Although a merger and acquisition (M&A) involves the transaction of making two companies into one, each term means slightly different things. The main point of a M&A is that the two companies combined are worth more than the two separate. Although these terms are often used interchangeably, there are clear differences between the two that you should understand before going through the M&A planning process.
Acquisition: This is when a 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.
Merger: This is 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.
M&A Transaction Types
There are several different types of M&A transactions, including:
When two companies that are operating at different stages but share the same industry combine, this is a vertical merger. An example of this would be a pottery store taking over a ceramics factory. This increases synergy in the process and will allow the pottery store to gain more control of the ceramics process and increase 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 which 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, if a company which produces carpets mergers with another company which also produces carpets, this would be a horizontal merger. 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 but not directly competitive. if a company that sells rock climbing helmets merged with a company that sold 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 different products and services, and are operating at different stages. The purpose of a conglomerate merger is to diversify industries and lowerinvestment risk.
Why You Need to Reprocess Your Financials After an M&A
Reprocessing your company’s financials after an M&A is often an essential part of the integration process. 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 combining companies to be united and standardized in a seamless process.
There are five key steps to pulling off a successful merger, these are:
- Developing 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
- Understanding 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 your company does 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 company that is acquiring you beforehand: Make sure to do your research ahead of time —search the acquiring company’s website or publications and talk with their employees. You want to have a picture in mind.
- Considering several different options: While it’s important 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.
- Making the structure fit: Although you may have developed a detailed plan for how the new company will be restructured, you likely need to review this more than once and make changes to the previous steps once the deal is done. Doing an ongoing review enables you to confirm which areas are sound and which need to be reconfigured and refined.
- Be open to not knowing all the answers from day 1: No matter how much forethought and strategic financial planning you put into the M&A, it would be unreasonable to expect the organization to run perfectly from the get-go. This is the case with all M&As, but particularly with vertical and conglomerate mergers. However, that doesn’t mean you have to redesign your whole system from scratch when you encounter a hitch. 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 do a formal assessment to see exactly what condition your financials are in and where more changes need to be made.
The Steps to Streamlining Financials Through the M&A Process
Integrating the financials after the M&A is a crucial part of the process. By following the steps listed below, you can ensure that reliable financial controls are put in place.
- Create a timeline: Develop a timeline to show which activities need to be addressed. Provide deadline 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 — it’s not the end of the world. 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 to determine which members can stay, which ones need to be reassigned to a new department or position, and which ones need to be let go. This is also a good time to address any employee concerns and questions. Management should meet with staff as soon as possible and communicate everything about the M&A clearly.
- Safeguard business assets: When two companies merge, it is necessary that the people involved with the organization’s financial departments identify and safeguard the existing assets and the ones which 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, including 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 a M&A. Signature Analytics is an outsourced accounting firm providing ongoing accounting support and financial analysis to small and mid-size businesses.