Dr Keen Mhlanga
There are many ways to kill a cat, stated one wise man. Such has been the norm in making numerous decisions in today’s world.
The business environment itself faces many routes in trying to achieve its corporate objectives. When it comes to business growth and expansion, various methods are undertaken by organisations depending on their size, risk acceptance and financial stability.
For years companies have opted opening new branches or launching new products as growth and expansion strategies but the latter has shifted due to globalisation.
Companies and industries worldwide have resorted to mergers, acquisitions and franchisees as new popular methods of business growth. Gone are the days when a company would take years or months to initiate its intentions because as the business environment evolves so does the business strategies as well.
Although the methods seem riskier and expensive, they provide faster results compared to old routines of company growth. Mergers and acquisitions remain a debatable issue in the business market as to their effectiveness versus the risks associated with the forms of business growth. However, the decision relies on company owners and their shareholders as to which method befits their organisation best as each category provides underlying benefits and demerits.
One would then ask why grow or expand when you are making normal profits? The question itself is invalid since the action or feeling is inevitable.
Normally when businesses make it and gaining a lot financially, they seek higher ground thus growth objective, which is a way of securing and increasing more future investments.
The move is often accompanied by finance and risk of either failure or success hence decisions to either merge or acquisition. An acquisition can be defined as the process by which one company purchases either most or all of another company’s shares and takes control of its operations.
The buyer only needs to acquire an ownership stake of more than 50%, though they will often also buy the company’s tangible assets (such as property, equipment). It does this to ensure that they can make decisions regarding the company (and its assets) without requiring the approval of the company’s other shareholders. Since the 1990s, the rate of business acquisitions has nearly doubled.
It is now one of the most popular means of facilitating business expansion and occurs on a global scale, in markets of all shapes and sizes. A merger occurs when two separate entities combine forces to create a new, joint organisation.
Legally speaking, a merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm).
The three main types of mergers are horizontal, vertical, and conglomerate. In a horizontal merger, companies at the same stage in the same industry merge to reduce costs, expand product offerings, or reduce competition. Many of the largest mergers are horizontal mergers to achieve economies of scale.
In a vertical merger, a company buys a firm in its same industry, often involved in an earlier or later stage of the production or sales process.
Buying a supplier of raw materials, a distribution company, or a customer gives the acquiring firm more control.
A conglomerate merger brings together companies in unrelated businesses to reduce risk. Combining companies whose products have different seasonal patterns or respond differently to business cycles can result in more stable sales. A company will typically acquire to grow their business at a faster rate than natural, organic growth would allow hence friendly and hostile acquisitions.
A friendly acquisition takes place when there is no resistance to the deal, and the company to be subsumed does not object to the process. On the other hand, a hostile takeover involves opposition and objections on behalf of the target company.
If they refuse, the hostile company must acquire a majority stake in the desired business to force the deal.
The principal means of achieving this is by offering a ‘tender offer.’ A tender offer is an offer to buy shareholders’ stock in a company at a price that is above the current market value. This is a tempting offer for many shareholders, as it offers a guaranteed pay-out at a price above the company’s value.
In practice, friendly mergers of equals do not take place very frequently. It’s uncommon that two companies would benefit from combining forces with two different CEOs agreeing to give up some authority to realize those benefits.
When this does happen, the stocks of both companies are surrendered, and new stocks are issued under the name of the new business identity. Typically, mergers are done to reduce operational costs, expand into new markets, boost revenue and profits. Mergers are usually voluntary and involve companies that are roughly the same size and scope.
Acquisitions require large amounts of cash, but the buyer’s power is absolute. Companies may acquire another company to purchase their supplier and improve economies of scale–which lowers the costs per unit as production increases. Companies might look to improve their market share, reduce costs, and expand into new product lines.
Companies engage in acquisitions to obtain the technologies of the target company, which can help save years of capital investment costs and research and development.
There are reasons, advantages and disadvantages to companies for merging. Companies may undergo a merger to benefit their shareholders. The existing shareholders of the original organizations receive shares in the new company after the merger.
Companies may agree for a merger to enter new markets or diversify their offering of products and services, consequently increasing profits. Mergers also take place when companies want to acquire assets that would take time to develop internally.
To lower the tax liability, a company generating substantial taxable income may look to merge with a company with significant tax loss carry forward. A merger between companies will eliminate competition among them, thus reducing the advertising price of the products.
In addition, the reduction in prices will benefit customers and eventually increase sales. Merging increases market share because when companies merge, the new company gains a larger market share and gets ahead in the competition. Companies can achieve economies of scale, such as bulk buying of raw materials, which can result in cost reductions.
The investments on assets are now spread out over a larger output, which leads to technical economies. Another merit of merging is avoiding replication in the sense that some companies producing similar products may merge to avoid duplication and eliminate competition and also results in reduced prices for the customers.
A company seeking to expand its business in a certain geographical area may merge with another similar company operating in the same area to get the business started hence the conclusion mergers are less costly compared to acquisitions.
In some industries, it is important to invest in research and development to discover new products/technology. A merger enables the firm to be more profitable and have greater funds for research and development.
This is important in industries such as drug research, where a firm needs to be able to afford many failures.
Two companies might merge so that they get the benefit of leadership of key individuals in the company. A small smartphone game-development company might find itself wildly successful beyond expectations and it might feel unprepared to continue to serve such a large market.
Merging with another company that understands how to capitalize on growing success gives the smaller company the ability to grow successfully and to continue to deliver products without problems.
When companies grow, they are able to benefit from economies of scale, meaning the cost to produce and distribute the same item reduces as the market share increases. Additionally, as companies merge, overall revenues increase, making the end company much stronger financially to obtain credit, investors and strategic alliances.
A major requirement for business loans is revenue thus the higher revenue resulting from the merger creates a positive cash flow and credit scenario for companies. This allows the merged company to grow faster with capital investment for development, marketing and talent.
However, there is always a downside to every strategy or decision in business. Opting for mergers when planning to grow and expand as a business has its own problems. Being recognised as a major producer or supplier in the business world can create problems for third parties who in this scenario are always the customers.
When two good companies merge this results in reduced competition and high market share. As financial advisors such characteristics create room for a monopoly in economic terms.
Thus, the new company can gain a monopoly and increase the prices of its products or services.
Employees are often worried and affected by mergers because some risk losing their jobs whilst others face adamant new management structures because in an aggressive merger, a company may opt to eliminate the underperforming assets of the other company.
It may result in employees losing their jobs. The companies that have agreed to merge may have different cultures. It may result in a gap in communication and affect the performance of the employees thus low staff morale leads to low output.
In cases where there is little in common between the companies, it may be difficult to gain synergies. Also, a bigger company may be unable to motivate employees and achieve the same degree of control.
Thus, the new company may not be able to achieve economies of scale.
Since mergers are so uncommon and takeovers are viewed in a negative light, the two terms have become increasingly blended and used in conjunction with one another.
Contemporary corporate restructurings are usually referred to as merger and acquisition (M&A) transactions rather than simply a merger or acquisition.
The practical differences between the two terms are slowly being eroded by the new definition of M&A deals.