Mergers and acquisitions is a term that describes the consolidation of assets or companies through different financial transactions, including consolidation, mergers, management acquisition, acquisitions, tender offers, and purchase of assets.
What’s an Acquisition?
A lot of us do not know the difference between ‘acquisitions’ and ‘mergers’ and often use the two terms interchangeably, even though they’re not the same. While they both include changes in ownership, they differ in terms of action.
– Acquisition: An acquisition occurs when one firm buys out another and becomes the new owner. Legally, the company that has been bought ceases to exist and the new owner or buyer owns all of the target firm’s assets. An acquisition may be friendly or hostile. The owner of the target company may work in some position in the new company or sign a contract to prevent working in the same industry for a specific period of time. Facebook can be a good example of a company that has acquired a number of top names such as Instagram and WhatsApp.
– Merger: A merger occurs when two firms, typically of the same size, decide to join hands as one company. In case of a merger, both companies cease to exist and a third company comes into being. A very good example of this is oDesk and UpWork, the two freelancing platforms joined hands a few years ago and formed UpWork, which is now a publicly traded company that brought together the best of both the now-ceased companies to create a top brand
An acquisition only means a change of ownership. The new owner may decide to continue running the company or cease it.
Not As Straight As It Seems
A merger or acquisition is not as straightforward as it seems. One of the most difficult steps is valuation. Professional help is needed to handle these matters.
The next step is to seek permission from all shareholders or convince them and to communicate the changes to employees. This can be very difficult for the target company, especially if it is a hostile acquisition, i.e: when the company doesn’t want it but it has no option.
Some companies opt for a merger or acquisition because they have no way out. Instead of going bankrupt, they prefer to get ‘sold’, a step that may not make sense to some.
Here’s a step-by-step procedure:
#1 Have a Strategy
As an acquirer, you must be clear about what you expect to gain with an acquisition. The purpose should be clear, i.e: you want to enter new markets, expand products, etc.
#2 Set a Search Criteria
One should only acquire companies that have potential, even if they’re not doing well right now. Some businesses also acquire firms just to eat competition, as WWE did to WCW. Still, it is important to know your search criteria, i.e: geographical location, customer base, profit margin, etc.
#3 Look for Targets
Once you have a clear understanding of why you want to acquire, it is time to search for targets. Some companies openly want to be bought out, some are discreet.
#4 Begin Planning
Open a line of conversation and plan how you want to move forward. You must show why it is a good option to select you over others by highlighting what you bring to the table.
#5 Perform Valuation
Ask the target company to provide financial documents and other such information to help you evaluate its worth so an appropriate offer can be made. However, remember that acquisitions and mergers are largely based on future potential and not current or past conditions.
Once you receive interest from the other party, it is time to negotiate. Acquisitions do not only involve cash. Offers may include shares, a good position, etc. This process can go on for months, hence be patient.
#7 Due Diligence
This is an exhaustive process that starts once the target company accepts your offer. It involves performing detailed analysis and examination of every aspect of the target firm including assets and liabilities, human resources, customers, and financial metrics.
#8 Draw a Contract
Assuming everything looks good, it is time to produce a purchase agreement that must be drawn keeping in mind the requirements of both parties.
#9 Financing Strategy
You must have explored financing options before going all in but the picture gets clearer once an agreement has been signed.
#10 Closing the Deal
Once the payment has been made, which may take a while, the deal will close. In case of an acquisition, the new owner will work on managing the newly acquired firm. On the other hand, a merger may involve the two teams working together.
Acquisition Change Management
Not all acquisitions are successful because the new owner doesn’t always know how to handle such a big change. Some failed merger examples include AOL and Time Warner, HP and Compaq, and Alcatel and Lucent. While these failed due to multiple reasons, change management often ends up causing trouble.
Change management basically involves designing new work processes, implementing new technologies to create a new, thriving organization. This is very important because mergers and acquisitions can result in:
- Loss of trust
- Poor communication
- Loss of important employees
- Poor motivation
- Management confrontation
- Incompatible cultures.
While HR is usually blamed for these problems, it is not solely the responsibility of the HR department to look after the system. In fact, there can be problems in the HR department as well, which is why it is important to think about change management before completing an acquisition.
The policy must be tailored according to the specific situation. Not all mergers and employees are the same. Managing the people side of the change can be quite challenging. Known as the soft side of the change, it involves understanding human behavior.
Getting people to participate in the change is important. Individuals may have to move from one department to another or do the same job differently. Some may even have to lose their job.
We must mention that change management is not just a process, it is also a competency. The process involves preparing, managing, and reinforcing. The competency aspect involves the skills of the leader and how well or she can lead people through the changing scenario.
Leaders must be an effective ambassador of change and demonstrate their own and their organization’s commitment to it. It is best to build these competencies through their ranks. You cannot expect all employees to show the same level of commitment.