Mergers and Acqusitions to Expand and Diversify Operations

The term mergers and acquisitions refer to the process of joining or purchasing other companies. Usually a merger involves two companies that are similar in type, operations, stature, or size. With acquisitions, one company buys another that is smaller in size. The latter then becomes a subsidiary of the former.

Investment Banks

Investment banks specialize in corporate restructurings, carve-outs, spinoffs, and M&A transactions. They help companies to create shareholder value, expand their operations, and become more competitive. Investment banks work for businesses to increase their market share.

How Transactions Occur

There is a difference between mergers and acquisitions. Small businesses agree to be purchased when they are not competitive enough to survive. When this happens, the company is absorbed and ceases to exist. The buyer becomes the new owner. A merger takes place when two businesses that are separately run and owned agree to surrender their stocks. Then the new company issues stock. At the same time, mergers of equals, i.e. companies that are of similar size, rarely occur, and the transaction is actually an acquisition. How the transaction is

called depends on whether it is hostile or friendly. The main reason for transactions of this type is to fill a gap in capabilities, customer base, resources, products, and services. Another reason is to get favorable tax treatment. M&A also occur when companies seek to enter new markets, diversify their business, portfolio, and operations and increase their revenue stream. The ultimate goal is financial viability. Acquirers assess the financial strength of the target company, focusing on brand recognition, employees, intellectual property, fixed assets, stock, and other sources of value. They exercise due diligence to achieve this.

Cross-border mergers are not riskier than national ones. In many cases, the problem is structural incompatibility due to different decision making models, management practices, and degrees of centralization. The structure and market orientations also play a role when it comes to sales volume, regions, customer base, products, and marketing strategies. This said, research shows that more than 50 percent of the mergers and acquisitions fail. There are different reasons for this, including cultural misfits and gaps, differences in value drivers, and unrealistic valuations. There are many challenges. The new company is to build a new product roadmap, develop a new plan, build a new management team, and integrate teams. The two companies have different politics, offices, and corporate cultures.

Due Diligence

Due diligence involves a number of steps and processes to investigate or audit a business and assess its potential. It is usually done before signing a contract or making a financial decision. Businesses gather information about the resources, legal status, and financial situation of third parties. They look at different aspects such as profits, liabilities, assets, customer records, legal obligations, and others. Businesses usually use the services of an attorney or certified public accountant to perform due diligence. Depending on the transaction, it can be costly. The accountant or attorney reviews documents, records, and assets such as general company information, insurance policies, equipment, condition of facilities and plants, and others. For a merger or acquisition to be successful, they also focus on liens on assets, purchase and sales agreements, as well as recent litigation.


Usually the target company experiences a high employee turnover after the transaction takes place. Many businesses implement retention programs so that they retain valuable employees. There are different ways to go about this – offer stock options, bonuses, raises, and other incentives such as an attractive retirement plan or life and health insurance policy. It is important that employees know that their employer is willing to accommodate their needs. Options include telecommuting, flextime, and others.

Post-merger integration is a challenge by itself. There are many risks to watch for, including limited human resource capacity, lack of expertise, changes at the CEO/managerial level, and others. The main threats to the company’s integrity are structural, project, and synergy risks. The financial figures and forecasts and the structural, organizational, and management differences are important considerations. The extent to which downsizing is desirable and viable is also an important factor, along with synergy targets, goals, and resources.

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