Business mergers involve two separate companies agreeing to become a completely new legal entity.
This article will look at the reasons why businesses may decide to merge, the procedure involved and the potential advantages and disadvantages of such a move.
Mergers are a complex area of law and anyone considering embarking on such a course should seek expert advice.
What is a merger in business?
The terms “merger” and “acquisition” are sometimes used interchangeably. In fact, the two concepts refer to two entirely different processes.
A merger generally involves two companies which are roughly equal in terms of size, market share and turnover (the term “merger of equals” is sometimes used to reflect this).
Importantly the process is usually voluntary with both businesses taking the view that it is in their interests for the company merger to go ahead.
By contrast, an acquisition is usually neither equal nor voluntary and sees a stronger, more dominant organisation take over one which is in a weaker position.
What are the different business mergers?
The different types of business mergers include:
This involves two businesses from the same industry who are usually offering the same products or services – for example, two supermarket chains.
By coming together in a horizontal merger the organisations hope to achieve a greater market share and, via economies of scale, increased efficiency.
This occurs when two companies from different stages of an industry’s supply chain agree to merge – for example, two companies who manufacture different components for vehicles.
When two companies from different industries or geographic regions merge they are said to form a conglomerate.
Market Extension Merger
This type of merger involves two businesses that provide similar products or services but compete in different markets.
Two companies which compete in the same industry but provide different product lines may choose to combine to increase their market share and take advantage of the overlap in areas such as technology.
Why do businesses choose to merge?
In order to justify the resources which will be expanded in the process, both organisations must be sure that the benefits of a corporate merger will make it worthwhile. A key concept here is that of synergies – where the increased revenue or lower costs that flow from a merger result in the new company having a greater value than the two original companies combined.
Synergies can bring a number of potential advantages following a merger.
Increased market share
By combining their existing shares of the market, the two businesses can create a company with far greater commercial dominance.
The new organisation can then attempt to use this enhanced market share to further strengthen its position and attract customers away from its rivals.
A crucial benefit of a business merger relates to the economies of scale that it provides.
The resulting larger organisation may be able to obtain items such as raw materials and manufacturing equipment (e.g. logistics support, recruitment and maintenance) at a lower price.
This in turn can enable it to offer goods and services at a lower price – increasing both market share and profits.
Should parts of either business have been struggling prior to the company merger, the increased efficiency resulting from the move can provide an effective way of tackling the situation, preserving both the product line and the jobs of those who provide it.
By pooling resources in areas such as human resources and technology, the business merger can create a dynamic and vibrant organisation which makes use of the best that the two original companies had to offer.
The synergy this creates can lead to greater enterprise and innovation, further increasing efficiency and competitiveness.
Streamlining of products
Should two companies be providing similar products or services, a corporate merger can be a way of streamlining their offering.
By avoiding duplication, the merger can again be seen to enhance efficiency and competitiveness – something that should benefit the company through increased profits and customers via lower prices.
Increased global reach
If a company wishes to expand overseas, it may view the task of potentially starting from scratch and building up a business in the face of tough competition from existing businesses in that country to be an extremely long-term undertaking.
By merging with a company already operating in that geographical area, however, the organisation immediately acquires a strong market position which it can then exploit using the other benefits of the merger.
How do I merge two businesses together?
Successfully merging two companies together is a complex process and it is highly advisable to gain expert advice and guidance.
Our expert team of solicitors at Wilson Browne have a successful track record of advising on all aspects of mergers and will, where appropriate, work in partnership with trusted accountants and financiers to provide you with the best possible integrated service.
Stages of a business merger
We will look below at the stages you should go through when undertaking a company merger.
It is important to assess in general terms if a merger is right for your business.
You should consider what you are hoping to achieve and the kind of company with which you are seeking to merge.
Due diligence on potential companies
Once you know the kind of business you wish the merger to involve, you can set about identifying potential candidates.
It is vital to carry out extensive due diligence which will include examining in detail the accounts and operations of those companies.
When a suitable company has been identified (and has indicated that it is interested in the merger) the process of negotiations can begin.
The complexity of these discussions will vary from case to case depending on factors such as the size of the businesses and their scale of operations.
Part of the negotiations is likely to include a valuation of both companies while it will also be important to consider issues such as how any finance required for the deal will be obtained,
Formal acceptance of the deal
Once agreement has been reached the merger can be formally agreed by both companies.
As the deal is likely to have major consequences on both a corporate and personal level it is again crucial to obtain expert legal advice on the final agreement.
Establish two-way communication with employees
Once an agreement has been reached it is important to bring the employees of both companies into the process to ensure they are committed to the merger.
As well as allaying any concerns they have it is important to seek feedback from staff on the best way to integrate the businesses.
As well as potentially having valuable input due to their practical day-to-day experience, employees are likely to be more committed to the process if they have helped to shape it.
Does it cost to merge businesses?
There are likely to be significant costs involved in bringing about a successful corporate merger.
This relates not only to actual expenditure on the process (which is detailed below) but also the opportunity cost of resources (including money and employee time) that could have been used to increase turnover and profitability in the short term.
The actual costs of a company merger will depend on variables such as the size of the companies involved and the complexity of their operations.
For example, a deal involving businesses that operate on a global basis may incur significant outlay in ensuring that it meets the regulatory requirements of all the countries in which the new organisation will be trading.
Costs of Business Mergers
We will now look at some of the specific costs associated with achieving a successful merger:
These may include a range of issues including the cost of having both companies professionally valued, guidance from industry experts and travelling to meetings (which will be more significant if the businesses are in different countries).
Once again, these costs are likely to be greater for more complex deals.
It is very important to seek expert advice when contemplating a merger and this will incur an expense.
Working with Wilson Browne will help to keep this outlay as low as possible as we are committed to offering excellent value for money and a fully transparent pricing structure.
Should the merger result in some staff at one or both of the businesses losing their jobs, it will be necessary to factor in redundancy payments to the cost of a deal.
In addition, relocation expenses may have to be paid to employees should they be required to work from a new location.
In modern working it is crucial that an organisation’s IT system is fully integrated and effective.
Since the two existing companies might have been using totally different systems prior to the merger, significant outlay may be required to ensure compatibility across the new business.
Marketing and PR costs
Once the business merger is made known to the public it is important a positive image of the move is created – something that could be a particular challenge if the process is to lead to job losses and/or site closures.
An effective PR strategy delivered by external consultants (involving, for example, local, national and specialist media outlets) can help facilitate this.
Likewise, the new organisation may seek the help of marketing experts to rebrand its products in line with its new identity.
Should a business loan be required as part of the deal, the repayment of the funds will add a further expense to the process.
What are the disadvantages of Business Mergers?
We have seen above that there are many potential benefits to a business merger. Any company contemplating such a move, however, must also consider the potential risks involved.
As well as the short-term costs and potential negative publicity incurred the resulting organisation may not perform as well as had been anticipated.
This could be because the new company is so large and unwieldy that effective leadership is made more difficult and innovation, creativity and enterprise are stifled.
Likewise, bringing together two organisations with their own distinct cultures may create friction and tensions between staff leading to reduced motivation and productivity.
While economies of scale can help offset the above problems and increase efficiency, this may not be the case where the two companies provide different products or services.
How long does it take for two companies to merge?
The timescale for companies to merge will depend on the complexity of the deal. A company merger between businesses based in different countries, for example, may take longer due to the requirement to comply with two legal systems.
Our team of expert solicitors at Wilson Browne will take the time to get to know your full circumstances and background in order to provide you with an estimate.
It is important to be aware that even when the formal agreement has been signed, there may be much work to do to integrate the two companies so that the new organisation is operating with maximum efficiency.
Are business mergers a good thing?
A successful corporate merger can result in a new company that:
enjoys a much stronger market position than either of the previous businesses
possesses the synergy and dynamism to continue to increase its profits while providing consumers with products at lower prices.
As we have seen, however, there are potential downsides to mergers and so it is important to seek expert guidance.
We operate with the highest standards of integrity and professionalism to offer advice tailored to your specific requirements. With offices in Corby, Higham Ferrers and Rushden, Kettering, Leicester, Northampton and Wellingborough we can offer a friendly face-to-face meeting at a convenient location.