Mergers are common in the business world today because they allow companies to scale up their operations and increase profits. However, according to Harvard Business Review data, 70-90 percent of these mergers and acquisitions fail within the first few years.
The high failure rate has been linked to a number of factors, the most common of which are poor culture fit and human capital issues. Both factors point to one thing: These businesses were unprepared.
This means that whether you are looking to consolidate your growth or to capitalize on a business opportunity through a merger, you must carefully consider how this will affect your company in the long run before committing to the process.
Taking a Closer Look at Your Business
Here are three important things to do to determine if your company is ready to take the bold step of entering into a merger:
1. Evaluate Your Company Culture
Many businesses spend time and resources developing a strategy for their new venture following a merger and mapping out day-to-day operations, but they frequently overlook culture, which is the foundation upon which operations and strategy are built.
Before considering a merger, conduct a comprehensive assessment of your organization’s culture. This will assist you in identifying any cultural differences that may exist between you and a potential merger partner.
It will not bode well for the new company if half of its workforce is innovative and quick, while the other is methodical and slow. The costs of these differences may not be obvious at first, but they will gradually eat away at your bottom line.
Evaluating your company’s culture will also assist you in determining the culture combination that will produce the best results for the new venture. That could mean maintaining both cultures’ independence, assimilating the other company’s culture into yours, or combining both to create a new culture.
2. Examine Your Company’s Financial Health and Liquidity
A merger is one of the most significant risks that a company can take. It is therefore critical that you determine whether your company has the financial capacity to manage this risk, especially if the merger is the result of an acquisition on your part.
Determine whether your company has the liquidity to make and sustain the investment by assessing whether your capital structure can withstand the additional strain. If this is not the case, consider a variety of equity and debt funding strategies that will provide you with the balance sheet you need for a successful merger.
Consider documenting and appraising a comprehensive asset manual and business process that clearly fleshes out each aspect of your company. This is an important step in ensuring that you are properly valuing your company.
3. Articulate The Type of Merger That Will Be Most Beneficial for Your Business
The only reason you should be considering a merger is if it will give your company a significant competitive advantage in the marketplace. However, in order to make an advantageous match, you must first determine the best merger formula for your business objectives.
Consider the following options:
- Joining forces with a company that offers similar products and services to yours in order to gain market share. For example: a merger between two mechanic workshops.
- Teaming up with a company that creates the products, solutions, and services that your company requires for its operations. For example: a merger between a computer game manufacturer and a computer software design company.
- Partnering with a company that is in the same industry as you, but has a different customer base. For example: Consider the merger of two payment platforms in different regions.
On Risk Management for Mergers
If you decide to proceed with merger plans, risk management will be an important part of the process. Consider hiring a corporate services provider, such as one that offers audit and assurance services, to improve the quality of your company’s risk management and avoid potential negative consequences to your business throughout the process.
An auditing firm can be your most valuable ally, especially if they are involved as early in the merger process as possible. They can be of great assistance by conducting risk assessments, which include evaluating your business strategy process, particularly as it relates to merger growth.
They can also assist you in determining the market value of your company’s hard assets, developing solid comparables, and determining the market value of your operations, as well as conducting due diligence and providing expertise in business process integration. What’s more, they can provide their expertise in strategy creation, post-merger integration, and post-merger auditing.
Given the importance of risk management, the firm you select to assist your company in preparing for a merger should be carefully considered. Choose a firm with a reputation for impeccable processes and a successful track record of working with businesses in markets similar to yours, as they will be able to provide industry-specific advice and insights. You should also consider the firm’s local expertise. For example, if your company is based in Dubai, you might be better off hiring auditing firms in Dubai that are familiar with the local mergers and acquisitions policies.
What’s Next? Keeping Your Eye on the Ball
The merger process can be extremely distracting for a company and its employees. You must make a concerted effort to ensure that things do not slip on the operations side, as this will jeopardize the transaction and put the company in a difficult situation. The other company, just like you, will closely monitor your company’s financial performance during the due diligence period and compare it to future projections.
As a result, while you may be focused on the legal and financial details of a merger, keep in mind that you will also require a strong human capital guidance system to make the transition. Meet with your HR team to develop a communication plan, transition plan, and timeline that keeps your workforce updated at each step of the process. You can begin with the executive board and gradually bring in other employees as your plans progress.
A well-thought-out and clear communication strategy can go a long way toward reducing resistance, distrust, and concerns as employees are challenged to move from the known to the unknown.
About the Author
Naresh Manchanda is a Partner at MBG Corporate Services, an international organization supporting clients across Asia, Europe and the Middle East and providing sustainable solutions and strategies that drive business transformation. Established in 2002 and headquartered in Singapore, MBG is a 450-strong member team that operates out of Europe, the Middle East and Asia, providing Legal, Risk, M&A, Tax, Strategy, Technology and Audit Services.