Mergers and acquisitions are a common and occasionally disruptive feature of the corporate landscape these days. Some mergers and acquisitions even transcend the business world – think about the reaction of many Marvel fans when they learned that Disney was acquiring Marvel Studios.
Although a merger and acquisition (M&A) involves the transaction of making two companies into one, a merger is different than an acquisition. These terms, often used interchangeably, have clear differences that you should understand before going through the M&A planning process.
An acquisition occurs when one company buys another company and obtains more than 50% ownership. Legally, the original company (target company) no longer exists and is absorbed by the acquiring company. A merger occurs when two companies, usually of equal size, sign a contract to move forward as a single entity. Each company surrenders its stock, which is replaced with new company stock. Mergers can provide benefits for both companies — like cutting costs, increasing profits, and boosting shareholder values.
What are the Different Types of M&A Transactions?
There are several different types of M&A transactions, including:
A vertical merger occurs when two companies that are operating at different stages but share the same industry combine. An example of this would be a pottery store taking over a ceramics factory. This deal increases synergy in the process and will allow the pottery store to gain more control of the ceramics process and grow the business. The purpose of a vertical merger is to secure a consistent supply of goods, increase efficiency, to save on costs, and to increase the profit margin.
A horizontal merger occurs when one company takes over another company that produces or offers the same products or services and is at the same stage of production. Typically, the two companies are in direct competition with each other. For example, when Hewlett-Packard merged with competing computer hardware producer Compaq – a move that ultimately helped put HP at the top of that particular industry. The purpose of a horizontal merger is to eliminate competition, increase market share, and boost revenue.
A concentric merger, also called a congeneric merger, happens between two companies that are complementary to one another, but not directly competitive. An example might be a company that sells rock climbing helmets that merges with a company that sells rock climbing shoes. The purpose of a concentric merger is to offer a better service to customers, help the company diversify, and increase profits.
A conglomerate merger involves the combination of two different companies that are operating in different industries, offering various products and services, and are operating at different stages. The recent purchase of Whole Foods by Amazon is a good example. As businesses go, the two could not be more different, but the merger seems to have benefitted both brands, as well as their customers. The purpose of a conglomerate merger is to diversify industries and lower investment risk.
Why You Need to Reprocess Your Financials After an M&A
An essential part of the integration process is reprocessing your company’s financials after an M&A is complete. It can be a useful means of finding new value in the new company. This type of reorganization allows all the business units from the two companies to be united and standardized in a seamless process.
If you are interested in merging your company with another, here are five critical steps to pulling off a successful merger:
- Develop a statement of profit and loss: Don’t underestimate the importance of an accurate profit and loss statement. You should have an annual or quarterly snapshot of your revenue, costs, and expenses.
- Understand your company’s strengths and weaknesses: It can be a challenge to assess the weaknesses and strengths of your company before the M&A process begins. Ask yourself: What does your company do well? What areas need improvement? Be honest and upfront about the areas where you and your business need to improve and what hope you have for the future.
- Research the company that is acquiring you beforehand: Make sure to do your due diligence ahead of time —search the acquiring company’s website or publications and talk with their employees. You want to have a full understanding of the acquiring company as you begin the process. Why? This company is going to have a considerable influence on how your company runs in the future. Are you interested in maintaining your legacy after the M&A? Ask past sellers if their legacy was left intact or overhauled after the sale.
- Considering several different options: While it’s smart to consider the outward appearance and impression of the organization, it’s also crucial to think about the underpinnings and how they work. You should be able to put together a solid understanding of what the new company will look like after the M&A, including the new company culture and the individuals within it. Think about the daily processes of running the company and how these will change as well.
- Make the structure fit: You might have developed a detailed plan on how you envision the new company should be structured. Try to remember you will likely need to review that plan multiple times and make necessary changes after the deal closes. Doing an ongoing review enables you to confirm which areas are sound and which need to be reconfigured and refined, including outlining new org charts, writing updated job descriptions, and mapping out how things will operate. This may change during the M&A process, but you will have a vision and roadmap of how things fit together prior to the merger.
- Be open to the unknown: No matter how much forethought and strategic financial planning you put into the M&A, it is unreasonable to expect the organization to run perfectly after the merger. For almost all M&As, but particularly with vertical mergers and conglomerate mergers, this is entirely normal. However, that doesn’t mean you have to redesign your whole system from scratch when a challenge arises. You do need to encourage your team to indicate and discuss problems when they arise. But you do need to encourage your team to indicate and discuss problems when they arise. After you’ve completed one or two financial cycles, it’s a good idea to conduct a formal assessment. Doing so will illustrate what condition your financials are in and where more changes should be made.
What are the Steps to Streamline Financials in the M&A Process?
Integrating the financials after the M&A is a crucial part of the process. Finances can get tricky when you combine two companies, so you must ensure financial controls are in place. Be proactive and plan out the following steps.
- Create a timeline: Develop a timeline to show which activities need to be addressed. Provide deadlines for when they should be accomplished. For example, in the first week following the M&A, establish benchmarks, identify key personnel, and review bank relations. By the end of the first month, meet with management, distribute a code of ethics, and address any employee concerns. Within the first six months, aim for full integration of IT systems, established reporting conventions, and identified high-potential individuals. If you don’t have these things done according to your timeline, don’t panic. Adjust accordingly and make sure you come back to them.
- Evaluate finance and accounting personnel: One of the first things an acquiring firm should do is assess the skills and capabilities of the financial team. Doing so will help determine which members can stay, which need to be reassigned to a new department or position, and who needs to be let go. This process is also a good time to address any employee concerns and questions. The remaining staff will be entering a strange new world and will look to you for guidance and assurance. Management should meet with the team as soon as possible and communicate everything about the M&A.
- Safeguard business assets: When two companies merge, members in the financial departments should identify and safeguard existing assets and ones that have been acquired. This process also involves assessing any potential areas of concern.
- Ensure the adequacy of financial controls: First, management should assess financial controls to ensure that they are compliant with regulations and laws. The regulatory framework and its operations must be thoroughly examined. Draw up a list of all the scheduled authorities, including areas such as hiring and firing, investment decisions, bank mandates, etc.
- Review IT systems: It can be a big challenge to integrate two or more different IT systems, and the process can be tricky. In some cases, it may not even be possible, and an entirely new system may have to be implemented. It’s critical to understand and assess the current systems’ strengths and weaknesses. The acquiring company should also identify the existing and future state of the IT architecture.
M&As require close attention to contracts and due diligence. It is equally important to maintain communication and transparency throughout the whole process to build trust with all parties involved, from stockholders to employees. Reprocessing your financials after a merger will help you to integrate business operations effectively and achieve new, streamlined processes throughout the organization.
We Can Help
Contact us if you need help with strategic financial planning after an M&A. Signature Analytics is an outsourced accounting firm providing ongoing accounting support and financial analysis to small and mid-size businesses.