Finance

Mordechai Gal: mergers and acquisitions specialist

Five reasons why mergers can be an excellent strategy? What is a merger between two firms? A merger is referred to as a financial operation in which two companies join each other and continue business operations as one legal entity. Generally, mergers can be divided into five different categories: Product-extension merger: Merging companies operating in the same market offer products and/or services complementary to each other. A note for this M&A guide is that the type of merger selected by a company primarily depends on the motives and objectives of the companies participating in a deal.

What are the Different Motives for Mergers? Companies pursue mergers and acquisitions for several reasons. The most common motives for mergers are: Economies of Scale: Underpinning all of M&A activity is the promise of economies of scale. The benefits that will come from becoming bigger: Increased access to capital, lower costs as a result of higher volume, better bargaining power with distributors, and more. While buyers should always avoid the temptation to indulge in ‘empire building,’ as a general rule, bigger companies usually enjoy advantages that small companies do not.

Synergies are typically described as ‘one plus one equalling three’: the value that comes from two companies working together in tandem to make something far more powerful. An example is provided by Disney acquiring Lucasfilm. Lucasfilm was already a huge cash generator through the Star Wars franchise, but Disney can add theme park rides, toys and merchandise to the customer offering. Revenue synergies: Synergies that primarily improve the company’s revenue-generating ability. For example, market expansion, production diversification, and R&D activities are only a few factors that can create revenue synergies. Cost synergies: Synergies that reduce the company’s cost structure. Generally, a successful merger may result in economies of scale, access to new technologies, and even elimination of certain costs. All these events may improve the cost structure of a company.

Tax purposes: If a company generates significant taxable income, it can merge with a company with substantial carry forward tax losses. After the merger, the total tax liability of the consolidated company will be much lower than the tax liability of the independent company. Access to Talent: Ask anybody in the recruitment industry where the biggest talent shortages currently are, and the answer will invariably be a variant of ‘people that can code’. Why is this? Firstly, because of the huge demand for coders in the so-called fourth industrial revolution. But also because all of the best coders are working for large silicon valley technology companies. The biggest always have access to the best talent. That’s as true for every other industry as it is for technology.

Incentives for managers: Sometimes, mergers are primarily motivated by the personal interests and goals of the top management of a company. For example, a company created as a result of a merger guarantees more power and prestige that can be viewed favorably by managers. Such a motive can also be reinforced by the managers’ ego, as well as his or her intention to build the biggest company in the industry in terms of size. Such a phenomenon can be referred to as “empire building,” which happens when the managers of a company start favoring the size of a company more than its actual performance.

Big mergers and acquisitions (M&A) tend to get the biggest headlines in newspapers, but research indicates that executives should be paying attention to all the smaller deals, too. These smaller transactions, when pursued as part of a deliberate and systematic M&A program, tend to yield strong returns over the long run with comparatively low risk. And, based on Mordechai Gal‘s research, companies’ ability to successfully manage these deals can be a central factor in their ability to withstand economic shocks. The execution of such a programmatic M&A strategy is not easy, however.

Know what strategic outcomes you ultimately want from engaging in M&A and consider the implications for both the buyer and seller. Is your goal to enter a new end market? Are you purchasing customers or contacts to geographically expand? To stay focused, always come back to how you answered the first three questions as you consider opportunities. Developing an M&A strategy requires knowing what makes your business successful now and what acquisitions can add to make the business even better in the future. It will help you clearly define the value proposition for both the buyer and the seller, as well as the value drivers that should guide acquisition decisions.

Why Mergers and Acquisitions Fail? There are many reasons so let’s discuss some of them: Business climate not suited or wrong time : For the myriad of reasons cited for the failure of the notorious AOL/Time Warner deal, one is seldom given: The year 2000 was not a good time for media firms to merge. The media industry was about to undergo the biggest shake-up in its history, from which it is only now beginning to show signs of recovery. The inability to see long-term shifts is a human trait (we overestimate change in the short-term and underestimate it in the long-term) and one that catches out many managers in M&A, ultimately leading to the downfall of many transactions.

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