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Mergers And Acquisitions Tactics For Management Teams
March 03, 2020

Mergers And Acquisitions Tactics For Management Teams

Mergers and acquisitions are stressful, but they can lead to exceptional growth for you, your team, and your company. For many managers, a successful merger is a career highlight.

There are some strategies management teams can use to help the process go smoothly. These methods will help you get the best price, avoid mistakes, and know if it’s time to walk away.

The M&A World Is Ever Changing

What are mergers and acquisitions (M&A)? Both of these terms refer to two companies joining together. A merger is when two companies combine to form one consolidated company. An acquisition is when one company takes over another.

Acquisitions, which are sometimes called takeovers, can have a negative connotation. It’s true that some acquisitions are hostile, which occurs when the company’s board doesn’t agree to the deal. Other times, the acquisition is in the best interest of both companies.

Over the years, there have been changes to how mergers and acquisitions work and how popular they are. The status of the economy and current government regulations affect merger and acquisition activity.

In 2018, mergers and acquisitions activity skyrocketed, reaching a total of $1.7 billion in the U.S. alone. That number was 30 percent higher than in the previous year. In 2019, activity decreased slightly. Certain markets, such as healthcare, saw continued growth.

Another trend in 2019 was “mega-mergers.” Each of these massive deals was worth $10 billion or more. They included a merger between luxury brands LVMH and Tiffany and one between United Technologies and Raytheon.

In 2020, M&A professionals are keeping a close eye on the presidential election. The outcome of the election might lead to changes in financial regulations. Some industries are more likely to be affected if there’s a change in administration, like banks and healthcare.

Although mergers and acquisitions are always changing, the following M&A tips can help you manage these unique processes.

Strong Tactics for Mergers and Acquisitions

Several methods can help you successfully negotiate a merger or acquisition. It can be tempting to try to complete the deal as quickly as possible and get it over with. However, by being careful, you can ensure a positive outcome for both businesses.

Bear in mind that it’s unlikely you’ll get everything you want. If you expect perfection, you’ll probably be disappointed. Instead, be flexible and focus on finding a deal that is profitable for both sides.

Ensure Concessions Are Strategic in Nature

Negotiation is a key component of all mergers and acquisitions. Part of the negotiation process often includes making concessions between parties. For example, a purchase price concession is an adjustment to the price when one company buys another. Concessions can also involve the business’s assets.

The purpose of a concession is to ensure that both parties are happy with the agreement. If you choose to offer a concession, it’s crucial to do so strategically.

Don’t be overly generous with your first offer. Instead, leave room for further negotiation. It’s normal for the other party to reject an offer and request additional modifications.

Make sure each party understands that you’re offering a concession. Don’t just assume that you’re on the same page.

Otherwise, the other group might not realize that you’re giving something up. Or, they might try to downplay the value of the concession you’re offering. Make sure your counterpart will offer something equally worthwhile in return.

Price Matters, But Isn’t The Only Thing That Does

Of course, the price of a sale is one of the most critical factors in any M&A deal, but it isn’t the only one.

The value of a company’s stock often affects the terms of a sale. When one company is acquired by another, sometimes payment is in the form of stock shares rather than cash.

When acquiring or merging with another company, consider its assets, both tangible and intangible. Tangible assets include inventory, equipment, offices, land, and more.

Goodwill is one example of an intangible asset, as it’s how a community regards a business. Factors that determine goodwill include the company’s brand image and customer base. Loyal customers and a good public image shouldn’t be discounted.

The purchase price is often affected by taxes, fees, and the method of payment. Make sure you understand how all of these will impact the final cost of the deal.

Get To Know Your Competition

There are a few reasons why it’s smart to understand your competition. You might get an offer from a competitor to merge or to take over your business. Or, you might want to buy a competing company that is doing well.

If a competitor completes a deal that turns out to be a major success, you might find yourself inspired. Likewise, if a deal turns out to have been a mistake, it can give you an idea of what to watch out for.

If you’re thinking about buying or selling a business, make sure you have a strong confidentiality agreement. This step is especially crucial if you’re working with a competitor. You don’t want to share any confidential information that a competing business could potentially use against you.

Realize That Sometimes It’s Best To Walk Away

Potential mergers and acquisitions are exciting. Once you begin talking about a deal, momentum begins to build, and it can be easy to overlook problems. That’s why due diligence is necessary. Don’t ignore red flags that might pop up during this process.

One common reason for a transaction to fall through is that the price gets too high. If there are multiple bidders, the price can skyrocket. Spend some time deciding the price range that works for you and stick to that range during negotiations.

If you realize you need to walk away, let the other party know as soon as possible. Be honest about the reasons you’ve decided not to proceed. Your goal is to avoid burning bridges and remain on good terms. The fact that the offer wasn’t a good fit doesn’t mean a better one won’t arise down the road.

Fears of Sunk Costs Are Real

Sunk costs are another reason that it can be hard to walk away from a potential merger or acquisition. Once you’ve spent money, time, and energy on a deal, you don’t want it to fall through.

The sunk cost fallacy is when people continue with an endeavor because of the resources they’ve invested in it. Buying into this fallacy is part of being human, but being aware of it can help you avoid mistakes.

Remember, you can’t get the time and money you’ve spent back, regardless of your final decision. If a deal goes south, you’ll likely lose even more money than you already invested. If something doesn’t seem right, pay attention to that feeling. Once an M&A transaction is complete, it can be difficult or impossible to reverse it.

At Times, Being Ahead Of The Game Is Best

Staying on top of news in the world of mergers and acquisitions can pay off. If a company that might be a good fit starts looking to merge, you can be first in line. By making the first offer, you can heavily influence the final sale price. This phenomenon is known as the anchoring effect.

You can also learn from other businesses’ successes and failures. In addition, there are several trustworthy online sources to help you learn more.

Reuters has a section dedicated to following M&A-related news that is updated every day. The New York Times and CNBC also have relevant sections. The M&A Journal is an independent news source that offers insights into the history and theory of mergers. It requires a subscription to access all of its content.

Do Extensive Due Diligence

If you’re the buyer in a merger or acquisition, due diligence is vital. There are many steps in the due diligence process. Some significant factors you’ll need to understand are the company’s financial status, its intellectual property, and its customer base.

Experts recommend reviewing financial statements for the previous three years. These statements will give you an idea of the company’s financial health and whether its performance has been stable.

Intellectual property (IP) includes any patents or copyrights a company holds. It also includes any proprietary software and hardware. These assets can make a difference in the purchase price.

As far as the business’s customer base, find out who their largest clients are. Are their customers loyal, or is there a risk of losing them? Learning that a company is going through an acquisition can scare customers away.

These are just a few examples of what to look for during due diligence. A financial advisor or M&A specialist can help you ensure you don’t miss anything.

Always Know Your Limitations

Having realistic expectations will help any merger or acquisition go smoothly. Understanding your limits will help you be objective and avoid mistakes.

If you’re buying or selling a business, make sure your desired price range makes sense. Keep in mind that a specific price isn’t the only sign of a successful agreement.

Make sure your business is ready for a sale or merger. Your financials should be in order, and there shouldn’t be any surprises during due diligence. While timing is important, if your business isn’t ready, it’s better to wait until it is.

Remember that M&A deals don’t occur in a vacuum. The economy is always changing, as are government regulations and your specific market. All of these factors can affect the outcome of a deal.

Ever Changing Doesn’t Mean Daunting

Beginning the process of a merger or acquisition probably seems daunting. You might worry that it will end up being a mistake for your business, or that you won’t get a good deal. The variety of factors that go into a successful M&A process can be intimidating.

Many of the changes in the world of mergers and acquisitions have made the process easier. For example, there’s more information available online than ever, including checklists for each step.

If you follow the strategies outlined above and take your time, you’ll likely be happy with the outcome.

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Frequently Asked Questions

When is the best time to complete a merger or acquisition?

As the saying goes, there’s no time like the present. If you wait for the perfect conditions, you might miss out on a great deal. Keep in mind that you can begin exploring your options without having to commit.

What are some red flags to watch for when completing a merger or acquisition?

Performing due diligence is vital for uncovering any potential red flags. One issue that may arise during a merger is incompatible corporate cultures or business models.

Make sure you understand how the other company operates. Financial troubles are another common problem to watch for. Look into the other company’s credit and carefully review their financial statements.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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