Are mergers the answer in this time of crisis?

Let’s face it, the business world has been rocked severely over this time of the Covid pandemic.  Many are struggling to survive and the closure of one business can affect the supply of another.  Increased unemployment in its turn affects overall consumption and the outlook is bleak.  As companies grapple with a decrease in cash flow and dwindling profits, where can they turn?

Many look to see how they can run their business more efficiently, look for ways to streamline and to cut costs.  In this scenario, it is worth looking at merger possibilities.  It may seem the worst time to merge when all are struggling. However, a merger, when managed well, can have more value than the sum of the separate parts. This is called synergy:

Synergy

How does this work?  In what ways will a merger perform better than separate companies? We will have a look at some of the ways Mergers can be successful in cutting costs, creating more profit and performing better.  Then, we can look at some of the risks involved and have a better idea of what mergers will work best.

Cutting costs

  • When two similar production companies are merged much of the equipment used can be combined. It may be possible to carry out production on one site.  This means there will be less costs in equipment and in the lease of land or buildings.
  • Buying in bulk can often enable better negotiation with suppliers. The best deals from each of the respective companies can be used, making use of established relationships.
  • Some staff will be redundant. In merging separate companies the management and administration will need to be combined.  It will not be necessary to keep all the staff as they will be duplicating the work of others.  This may be an initial expense, but saves funds further down the road.
  • Other subscriptions and fees can be merged, reducing costs

Increasing Cash flow

  • Sharing of markets and distribution chains may be possible after a merger. This has the potential to broaden the market for products of the original individual companies.  Transportation costs will also be shared.
  • Combining the customer base will also broaden the market to which all products are exposed and can be promoted.

Utilizing the strengths

Every company has its strengths and weaknesses.  In combining companies it is possible to get the best from each.  This is where good management of the merger is essential.  One company may have stronger in administration, one in operational processes.  When the best in each is utilized then the sum of the companies combined becomes greater than the sum of the individual companies.

Larger companies can also have the advantage of having a greater market share, which can on its own generate more interest.  Often larger companies can achieve a better evaluation, as investors take the company more seriously.

A successful merger between ‘Gillette’ and ‘Proctor and Gamble’ in 2005 shows how synergies can really work.  One of the main contributions Gillette made was adding more masculine products to P&G, with its more female products.  There was a working together and experience was shared for instance in the marketing of products to either men or women.  Advantage was also used for the different geographical areas where the companies have developed.

Some risks

Not all mergers are successful, however.  Careful financial modelling and due diligence is necessary beforehand to see if it will work.  Other factors also need to be taken into account too:

  • How compatible are the individual companies? Are the products complimentary to one another?
  • Are the individual companies willing to combine know how and expertise
  • Is there strong managerial leadership to take the company forward?

An example of a merger which was not so successful was that of Chrysler and Daimler in 1998.  The different languages and cultural barriers, prevented the two companies really working well together.  Knowledge was not shared and there was much mistrust.  Proper due diligence was also not carried out, which had costly consequences.

Conclusion

A merger can be an excellent way to help a business through a crisis, but it is important that the individual companies are compatible.  Expert help will enable you to find a company that fits for a good merger and helps to plan how to take best advantage.

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