All posts by Adrian Ness

An Overview of the Different Types of Mergers and Acquisitions

Mergers and acquisitions occur every day in the business world for a variety of different reasons. Corporate restructuring is going on all the time. If you look in a newspaper, chances are there will be at least one announcement of a merger or acquisition. In the world of small and medium sized business, acquisitions and divestments are also happening all the time, even if we rarely hear about them. It is simply the nature of business – and the ultimate aim is either to grow and/or divest at the expense of another or with their mutual support.

shutterstock_177263111This article looks at the main types of mergers and acquisitions and the motives of the participants in each case.

Mergers

A merger is where two or more companies join forces for mutual benefit. Control and operational management form part of negotiations and may be shared or end up in the hands of a single party There are five common types of mergers that occur:

  • Conglomerate merger – A conglomerate merger is where two companies that have nothing in common with each other merge in order to share assets or to reduce their business risk.
  • Horizontal merger – This is where two companies in the same industry merge. They are often competitors, and the aim of such a merger is to reduce costs and to gain a greater share of the market.
  • Market extension merger – Market extension mergers are when two companies in the same industry but in separate markets merge, with the aim of creating a larger customer base.
  • Product extension merger – This is where two companies in the same industry but producing different products merge in order to increase profits by grouping their products together to access a bigger market.
  • Vertical merger – A vertical merger is where two companies producing different products in the same supply chain merge together to increase their efficiency.

Acquisitions

An acquisition is where one company takes control of another by purchasing its assets or the majority of its shares. There are five main types of acquisitions:

  • Value creating – Value creating is where a company acquires another company, improves its performance and then sells it again for a profit.
  • Consolidating – This is where a company acquires another company to remove competition from an over-supplied market.
  • Accelerating – Accelerating is when a larger company acquires a smaller company and uses its greater resources to accelerate market access for the smaller company’s products.
  • Resource acquiring – This is where a company acquires other companies to gain resources, skills, intellectual property, technologies or market positioning they need, because it is more cost effective than developing their own.
  • Speculating – Speculating is when a larger company acquires a smaller company with a new product, with the aim of cashing in on its future growth potential.

Businesses involved in M&A

Much discussion and most news coverage of M&A activity focuses on the actions of large and/or publically listed enterprises. In reality, M&A activity occurs as frequently if not more so in the SME market, which comprises small and medium sized businesses.

When acquisitions involve smaller companies transacting with each other, most of the purchases fall into either the “resource acquiring” or “accelerating” categories (see above). In this space there are two main types of buyers – trade and individual. The former refers to businesses buying businesses and the latter to individuals buying businesses. Buyer motivation and perception of value in this space depend on what problem they want to solve. Some typical reasons why smaller entities acquire other businesses include:

  • Geographic scale – to enter a new geographic market
  • Market extension – to acquire access to a customer base and/or demographic in order to grow market share.
  • Channel extension – to gain new channels to market for an existing product / service offer.
  • Product extension – to gain new products or services for offer to an existing market and/or channel, thereby extending market share.
  • Revenue growth – acquire a similar business offering similar product / service to similar markets in order to grow revenue and customer base faster than through organic growth.
  • Brand or positioning acquisition – to gain improved market position through a recognised brand or competitive position.
  • Operational bolt-on – to increase capacity and/or resources through infrastructure, capabilities, intellectual property and/or human resources, when the acquisition is more cost and time effective than building them organically.
  • “Buying a job” – where an individual buys a business to gain access to an income stream and potential long-term equity growth.

Five Tips for Effective Business Divestment

Selling a business is much like selling anything else in that it must be presented as a solid investment with the potential to benefit the buyer. Following are five tips to help you present your business to buyers in the best
possible light and to divest yourself of it in a timely manner and at the right price.

Create a good impressionshutterstock_112048142
First impressions are everything, so make sure your business is clean, tidy and running efficiently when buyers come to look at it. Show them examples of your past accomplishments and of your company’s potential for future growth.

Be ready with the right answers. For instance, they will want to know the reason you are selling your business. Have your answer prepared and ensure you tell them that it is for a valid reason, such as to pursue other interests or retire. Otherwise they may assume that the business is changing adversely or that the industry/market outlook may have diminished for reasons they are unaware of.

Have your books in order
No matter how good your first impression, a buyer will always want to see hard evidence of performance, profitability and future opportunities. Make sure your books are up-to-date and on hand, and that they clearly illustrate the viability of your business. Show them your solid sales figures and mid to long term margin performance. Put your vision of the company’s future down on paper in the form of projections, as demonstrating your company’s growth potential in the hands of an acquirer is key.

Use professionals
Selling a business has legal and tax implications, so make sure you use professionals such as an accountant, financial advisor and solicitor to draw up contracts and to advise you of your obligations.

If you want to increase the number of potential buyers, you should also invest in the services of a broker, who will assist you in finding prospective buyers, present your business in the best possible light, qualify interested parties and negotiate the sale on your behalf.

Reduce perceived buyer risk
When evaluating a business, buyers look at both the prospective upside and potential down-side. This means that as critical as it is to demonstrate current value and future performance and growth potential, it is equally important to reduce any perceived risks in the purchase of your business.

Some concrete “risk-reduction” steps you can take prior to marketing your business are:

  • Have your books and financial statements in order, i.e. performance data is available, consistent and up to date.
  • Eliminate any bottlenecks such as reliance on a single staff member, customer or supplier.
  • Make a handover appear less risky by putting in place management structures and resource(s) as well as industry-standard or benchmark processes and information systems.
  • Resolve any outstanding legal or regulatory risks and issues, e.g. those involving staff, clients, suppliers or industry bodies.
  • Be prepared to offer to stay around during an agreed handover period to ensure a seamless transition between old and new ownership.
  • Make sure current client contracts and purchase orders are documented and up-to-date.
  • If and where issues or uncertainties do exist, it is better to raise them earlier in discussions rather than later. Do not wait for a prospective buyer to discover “hidden skeletons” during due diligence. This experience will create fear and mistrust for the buyer – in the best case prolonging due diligence and in the more common case devaluing the sale price if not derailing the transaction completely.
  • Finally, if and where issues and uncertainties do exist, you may have to consider a staged buyout, in which some portion of the agreed sale price is paid on a deferred basis and dependent on actual performance milestones.

Be flexible and patient
It’s not over until the proverbial lady sings, and divesting a business can in some instances take time. After completing offer and acceptance with an interested party, many vendors find the due diligence and closing stages of a deal especially long and frustrating. It seems like the deal is done, but settling on the terms of sale, of payment, and of handover can involve lots of give and take on all sides. Add the involvement of third parties like solicitors and the mix of different agendas can easily knock a deal off the rails.

As a vendor it is therefore important to keep an open mind, as you might have to explore options that diverge from your original expectations or vision of getting out. It’s best to enter into a divestment process with as few fixed ideas as possible and focus on the long-term outcome for yourself and return on investment for your acquirer.