An introduction to Mergers & Acquisitions
The key objective behind a merger or an acquistion is to create shareholder value over and above the value of the two separate companies. Merger synergies include:
- improving market reach or market share
- improving industry visibility (bigger companies can raise capital more easily)
- strengthening/increasing the product portfolio
- improving operating efficiencies
- securing greater economies of scale
- acquiring new technology.
Strictly speaking, an acquisition is when one company takes over another, maintains itself as owner and the acquired company ceases to exist legally e.g. the Royal Bank Of Scotland's takeover of the National Westminster Bank in 2000 (though note that the NatWest brand has been retained). On the other hand, a merger is when the two companies agree to go forwards as a single, new company e.g. when Chrysler and Daimler-Benz became DaimlerChrysler in 1998.
The legal framework not withstanding, the real difference in integration approach comes from whether the deal is friendly or hostile and how it is communicated to stakeholders.
There are typically five steps in delivering value from mergers and acquisitions:
- Determine objectives
- Identify & evaluate candidates
- Do the deal
- Plan post-merger integration
- Deliver post-merger integration
Determine objectives
The business defines its strategic objectives to determine the kind of merger or acquisition and the types of candidates to look for. For example, it could expand horizontally to increase market share and increase economies of scale or it could expand vertically to decrease dependence on suppliers and decrease costs. A business could also seek to expand its products to increase sales to existing and new customers or it could acquire new technology for new/improved products to increase sales or lower costs.
Identify & evaluate candidates
Based on the overall objectives, a business will draw up a list of public companies, divisions of companies and private companies that might be suitable candidates, including competitors, suppliers and new emerging companies. Candidates are prioritised based on agreed criteria, such as: are they too large or too small, where are they located, are some business segments unattractive (and is so, could they be profitably sold), are the well run (and if not, could it be improved), would it be friendly or hostile, are they any barriers (political, legal etc)?
Having drawn up a short list, the remaining candidates are valued. As part of this process, the business also needs to define how it will get back the takeover premium (through real synergies, restructuring and financial engineering opportunities, for example).
Do the deal
The business decides the maximum price it's prepared to pay and establishes its negotiation strategy (understanding the background and incentives of the other side, and the value that might be paid by a third party). It then negotiates, conducts due diligence and closes the deal.
Plan post-merger integration
Planning for the integration is undertaken while the deal is being negotiated and closed. The business and operating models are agreed, the initial organisation structure determined, those who stay are identified, draft communications prepared, transition service agreements set up where necessary, and the Day 1 plan confirmed.
Deliver post-merger integration
Delivery of the IT benefits of a merger or acquisition is typically in three phases: day 1 imperatives, year end transition projects, and the post-merger realisation programme. Managing the integration process will be the subject of a future blog.
