Question

Suppose that you are a consultant that specializes in mergers and acquisitions. A client has extra cash on hand and wants your advice on what to look for in a potential take-over. In addition to your general advice about purchasing another firm, your client wants to know the potential sources of value from a merger and how that value affects the amount to offer for the target firm.

Answer 1

Mergers and Acquisitions are done by cash rich companies for numerous reasons. When a company opts for M&A it possibly assumes to gain one or more of the following advantages as a possible outcome:

1. Expansion: Regular business operations normally provides a linear of steady growth and by expanding its horizons through M&A it can increase its reach and which in turn boost it growth and profitability. This type of action is normally seen between peers of the same industry having a competitive advantage over one another. Where the M&A happens between companies with different line of businesses there benefits of diversification also flows in.

2. Synergy in Operations: In many cases it is seen that where companies are lacking an area of expertise, acquires another competitor company having an well established operation in that area which in turn results in lower cost of operations and increased profitability. This is the best way to strengthen the overall business activities of the company.

3. Larger Customer Base: M&A happening in same industry results in removal of competition and merger of the customer base of both the companies. For gaining such benefit, companies often look at the geographical distribution of branches or network of the amalgamating company.

4. Technological Advancements: This is an event of consolidation of technologies as well which can help to adopt the best one of the available options and hence in turn will help in technological growth of the company as well.

Value out of Take over:

Apart from the benefits mentioned above, It is very important to understand the Cash Inflows that will happen post acquisition. The benefits that are assumed to be realized should be carefully considered along with the associated costs. For a merger to be of value it is necessary for one of the parties to M&A has a performance below average Industry standards and the other party has under utilized resources.

There will be several Post merger integration challenges in terms of processes, policies, technology and Human resource as well which need to be addressed carefully as this will form the backbone of the new entity and will be the main reason of make or break for the company. There will be a necessity of long term commitment from management of both the companies.