A merger is the combining of companies into one larger entity. It may be in the form of an exchange of cash, company stock or a hybrid, where the acquiring firm takes over all assets and liabilities of the merged entity. Mergers are a common strategic option for businesses looking to increase market share or improve profitability.
Some of the reasons for a merger include competitive pressure, a desire to expand into new markets, cost efficiency and an opportunity to eliminate competitors. Mergers can be successful, but they also can fail and cause significant financial losses. The main risk is integration problems, high costs and disruption of business operations. Other risks are a change in management structure and culture, job loss, and attention from regulators.
The main types of mergers are horizontal, vertical, corner and product-extension. Horizontal and vertical mergers occur between companies that offer similar products or services in the same industry. A product-extension merger involves a manufacturer of one product acquiring a distributor to control the supply chain and gain access to new markets.
The key to a successful merger is careful planning and preparation. The M&A process should start with identifying potential partners and conducting due diligence on their companies. This will help you understand the financial implications, business structure and valuation of your target. Creating a detailed integration plan and providing transparent communication to staff, customers and other stakeholders will also be important to ensure that the process runs smoothly. Lastly, it is critical to evaluate the results 3-6 months and 12 months after completion of the merger or consolidation to determine next steps.