At the heart of any merger or acquisition is a wish to gain an advantage that neither company could reach alone. The reasoning is often compared to a marriage: two parties combine resources and expect a better future together than apart. The comparison is apt in a less flattering way too, since a large share of deals fail to deliver what was promised.
Merger or Acquisition?
A merger, strictly, is two companies combining into a new entity. An acquisition is one company buying another, which continues as a subsidiary or is absorbed. In practice most transactions described as mergers are acquisitions, and calling it a merger is usually about how it is presented to staff and customers.
There is also a structural distinction that matters greatly to lawyers and accountants: buying the shares of a company means acquiring it whole, including its liabilities and history; buying its assets means taking named items and typically leaving unknown liabilities behind. Buyers usually prefer asset deals and sellers usually prefer share deals, and the tax treatment differs substantially.
Why Companies Do It
- Horizontal — buying a competitor, to gain market share, remove price competition, or spread fixed costs over more volume.
- Vertical — buying a supplier or a distributor, to control a critical input or reach the customer directly.
- Capability — acquiring technology, a skilled team, a license, or intellectual property faster than it could be built.
- Geographic — entering a new market with an operation that already understands it.
- Diversification — reducing dependence on one market. Historically the least reliable rationale.
- Financial — buying an underperforming business cheaply and running it better.
Synergy Is the Word to Distrust
Synergy means the combined business being worth more than the two parts separately. It comes in two forms and they are not equally believable.
- Cost synergy — removing duplicated overhead, premises, and systems. Reasonably predictable, and the reason overlapping departments are the ones at risk after a deal.
- Revenue synergy — selling each company’s products to the other’s customers. Far less reliable, and routinely overestimated in the projections used to justify the price.
Since the buyer usually pays a premium over market value, the entire case often rests on synergies arriving on schedule. When they do not, the buyer has simply overpaid.
How a Deal Runs
- Strategy and target search — deciding what would genuinely help before deciding who to buy. Doing this in reverse is a common and expensive error.
- Approach and confidentiality agreement.
- Valuation — typically some combination of discounted future cash flows, multiples paid for comparable businesses, and asset value.
- Letter of intent setting out price and structure in principle, mostly non-binding.
- Due diligence — the detailed examination of financial, legal, tax, commercial, and employment reality. This is where deals most often change price or die.
- Definitive agreement, including the warranties the seller gives and what happens if they prove untrue.
- Regulatory clearance where the combination raises competition concerns.
- Completion and integration, which is the part that determines whether any of it worked.
Why So Many Disappoint
- Overpaying, usually because of competitive bidding or optimistic revenue synergies.
- Culture. The most-cited cause of failure. Two organizations with different assumptions about how decisions get made do not merge because a document says they have.
- Losing the people you bought. Where the value is a team or its relationships, the value can resign.
- Underestimating integration — systems, processes, and reporting take longer and cost more than planned, essentially always.
- Distraction. Management attention goes to the deal while the existing business drifts.
- Customer attrition, particularly where customers deliberately used both companies to avoid depending on one supplier.
If It Is Your Small Business
The same logic applies at any size, and small-business owners meet it from both directions — buying a competitor, or being approached to sell.
- Get your books in order well before selling. Buyers discount for anything unclear, and cleaning up accounting is the cheapest way to raise a price.
- Understand what is being valued. A business dependent entirely on the owner’s relationships is worth much less than one with documented processes and a team — see why writing your processes down matters.
- Do your own due diligence when buying, especially on customer concentration, undisclosed liabilities, and unpaid taxes.
- Take proper legal and tax advice. Deal structure drives the tax bill, and that is not the place to save a fee.
- Plan for the people. In a small business the staff and the customers are most of what you bought.
See also adjusting to change at work for what a sale looks like from an employee’s side.
