Mergers and acquisitions (M&As) are strategies commonly used by businesses to help them expand into new markets, improve their competitive position or acquire new technologies and skills. In this guide, we’ll be explaining exactly what mergers and acquisitions are and how they could potentially help your business growth.
What is a Merger?
The term ‘merger’ refers to the joining of two companies of the same size which then become owned and operated as one single company. Both companies surrender their individual stocks to a new company stock which replaces them.
What is an Acquisition?
The term ‘acquisition’ refers to the takeover of one company by another. For example, ‘Company A’ would take over ‘Company B’ and both companies would be owned and operated under Company A’s name. From a legal perspective, Company B is absorbed by Company A and ceases to exist, meaning it can no longer trade under its previous ownership.
Financial and Strategic Mergers and Acquisitions
Generally there are two types of mergers and acquisitions: financial and strategic.
A financial merger or acquisition is carried out for financial reasons, generally to generate some quick money or as an investment.
A strategic merger or acquisition is carried out in order to provide a solution to a different type of business problem. For example, the acquirer may be looking to expand their product line or enter a new market. These types of acquisitions yield value for both the acquired and the acquiring companies.
An example of a company which has successfully carried out both strategic and financial M&As is Walt Disney Co. Back in 2006, Disney acquired the animation company Pixar for $7.4 billion. This was a strategic acquisition as it gave Disney access to Pixar’s highly advanced animation technology and skills.
Similarly, in 2009, Disney acquired Marvel Entertainment for $4 billion. This was a financial acquisition as they generated a significant profit of over $53 billion from their investment relatively quickly.
However, it’s not just the multi-billion pound conglomerates which can benefit from a merger or acquisition. SMEs can successfully incorporate M&As as part of their growth strategy and can be the perfect solution to a number of problems.
Is a Merger or Acquisition Right for My Company?
Before embarking on a merger or acquisition, you should first stop and think about your answers to the following questions:
Is My Business Ready to Grow?
Is your business in good financial health? Can it feasibly invest in a new future? Think about how your business will fund the transaction and the level of liquidity that will be required in order to carry it out successfully. Make sure to have a detailed funding strategy in place.
How is a Business Valued?
A business can be valued in a number of different ways. For example, the value of a trading business will most commonly be based on a multiple of adjusted earnings. A skilled and experienced accountant can help to advise you on the most appropriate method.
Is the Target Company a Good Fit?
When considering any potential company to merge with or acquire, it is absolutely essential to carry out due diligence. This means doing much more thorough research and investigating than simply looking at their balance sheet. You need to be evaluating whether the company is viable or if it is likely to negatively affect your own through a merge or acquisition.
Look at the existing clients, staff, technology, operations and all of the legal obligations, such as debts, tax issues, supplier & employee contract and any other current legal proceedings which could impact your business.
Get the Right Kind of Professional Help
Not only are mergers and acquisitions complex and time consuming processes, they also have the potential to have severe negative impacts on your business which could end up costing you in the long run if not handled properly.
A successful merger or acquisition is one that has been well researched and skilfully negotiated. This can be done by getting an experienced accountant on board to help.
At Ryans Chartered Accountants, we can help you to:
- Identify potential targets for M&A
- Screen targets for suitability
- Prepare a negotiating strategy
- Raise the necessary capital
- Develop an integration plan
- Optimise the tax and financial position of the combined enterprise
Let us provide you with the right kind of professional advice on how to manage a merger or acquisition successfully.