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The Ins and Outs of Mergers and Acquisitions

By April 30, 2019June 16th, 2022Blog9 min read
Rakesh Narula

It has become tough for a business to keep up with the steadily rising pressures of each and every industry.

While mergers and acquisitions are very different, they often benefit both the parties involved in the deal.

Mergers allow both the businesses to be equal partners ultimately establishing one dominant company.

In acquisitions, on the other hand, one company takes over a significant portion of the stakes from another company.

Horizontal Integration essentially means that two companies in the same industry, at a similar stage of progress, will unite to form a singular organisation, sharing assets and liabilities. Sharing technology can prove to be extremely advantageous for both businesses in terms of profits and expanding their client base.

Cross-industry M&A is when two companies that are not related to each other decided to merge pertaining to various factors.

If you look at the recent history of the M&A industry, you will see big businesses joining forces with major corporations to form a company that might rule.

Before you take your first steps towards M&A, read along to know more about it.

To elaborate, here are a few of the major benefits of horizontal integration and cross-industry merger and acquisition:

  • Skyrocketed Revenues: As an individual industry, the extent of profit that it will make at the end of the year will increase due to the addition of clients from its merger company. It could be said that doubling the number of clients will double the profits the merged companies gain.
  • Market Shares Expand: Rather than having two smaller companies compete in the market, having one large company that is capable of establishing stronger foothold amid the customers sounds like a better way of doing business. Combining exception services, technologies, and products, the company can expand its power in the market.
  • Larger Customer Base: Just because two businesses work in the same industry doesn’t mean they share the same clients. Due to the merger, both the companies can attend to a larger number of clients related to both the industries.
  • Synergy in Marketing: The term simply means a larger than life impact of a method when combined with elements that were left unidentified before. With contributions from each business as to how to improve marketing techniques, greater ideas can be established.
  • Economic Scope and Scale: Increasing the economy scale refers to how cost-effective a business is. Generally, a larger company will see added cost savings than a smaller company. To understand the economic scope, take into consideration the various levels of a production and manufacturing process of a product. Simultaneous production will contribute to reducing costs which in turn increases the economic scope of business.
  • A Decrease in Competitors: A merger only means one less company to compete within the same market. The business can mightily flourish by getting a competitor on your team.
  • Advancement in Capabilities: The talent and skills of employees in a business they hold expertise in, can benefit the acquiring company and the acquired business in establishing a stronger reputation amongst clients.
  • Disruptive Business Models: Two varied industries come together to form a new business model which not only creates new needs for potential users but also gives them the services that will be needed to fulfil these requirements.
  • Increased Efficiency: New talent and technology, in terms of innovative ideas from a startup firm could be a saviour for the business that has been in the market for too long and is losing its grip over its customers. While smaller companies might have large scale ideas, they may lack funds which they can gain by being acquired.

Cross-industry M&A can work for and between every industry you could think of. A small scale business could reach new highs by joining forces with a bigger organisation.

In a world where a stagnant business can be wiped off of the face of the mother field, the companies tend to gravitate towards mergers and acquisitions to stay afloat. That being said, mergers or acquisitions aren’t easy to follow through. They require intense strategy planning and years of experience.

A disciplined M&A could potentially solidify the company’s hold on the market whilst multiplying its original value. A program that creates an impact on both, the company and the customer market has a higher chance of shooting up on the corporate charts rather than a merger that silently goes into the night.

Here are 4 ways through which M&A can have an impact on your company, and the market.

  1. Creating a productivity program that is sufficient according to the size of your business could put you into the top 30% of your industry.
  2. After the merger, it is essential to radically change the budget allocations to departments to bring a drastic difference in the way your company oversees functions.
  3. Creating a new business model taking into consideration the strengths of the merged company will ensure that the gross profit increases steadily and you move up on the power curve.
  4. Managing the ratio of capital expenditure to the sales of the company if you’re in the top 20% in the market after an M&A deal then it would mean you’re spending 1.7 times the median of the industry.

Combine any two, three or all the ways to increase the odds of your company becoming a tremendous success in the market. The current position of your business does not need to be the one that determines where you’ll stand in the future. Your annual revenue can increase by using the perfect combination of strategies and dividing the finance in smart ways.

Take a look at these two case studies to understand practically what really matters in a merger or an acquisition.

 

  • The Adidas and Reebok acquisition
    Reebok was facing crazy amounts of competition from brands like Puma, Nike, and even Adidas. So when Adidas offered to pay 34% more than the closing value of Reebok, it couldn’t resist the offer.
    Although the companies belong to the same industry, they had different ideas. Adidas concentrated on sports while Reebok was the brand that focused on stylized lifestyle.
    The companies are a beautiful blend of cultures, and they managed to implement new policies with proper communication. Their identities merged with each other as if it weren’t an acquisition, to begin with.
    After the so-called acquisition, Adidas remained focused on maintaining its international presence, and Reebok was made to establish itself as the brand of the youth.
    Since the operations increased, the costs in areas like manufacturing, marketing, sales, etc. reduced considerably for both the companies.
  • The Microsoft and Nokia Merger
    You must know the condition Microsoft was in 2013. That year it decided to merge with Nokia after continually being beaten at the game by powerhouses like Apple and Android companies.
    As Microsoft gained control of Nokia, it showered its wrath on the company by reducing the smartphone output and laying off employees. In the end, Microsoft, in impairment charges, even wrote-off the entire acquisition price at $7.6 billion.
    While Microsoft was busying in its own game, the market share of Nokia dropped from a whopping 41% to a mere 3%.
    The reality to be considered here is that both the companies thought that the other would be the saviour. It would seem as though Microsoft was unable to come up with innovations that would revive them in the market. The consumers were unattracted with the idea of Windows-powered phones since they lacked the user appeal.

You can see how different both these M&A were. The success of the Adidas and Reebok can be seen by the substantial increase in the company’s value, while the loss in the name and value of the companies show the failure of Microsoft and Nokia acquisition.

Amongst the various factors that will determine the future of the companies, one is to carry out the post-merger integration with a sound mind. Haphazard decisions may lead to failures that you might not be able to recover from.

The process before an M&A is as relevant. The sudden change in the dynamics of the business may lead to significant financial risks. These could cause layoffs, production halts, and decline in quality of services.

A well-executed M&A could be the swim-ring that a drowning company may be in need of.

RNC is a leading valuation consulting firm with expertise in the valuation of fixed assets for M&A, insolvency, dispute resolution, bank lending, financial reporting, statutory compliances, etc. RNC’s clients include publicly traded and privately held companies, Banks, Insurance companies, Audit firms, Law firms, Insurance advisors, government entities & investment organizations, etc.

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