An Inside Look Into Mergers and Acquisitions

Mergers and acquisitions (M&As) are generally mentioned in the same breath as if one can’t be accomplished without the other. The reality for our IT consulting clients and others is that a merger and an acquisition are two very different procedures, each directly bringing about a completely separate and opposite result:

Mergers involve two companies that are combined into one, creating a brand new entity. (This event is also known as a buyout.)
Acquisitions involve the total consumption of another company through the purchase of stocks, shares or other assets that relinquish operation. Acquisitions are also known as takeovers.

Mergers and acquisitions are two of the most misunderstood words in the business world. Both terms often refer to the joining of two companies, but there are key differences involved in when to use them. When considering a merger or acquisition, it is important to be guided through what can be a very delicate and intricate process. It is also important to know the purpose behind a merger or acquisition and what can be accomplished with each.

Why Do Mergers and Acquisitions Happen?

In the industries of corporate finance, healthcare, retail and technology, mergers and acquisitions (M&As) are very common. Many small and medium-sized companies in the healthcare and technology fields find it especially challenging to compete in the marketplace due to the handful of behemoths that usually control the industry. A small tech company may have innovative technology that can help a larger, struggling tech company grow and thrive for years. While growth is the most common reason behind a merger or acquisition, there are several more factors to consider.

Primary Reasons for Mergers and Acquisitions

Increase in customer base
Reduction of competition
Increase in market share
Economies of scale
Diversification
Expansion of business (products, geographies, assets, other resources, etc.)

In addition to increasing market share value, mergers and acquisitions can be cost-effective. They can reduce the costs of developing business activities that will complement a company’s strengths. M&As can also increase supply-chain pricing power. Aside from that, such business restructuring is one way to eliminate possible competitors of the business and generate diversification.

Mergers

Typically, mergers are done to reduce operational costs, expand into new markets and boost revenue and profits. Mergers are usually voluntary and involve companies that are roughly the same size and scope. In comparison to the acquisition of a company, mergers are often viewed as friendly, even though hostility is not entirely ruled out as a possibility.

When mergers take place between equals, it can be difficult for a business owner to realize the benefits in combining forces and agree to give up any aspect of their business (their baby) to another business owner. Whenever difficulties like this arise, the stocks of both companies are surrendered and new stocks are issued under the name of the new emerging business.

Mergers require no cash to complete, but dilute each company’s individual power. combining forces for the greater good of the resulting company. Mergers are often beneficial for the underdog or smaller company.

Acquisitions

In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist. Its assets and all operational decisions are taken over by the larger company. This is why acquisitions tend to have a more negative connotation. Acquiring companies may refer to an acquisition as a merger when in reality, it is most certainly a takeover. Acquisitions (takeovers) provide an area of opportunity for a managed services provider like SkyTerra to be involved as a neutral party that offers balance as there are obvious advantages to an acquisition.

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.

Takeovers require large amounts of cash and once the deal is complete, the buyer’s power becomes absolute. Acquisitions are often beneficial for larger companies.

Thinking of Merging or Acquiring Another Company?

If you are strongly considering a merger with or acquisition of another company, you want to go into it fully prepared and armed with the necessary knowledge to be successful. While mergers and acquisitions (M&As) promise a fast track to growth, it’s important to have a clear understanding of the value drivers and integration planning necessary to succeed.

Determining an end-goal is critical with any merger or acquisition. What is the return on your investment or value drivers? What is your plan for post-merger integration after the deal is complete? Deal-making is hard, but integration is even harder. If you’re not careful it can drag on for months after the transaction closes. Capturing the value of the deal is a balancing act that requires close attention to management, employees, customers and shareholders.

SkyTerra Knows M&As

Mergers and acquisitions are a delicate and intricate process that can take months of careful planning, know-how, time and dedication to complete. Don’t you want the experts there with you every step of the way?

Contact us to help take your business to the next level. Book a meeting with a company guided by integrity and doing what is right for our customers.