Barry Reagh's Blog

Mergers and Acquisitions are for business entities a means to exploit opportunities to grow their business in strategic ways. Their are many facets to a Merger – usually a joining of similar sized companies, or Acquisition – usually named because a larger company is absorbing a smaller company. In this short piece we cover a general list and overview of some important topics with the intent to cover some of these topics in more depth later.

Wikipedia defines – Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can aid, finance, or help an enterprise grow rapidly in its sector or location of origin or a new field or new location without creating a subsidiary, other child entity or using a joint venture. The distinction between a “merger” and an “acquisition” has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.(found at http://en.wikipedia.org/wiki/Mergers_and_acquisitions).

Given this definition lets break this down futher into some general categories of business acumen for further consideration. Corporate strategic reasons for merging or acquiring another business run a large gambit. The opportunity that initiates the idea of a Merger or Acqusition is to increase the stakeholders value, Typically Shareholders are highest on the stakeholders list (for public companies) because they ultimately  are effected and can vote to change managment if the results are not acceptable. Shareholders also approve or deny a change in ownership, so the acquiring company needs the approval of the shareholders to purchase and the company being acquired needs approval to sell.

Here is a list of the key stakeholders for public companies to consider in an acquisition or merger:
Shareholders
    Management
    Customers
    Suppliers
    Employees
    The local community
    The government/regulatory agencies
Each of these stakeholders’ viewpoints or why the M & A is good and why need to be considered. More on this topic later.

Now let’s list some of the reasons to consider Merging or Acquiring another organization. Increasing capacity – capacity refers to the amount of output that a firm is capable of producing given its existing assets. Opportunities to increase capacity must be matched with increases in demand and are popular in early business growth cycles. Economies of Scale – or gaining economies of scale are important when a business is in a growth mode and needs to lower costs of units being produced or services being provided ( more later). Filling a gap in the market – either newly discovered or a merging market. Again this has to do with sales expansion and is a strategy for increasing demand to supply. Accessing supplies or distribution networks – is a strategy used to increase the supply of products/services to match either an increasing demand or lower costs for marketing and distribution. Accessing technology or skills – is a popular strategy across many more industires since the increased use of technology, but in some sectors its is the main strategy for staying competitive. Tax reasons accomplish the strategy to decrease costs in overhead to stay ahead in competitive markets.

Legal issues for M & A include providing due diligence in preperation for a merger or acquisition. Since the company management has a duty to show they properly investigaged and valued their company, legal representation is a standard practice. Legal questions often arise at the beginning when a company desires to legally bind each other to keep their M & A talks secret and bind each other to not share trade or financial information during or after their due diligence process.

Regulatory issues are also causes for legal consultations. Regulations from the FTC and industry specific regulations need to be addressed during the due diligence process. Many times constraints are imposed through regulatory bodies and strategies are needed to avoid as many risks as possible due to these constraints. Human resource legal issues should be considred as well during a M & A.  Employees (Human Resources) are always needed to continually run the company and safegaurd its secrets.

Finally the financial opportunities and risks can be enormous for a proposed Merger or Acquisition. Shareholders want to make sure every possible outcome involving multiple scenarios is thought out and reasonably handled or planned. Many times companies routinely acquire companies. Google, Microsoft and Cisco along with others in technology controlled industries have in house divisions devoted to acquiring companies that own technologies they need to stay competitive. Big Pharma companies engage in many strategies including acquisitions to spread the risk of costly research and development.

Mergers and Acquisitions effect all aspects of managing , financing and running a business. As always it pays to do your homework before jump into something. This is just a list of possible things to consider and is not an inclusive list.