Are the Potential Benefits of a Merger or Acquisition Greater than the Risks Involved?

In today’s environment of global competition, growth from within your company can only take you so far. To compete successfully, you need a serious value proposition to differentiate yourself from agile global competitors.

One strategy is to grow through mergers and acquisitions, either locally or cross-border, to enter a market or acquire innovation capability. It is highly risky. You know that making a deal work is one of the hardest tasks in business. How can you reduce the risks and increase the chances of carrying out a successful acquisition or merger?

 

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Taking a Risk to Grow

There are four major steps in a merger or acquisition process:

1. Accurate Business Valuation

Calculating the true worth of your own company or one you want to acquire is easier said than done. It also has a lot to do with supply and demand. They say that if you are thirsty you will pay an exorbitant amount for water. Perhaps that’s the right analogy for Microsoft. They recently paid $240 million for a 1.6% stake in Facebook. Microsoft valued the then three-year old company at over $15 billion! That is a high valuation by any method. But that purchase stopped arch-competitor Google from getting its foot in the door. And perhaps that was the most important reason for the purchase.

2. Due Diligence Process

Due diligence is one of the classic business processes that are part of a merger or acquisition. It involves representatives from both sides of the deal examining the financial records of the other party. Traditionally, this is done in a data room filled with financial records and a group of analysts poring over them. Knowing what to look for and how to find it in the records is the key to an effective due diligence.

For large deals it is often possible to call in experts to conduct the due diligence. They are good at what they do but their costs are prohibitive for smaller deals. This results in a situation where the company has to be able to conduct its own due diligence. But people often lack the skills needed for this process. The task becomes even more difficult when your acquisition target is in another part of the world.

3. Integrating Financial Operations and Consolidating Accounts

After you sign the agreements and legal documents, the work is not over. You still have to merge the two organizations. This involves integrating financial systems, processes, business units and functions. While the process may seem mechanical and clearly defined, it can become complex. This is especially true when the merged companies are from two different countries with two different sets of financial regulations. It is important to do this correctly. A well-done consolidation makes it possible for the merged company to keep accurate financial records. It also lays the foundation for generating revenue and spending data that are the basis of strategic and operational decisions.

4. Integrating the new organization: The Key to a Successful Merger

Merging two organizations involves managing a whole series of changes to align the new organization to the new strategy and vision. And this process involves people and their careers. When people in two countries and two cultures are involved, there is another level of complexity to deal with.

Things can go wrong when dealing with this human element. It starts with the CEO and moves down to managers and line workers. Executives from both companies may compete for positions in the new organization. All of this can create tensions in the work environment. And that can make it difficult to keep things moving in the right direction.

During this phase of the merger, the smart CEO will spend just as much time analyzing the people issues as the balance sheets. But, according to those who have been through the process, it is well worth the effort. In fact, it may be the biggest potential success factor.

 

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Talk to MCE about Mergers and Acquisitions

MCE's Senior Associates

Our Senior Associates can work with management teams or individual managers to address all of the people and change management challenges facing industries, businesses and organizations today. They draw on their years of experience in top managerial and leadership roles to help you solve problems and identify "what works" in different circumstances, countries and cultures. Above all, they have led their people through the challenges of developing new capabilities and working in a different way. They apply their expertise in a wide variety of services, including:

 

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