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What exactly are Mergers and Acquisitions

Whether it’s to gain new technology or enter a foreign market, mergers and acquisitions are a potent tool for any sized business owner. 

This will allow you to skip over the long, arduous process of building something from scratch, but it is not without risks. 

You should make sure you do the appropriate due diligence, avoid overpayments, be realistic about potential synergies and be well aware of possible integration issues. These will help you navigate the process in a clear and coherent way. 

Here is a look at four common risks during mergers and acquisitions

Mergers vs. Acquisitions

Before we get into a discussion of the possible risks, let’s look at the difference between mergers and acquisitions. 

Merger: A merger occurs when two companies agree to form a new entity. Company A and Company B combine to create a new business, Company C. They agree to move forward as a single company. 

Daimler-Benz merged with Chrysler corporation to become DaimlerChrysler AG in 1998. Other famous examples included H.J. Heinz Co. and Kraft Foods Group combining into the Kraft Heinz Company in 2016 and Exxon and Mobil joining forces in 1998. 

Acquisition: An acquisition occurs when an existing company purchases and assumes ownership over another. Company A agrees to purchase Company B. The former continues as Company A, but the latter ceases to exist. 

Frontier Airlines acquired Spirit Airlines in February of 2022, for example. Google acquired Android for an estimated $50 million back in 2005, and Pfizer acquired Warner-Lambert for $90 billion in 2000.

Although the large, glitzy mergers and acquisitions get all the media attention, many small and medium-sized businesses engage in the process as well. 

Companies do this to:

  • Enter a foreign market,
  • As a growth strategy,
  • To reduce excess capacity and decrease competition,
  • To gain new technology.

4 Common Risks in Mergers and Acquisitions

Although a common business strategy, mergers and acquisitions are not without risk and should be very carefully considered before moving forward. 

Here is a look at four common pitfalls during the mergers and acquisitions.

  1. Absence of Due Diligence

Before inking a deal with another company, whether to merge or acquire, you should learn as much as possible about the business you’re dealing with. You’ll want to pore that firm’s financial information, signed contracts, existing customer base, insurance, taxation, etc. 

You want to have a complete understanding of the deal. 

Failure to engage in an appropriate amount of due diligence can mean you end up with a company that does not fit your plans. 

  1. Overpayment

One of the most common errors made during mergers and acquisitions is an overpayment. You don’t want to pay more for an asset than it will bring you in the long run. 

You may be urged by members of the other company or your team. Stick to your investment thesis and business plan and examine whether this deal is worth it. 

You want to create value in the merger or acquisition while avoiding additional costs. 

  1. Synergies are overestimated

Another common pitfall during mergers and acquisitions is overestimating the potential synergy between the two entities. 

The two companies involved might have very distinct operational objections. One may have been eagerly expanding into new markets, while the other may have been looking to cut costs. 

Both companies should be pulling in the same direction. 

Another way this works is when companies are overly optimistic about the benefit of the merger and underestimate how potential synergies can be fully realized. 

Combining workforces and operational workflows can take more time than entrepreneurs realize. 

This can add unexpected costs. 

  1. Integration Issues

A similar risk that can run in tandem with overestimating synergies in mergers and acquisitions occurs when there are real integration issues. It is a significant organizational change that will impact several operations and workflows. 

One of the main integration issues is operational. 

You need a detailed plan so that once the deal has been finalized, there is a clear path forwards. How will operations change, who is doing what, when, etc? 

Without a detailed plan, the two companies may continue to function separately for much longer than planned, leading to cost overruns and poor synergy. 

You also should consider the complex process of integrating the two company cultures. According to a study by McKinsey, roughly 95 per cent of executives say the cultural fit is critical to the success of integration. 

Perhaps one of the companies is more innovation-focused and more open to a free exchange of ideas during meetings whereas the other is more conservative and focused on data-driven decision-making. You’ll have to consider how to combine these two operations carefully. 

Reducing Risk During Mergers and Acquisitions

Mergers and Acquisitions can unlock potential benefits for both entities but must be undertaken deliberately. 

You’ll want to reduce risk by carefully examining the company you wish to purchase or combine. 

Due diligence at this stage is crucial. Is the price right? Carefully examine their debt load and any potential litigation. Very carefully scrutinize financials. 

You want to be sure it is a good deal for you and your company. 

You’ll also want a clear plan once the deal has been finalized. What is the plan moving forward? How will the two teams combine? What is a realistic timeline to reach the sort of synergies you’re hoping to achieve? How can you anticipate costs during the transition? 

Conclusion

Mergers and acquisitions can allow you to combine the relative strengths of two companies to form a much stronger, profitable entity

However, it is not without risk. Consider the four things discussed in this article before considering any potential deal.

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