As mergers and acquisitions have increased over the last decade, the industries most affected have been service-related companies as well as knowledge-based industries including: technology, banking, pharmaceutical and insurance services. 

A merger can allow a company to gain market share, protect its current customer base and gain intellectual property that may help in achieving a competitive edge as well as potentially reducing overhead through economies of scale. 

The theory of merging two companies is that “one plus one equals three” in terms of value and strength.  With the increase of revenue, decrease in expenses such as dual occupancy costs and human capital, what should emerge is a stronger, more profitable enterprise.

However, sometimes companies merge for the wrong rational such as stock prices, earning ratios and diversification.  It has been estimated that as many as 50 percent of transactions fail to meet financial expectations. 

So, what are some of the reasons that good companies do not succeed when they trek down the merger aisle?  As mentioned above the theory, one plus one equals three sometimes does not come to fruition due to overpricing of a target company that has been based on potential earnings or anticipated economies of scale that are never achieved.  Other factors include that the target company may be a poor strategic fit or have a culture issue that diverts management’s attention on a fixer upper rather than driving the company to the next level. 

There are also the unforeseen circumstances that dictate a particular industry or business unit.  As market and economy changes may affect business to a degree in general it may however devastate a business that has just gone through a merger. 

We all know that there are no guarantees in business and calculated risk is quite often unavoidable if you want to continue to be competitive and experience growth.  Timing also becomes an important factor as opportunities arise and the wrong decision can change a company’s future in either direction.   As there are two sides to every coin, mergers can also be rewarding for the other estimated 50 percent of transactions that meet or exceed expectations.  

A well thought out plan with proper execution can many times prevent these pitfalls.  Understanding that there is a difference between a “merger” and an “acquisition” is one of the fist things to consider.  Ask yourself which scenario fits the target company.  Both transactions may have many of the same components but should be not be handled the same way. 

With any good merger or acquisition, there are the obvious financial reasonings that may increase revenues and decrease expenses. Beyond economics is the people factor.  Many times, people can push a transaction to completion when intellectual property is obtained from employees.

In an acquisition, power is for the most part, assumed by the acquirer and may trigger uncertainty and fear of change that results in perceived job loss.  In an acquisition, change and conformance can be quick and sometimes brutal as the acquirer imposes its own financial and operational controls. 

In a merger, the parties are more likely to be matched in terms of size and culture, and may require more finesse which may lead to a longer drown-out process costing time as well as money as things work themselves out.  

A merger has been compared to a marriage with potential clashes of personalities.  Communication issues to need to be worked out with each party’s best interests in mind.  Although there may be similarities in size as well as cultures, it is rare that an acquisition becomes the marriage of equals.  Most acquirers or dominant merger players follow the adoption by absorption strategy when it comes to cultural integration.  Too few acquirers conduct the proper due diligence when it comes to understanding the cultural strengths and weaknesses that may help guide they way introductions are made into an organization.

PITFALL RE-CAP CHECKLIST

-       Know what you are acquiring or merging with … a fixer project or a smooth running machine.

-       Valuation expectations pre and post merger. E.g., Will one plus one equal three?  Why?

-       Are you contemplating an “acquisition” or a “merger?” What needs to be accounted for?

-       Is the target company a good strategic fit?

-       Assess the industry’s future market and economy trends.

-       Are you spending too much of your resources on the acquisition or a merger with not enough energy or motivation left for a properly planed integration process?

The rewards of completing a successful merger can catapult an organization into the number one or two market position shaving years and toil off the process.  A clear understanding of the potential pitfalls combined with a well thought out post integration plan, will launch your organization off on a solid foundation. The rest is up to you.

Mark Gould is a Vercor Partner, Master Mergers & Acquisitions Intermediary, and Certified Business Intermediary and Certified Business Opportunity Appraiser. Mr. Gould has valued companies, and has provided merger and acquisition services to a wide range of clients in many industries.