Although sometimes used interchangeably, a merger is distinctly different from an acquisition. While an acquisition involves one company taking over another, a merger
involves two companies coming together and creating a new entity, ideally composed of each of the individual companies' best elements. Before the transaction and
after, a number of steps need to be taken to ensure that a merger is a success. The following steps, which take the perspective of just one company in a merger, should
be considered a general guide to merging two companies. The steps should be performed in the below order to avoid common M&A challenges.
Establishing the motive
Similar to an acquisition, the first step is to establish the merger's motive. Without a motive, a merger is destined to fail from the outset.
For a merger, the motive has to be strong enough to convince the other party that the deal is a good idea.
While the motive for an acquisition can be financial or strategic, for a merger, it’s invariably strategic; there should be something that both companies can achieve together that they cannot achieve separately. Examples of this include:
- Complementary product or service lines
- Complementary regional presence (joining to create a national player)
- Ability to create economies of scale/scope
- Complementary operations (e.g., specialisms in different niches)
Assuming that the other company is performing well (it’s not in financial difficulty or experiencing a long-term deterioration in sales), you may have the basis for a strong merger motive.
Understand what the merged entity will look like
All too often, two companies merge thinking that they will automatically be valued higher than the sum of the individual parts.
If anything, a merger is even more difficult to pull off than an acquisition as it usually involves a merger of (near) equals. Alternatively, an acquisition, particularly a bolt-on acquisition, maybe a larger company acquiring a much smaller one.
Having agreed to the principle of a merger, the two sides need to get into the gritty details about what the newly merged company will look like:
- Who’s the CEO?
- Who’s on the board?
- Where is the new headquarters?
- What will the new company be called?
Oftentimes, complications can arise when the two companies discuss company culture (e.g., the new company’s strategic direction, long-term ambitions etc.).
- How much of the company’s money is reinvested every year?
- Are both sides happy to load up on debt to fund your ambitions, or is one side more risk-averse than the other?
Unsurprisingly, a deal is more likely to fall through when discussing culture than at any other stage of the process.
Taking the best components from each company and bringing them to the new entity is all very well, however challenging in practice.
Structuring a Deal
During a merger, the deal structure and high-level combined entity plan are often discussed simultaneously to ensure alignment. Efficient due diligence is vital in a
merger process, and it involves both the companies and their third-party advisors. Usually, a new legal entity is formed and both companies share the equity in pre-
agreed-upon amounts. One of the companies entering the merger may also pay cash to the other in an effort to retain more control. This is where the difference between
mergers and acquisitions tends to blur, but the creation of a new legal entity is distinct from mergers.
Post-transaction, a merger may look a lot like an acquisition. Both companies will undergo changes, which underlines the importance of implementing a change
management program. In a previous article, we outlined the benefits of hiring a change manager in the M&A process. Their input is arguably even more fundamental to
the success of a merger than it is to an acquisition.
The ultimate goal of any M&A-based transaction, including mergers, is to unlock a company's full potential and create the highest value for shareholders.