It takes time to grow a company’s organization and business scale. It is not true that a company can’t grow in a short period. “M&A” (Merger and Acquisition) has the potential to expand the scale of an organization or business. In this article, we will explain the outline, advantages, and disadvantages of M&A and the specific flow.
Table of contents
- What is M&A
- Purpose of M&A
3.Merits and demerits of M&A
WHat is M&A
M&A is an abbreviation for Mergers, which means mergers and mergers, and Acquisitions, which means acquisitions. Acquisitions by stock transfer are generally well known, but business transfers, third-party allotment of shares, and company split also fall under this category.
In addition, new mergers in which Company A and B merge to create a new organization, and absorption mergers in which Company A is absorbed by Company B are common forms of M&A. M&A is not uncommon in the business world, and many companies have grown through mergers and acquisitions.
M&A is an effective method for companies to achieve rapid growth. If you are a company that “feels an issue with organizational growth” or “has anxiety about the future,” how about incorporating M&A into your strategy?
Purpose of M&A
The purpose of M&A is different for the acquiring side and the selling side. Let’s take a look at the objectives of both the acquirer and the seller.
The objective of the acquirer is to reduce the time it takes for the organization to grow. Creating and growing a new business on your own takes a certain amount of time, but M&A can shorten the time. You can grow your organization in a short period and use your time effectively.
There is also a purpose to obtain a synergistic effect. For example, if we acquire a company that possesses technology and know-how that we do not have, we will be able to break into fields that have been difficult to enter in the past. It helps to improve the strength of the organization by compensating for its weaknesses.
In addition, the industrial cycle in modern business is accelerating, creating a disadvantageous environment for latecomers to enter new markets. Even if it is a new genre, the competitors of the first movers will grow in a blink of an eye, so latecomers will not be able to compete. M&A can solve such problems. Even if you are a latecomer, you will have the ability to compete with your competitors because you can enter the business without making an initial investment or going through a training period.
Purpose of the seller
The primary objective of the seller is to secure a successor. Many companies are troubled by succession issues. If the business cannot continue due to the absence of a successor, it may not be possible to maintain the employment of employees or the company’s technology and know-how may disappear, so there are many cases where M&A is selected.
In many cases, M&A is chosen to secure funds. M&A is effective in scenes that require a large number of funds, such as “I want to liquidate a company and start a new business” or “I want to pay off all my debts.”
M&A is also an effective method for business reconstruction. Bankruptcy becomes a reality if the cash flow deteriorates significantly and it becomes impossible to receive loans from financial institutions. By using M&A, it is possible to sell part of the business to another company and use the funds obtained to rebuild the organization.
Merits and demerits of M&A
M&A offers a variety of benefits for both the acquirer and the seller. On the other hand, we must also understand that there are disadvantages. Below are the pros and cons of both.
About the benefits
Advantages for the acquirer include the reduction in costs required for new business development. It takes a lot of money to develop a new business, but if you buy a company that is already active in the field, you can keep costs down. You can also reduce the risk of failure by acquiring companies with solid know-how.
It also helps reduce the time it takes to grow your business. By incorporating assets such as achievements, know-how, and human resources that the selling company has built up so far, the scale of the company will expand. In addition, if a company acquires another company in the same industry, it can gain market share from the selling side, giving it an edge in competition within the industry.
The next advantage for the seller is the financial gain that can be obtained from the sale. Even if the company is in the red or is unprofitable, there is a possibility that a profit on sale will be generated if a company that wants know-how and achievements appears.
It also has the added benefit of preserving the business for future generations. Even if it is for unavoidable reasons such as the absence of a successor or deterioration in business performance, it is sad to end a business that has been continued and lose the achievements that have been built up. By selling the company, you can inherit the technology and know-how, and you can secure the employment of the employees who have supported the company so far.
There is also the advantage of being able to let go of some businesses and concentrate on the main business. If you have an unprofitable business or a small-scale business, you can sell it to another company and concentrate the surplus resources on your main business to improve management efficiency.
Buying a company doesn’t necessarily mean you’ll get the benefit. On the contrary, there is a risk that the business will not progress, or that human resources will flow out because they will not be able to adapt to the new organizational structure. Also, remember that you may take over the debt if your preliminary investigation is inadequate.
Disadvantages for the seller include the possibility that an ideal buyer cannot be found. In addition to the possibility that the M&A will not be able to reach an agreement on the amount, it is also possible that a buyer cannot be found in the first place. In addition, there is a possibility that the content of the contract with the company you have been doing business with will change significantly, and the relationship will deteriorate.
In addition, major changes in organizational systems and policies can lead to dissatisfaction among employees. As a result, it may lead to an outflow of excellent human resources.
Flow of M&A
When considering M&A, it is important to first understand the specific flow. The flow of M&A differs depending on whether it is an acquisition or a sale.
First, clarify the purpose of the M&A. M&A as just a means to an end. If the purpose is not clear, there is a risk that you will be satisfied with the execution of M&A. Understand what kind of situation your company is in and what kind of issues it has and consider M&A with a clear purpose.
We also have to think about what happens after the acquisition. If you do not think about “what to do with the organizational structure” and “how to develop the business”, the company may slow down rather than speed up its growth.
One way is to consult with an intermediary company that specializes in M&A. You can receive advice from a specialist’s point of view, and you can also get strong support for finding a negotiating partner.
Once you have found a company that is an acquisition candidate, let’s calculate the enterprise value. If this process is skipped, business performance may deteriorate due to M&A.
Let’s investigate the buying side company from various angles, such as “How much is the business worth?” “Do you have any liabilities?” If you can judge that it will bring profit to your company, you will proceed to full-scale negotiations.
The content of the negotiations varies, but in the case of an acquisition, the focus is generally on the final price and the hiring of the target company. In addition, if an intermediary company is in the middle, you can support such negotiations.
If both parties agree on the amount and terms, a final contract will be signed. Both parties need to check the contents of the contract properly so that there will be no trouble later.
After signing the contract, we move to close. Closing is the execution of the contracted content. If you have acquired a company, this could include the transfer and payment of shares, or the transfer of business or assets.
Depending on the nature of the M&A, there are many cases in which closing takes a long time. For example, it will take a certain amount of time to transfer equipment from the factory of an acquired company to the company. If it seems that closing will take time, you can proceed smoothly by creating a plan in advance. Create a detailed plan such as a schedule and assignment of responsibilities, and try to complete the closing in the shortest possible time.
M&A has various benefits, such as reducing the cost and time required to develop new businesses, resolving succession issues, and maintaining employment. There are indeed disadvantages, but if you plan, the advantages will more than make up for them. Why not take this opportunity to consider M&A that is effective in realizing your management strategy?