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Understanding Mergers and Acquisitions

The terms “merger” and “acquisition” are often used interchangeably in business. Both refer to two companies that combine in some way. However, there are differences in mergers and acquisitions law and how the two companies integrate to create the new entity.

Mergers vs. Acquisitions

A merger is when two companies close to the same size combine and create a new company. With a merger, the assets and liabilities of both companies are blended. Mergers can involve multiple companies, but only two are involved in most cases.

An acquisition is when one company purchases the majority, if not all, of another company’s shares to get control of the company. The acquirer has the power to make decisions about the newly acquired assets without input from the other company’s shareholders. While mergers involve the approval of both companies involved, an acquisition can happen without the target company’s approval or even despite their disapproval.

The primary difference between a merger and an acquisition is that two businesses are combined to create a new entity with a merger. With an acquisition, one company absorbs the other without forming a new organization.

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Understanding Why Mergers and Acquisitions Happen

Mergers and acquisitions are effective ways for companies to grow new revenue streams and improve bottom-line profitability. They can increase an organization’s access to certain markets, eliminate competition, lower costs, and improve a talent pool. Some of the top benefits of mergers and acquisitions include the following.

1. Economies of scale

In many cases, the goal of a merger and acquisition is to produce economic gains along with economies of scale. This happens because the two firms involved in the fusion become more robust, efficient, and productive. Businesses benefit from increased access to capital, improved bargaining power, higher volume production, and lower costs.

2. Competitive edge

Merging two entities may lead to greater financial strength for both companies involved. More economic power can lead to more influence over customers, a reduction in competitive threat, and a higher market share. The bigger a company is, the harder it can be to compete against.

3. Access to top-tier talent

If your organization wants to excel in the market, you need the best talent. It is easier to recruit talent to organizations with a respected name. The bigger the company, the greater the access to available talent. This trend is seen in most industries, including technology, services, and manufacturing.

4. Access to new markets

One of the top benefits of mergers and acquisitions is the fact that you gain access to a new market. Breaking into a new market can be a challenge, even for established businesses that enjoy name recognition. You could set up a subsidiary or branch, but a merger or acquisition could help you save time. It may be less expensive and require less effort than starting something from scratch. This is especially the case if your organization is looking to move into a foreign geographical market, which is difficult to penetrate.

5. Enterprise continuation

If a small business is family or privately owned, once the founder retires, there is a possibility of business failure because there is no succession plan. A mergers and acquisition strategy can help businesses ensure continuity. Interruptions in the operations are reduced, and employees may have better job security.

Merger and acquisition benefits are clear to understand. However, for the benefits to be sustainable, your business needs to create and implement a suitable mergers and acquisitions strategy to address your organization’s goals and circumstances. While acquisitions and mergers can be beneficial, laying out the details is complicated, and some risks are involved.

What Are Some Mergers and Acquisitions Risks?

Mergers and acquisitions can create phenomenal growth. They also come with potential drawbacks for all parties involved.

1. Clashing cultures

Many organizations have experienced clashing cultures in their merging experience. This negatively impacts performance. Employees are the heart of an organization. If there is no compatibility between the parties involved, business success may be compromised.

2. Lack of due diligence

For a merger to be successful, both parties need to do their due diligence and evaluate their strengths and weaknesses. This includes asset and time management.

3. Overpayment

Many professionals believe that overpayment is the primary risk factor for negotiating a merger or acquisition. Most transactions are large size. So there is a ton of stress involved in preparing for the sale or purchase. Avoid feeling pressured to pay more than the value of an organization to guarantee a smooth deal.

4. Legal risks

There are many rules in place for acquisitions and mergers. Failure to abide by laws about wages, salaries, labor, and other regulations can lead to trouble that might negatively affect the merger’s success.

In addition to the above-mentioned risks, the M&A cycle creates other risks, such as new cybersecurity threats, unexpected market crashes, failure to catch synergies, etc. Even after the deal is complete, it is vital to devise a solid mergers and acquisitions strategy to use the pre-existing strength of both parties and build on them for future success.

Key Steps To Implement When Embarking on Mergers and Acquisitions

1. Searching for potential acquisition targets

During this phase, your legal department is researching potential target companies. The goal is to know who is who, identify related entities and subsidiaries, and have a clear picture of the industries they work in and where they are located.

2. The deal structure

Choosing the best structure is essential for success. These transactions are complex, and one structure may favor one party over another. The buyer purchases the stock from the target company and its shareholders with a stock purchase. With an asset sale/purchase, the buyer only gets the assets and liabilities laid out in the purchase agreement. With a merger, two companies create one legal entity, and the target company stockholders get cash.

3. Due diligence

Due diligence is where you audit or investigate your investment. Confirm any facts that will have a bearing on the buyer’s decision to fire or merge with the company. It is your job to ensure that all the facts presented pan out before getting into a financial agreement with the other party.

4. Implementing innovation roadmaps

To prevent hurdles and roadblocks, each department must spell out its role in an M&A roadmap. This is important in establishing room for innovation in the industry and the capacity between the companies to embark on innovative projects once they have combined entities. The focus should be to successfully merge businesses while benefiting from the best of both organizations, and ensuring a shared vision going forward.

5. Doing thorough research when entering new markets

Market research includes identifying the industry structure, competition, barriers to entry, and the size of the opportunity. When an M&A means that your organization is entering a crowded market, market research sets your company on a path to keep up with the competition and identify niches within the market to expand profits.

Fusion CPA is a certified public accounting firm specializing in business advisory and business process outsourcing services

If you have decided to embark on an M&A process for your business, Fusion CPA can assist. Our services include everything from aiding with deal structures, doing thorough due diligence and more.

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