commercial enterprise can enter into out of a whim with just its own business ideas to rely on. There are a lot of studies, planning and deliberation required to guarantee success.

Here are some key points you need to know about mergers and acquisitions.

1. Over one half of all mergers and acquisitions fail.

Research reveals that the rate of failure of mergers and acquisitions is approximately 50 per cent. This rate is measured by creating a post-merger financial value of the particular M&A. Some of the reasons for this high failure rate are wrong understanding of value drivers, high valuations, cultural displacement and so forth.

2. Merger and acquisition is a way to execute a strategy.

There must be a clear strategy at the start of the process. The leader of the M&A (which is usually the CEO) needs to look at all alternatives before he decides if the M&A is the best move to make. Such alternatives include co-investing, partnership, building-in-house, acquire, license and so forth.

3. M&A results in high employee turnover.

You must have a good retention program for the key employees of the acquired company because the history of M&As shows that there is usually a high turnover in its employees.

4. Companies acquire other companies because of 2 primary factors.

The motivation to acquire another company rests on two motivators:

a)    To enable the acquiring company penetrate a new market (already with existing revenue stream), and

b)   To fill a strategic gap in its resources (including people), capabilities, and products.

5. Understanding what drives the value is critical to the success of the M&A.

The acquiring company should put in sufficient due-diligence effort to ascertain and identify the sources of value such as the brand, people, property and so forth, of the company being acquired.

For instance if the acquiring company is considering a McDonalds franchise, it should determine the value of its McDonalds franchise cost to be able to get to the right amount by which he can wisely acquire the franchise.