Today, more than ever, companies face a large number of financial contingencies that can adversely affect their commercial statements given the tremendous fluctuations in the current economy. This makes it necessary to constantly design, evaluate and implement strategies to control the possible risks that may affect them. One of these strategies is mergers and acquisitions. This strategy is a very effective way of adding value through the corporate process. Essentially, it consists of modifying the content of a company’s portfolio, either by buying new assets, or by selling divisions or areas of work which are unpopular for their underperformance, or because that they move away from their business focus.
This management practice has become a trend during the last decades, despite the fact that, in many cases, the originally expected benefits are not materialized. On the other hand, mergers and acquisitions are usually very useful in case of divesting an asset that does not generate the expected value. In this way, this strategy allows to obtain capital that can be used to invest in new opportunities or to reduce the level of indebtedness of an organization (and, therefore, the exposure to new financial risks.)
There are two major types of mergers and acquisitions. The first is vertical integration, and basically, it happens when a company wants to strengthen the quality and reach of its products or services within the value chain of the industry to which it belongs. For example, a small publisher merges with a magazine that has large distribution channels. This allows the books produced by the small publisher to be available to millions of potential readers. The second type of operations is horizontal integration. This usually occurs when they seek to expand a market share, when they want to take advantage of a synergy, or to reduce costs. This type of mergers and acquisitions is very common among multinational banks that buy local bank portfolios.
Like any business management activity, it is possible to apply mergers and acquisitions as a risk management strategy to reduce the chances of failures when conducting business transactions. Those organizations that develop strengths in the field of M&As must have a clear understanding of the strengths of the industry to which they belong, the way in which they evolve, and the role of their main players.
Read also: The Most Common Myths Around Mergers And Acquisitions, by Suzzanne Uhland
Practically, in all cases, it is possible to reduce financial risks through mergers and acquisitions, however, there is a fundamental condition. It is necessary to follow a structured and systematic process. First off, it is important to create a team specializing in mergers and acquisitions that apply a strong capital discipline and includes the opinion on all the resources which are necessary to ensure the success of such a transaction (which is usually complex and takes long, by the way.) This team should be composed of specialists from complementary disciplines, such as economists, lawyers, tax experts, bankers, etc. The first thing that the team must do is to know what opportunities are available from the beginning so that a good plan of action can be drawn up and that all members of the team can be delegated afterward. The team must work quickly to advance a negotiation with clearly defined objectives, approvals, and value ranges.
Secondly, a proper market review is necessary. The best opportunities rarely come from investment banking since they often include assets that have been prepared for sale, and by which you will have to pay a high premium in case you beat the opponents during the process.
On the other hand, it is vital to assess the opportunities and synergies that come with M&As, as well as the potential for improvement on the basis of what can be achieved through this strategy.
A proper management of the integration process between merging organizations (regardless of the process of their choice) is an achievement that is not always attained. It is necessary to ensure that the team in charge of the integration knows well the assumptions applied in the negotiation, and focus all its efforts in the materialization of the project in the fastest way possible, as the time here is of the essence. For this, it is very useful to previously draw a business plan with clear goals. Starting these types of operations without knowing where to go, or with just a vague plan, is simply a financial suicide.
Two aspects must be considered, though. The first thing is that it should not be forgotten that mergers and acquisitions are highly competitive processes, and, therefore, it is more important to have a rapid assessment, a practical and effective decision-making, and a strong and blunt negotiation. Why? Simply because the business world is the Wild West, and any leaks of information can give competitors advantages over the merging companies. This is not difficult to happen, and the consequences are not pleasant: Not only does the value of the whole operation increase, but regulatory some failures can occur that could be easily avoided otherwise.
Recommended: A Risk Management Model for Merger and Acquisition
* Featured Image courtesy of Vilmos Vincze at Flickr.com