Many people have a divided opinion when it comes to mergers and acquisitions. It is common knowledge that the most appropriate way to save a business that is on its way to collapsing is to allow acquisition or enter into a merger with a stable one.
Acquisition may end up being a destruction of wealth if the acquired business does not succeed as expected. Investors should be extremely careful when entering into deals so that they do not end up suffering huge loses.
The damage caused by stupid acquisitions and mergers can be so severe that some investors end up losing trillions of dollars. Despite the many challenges associated with acquisitions and mergers, the two practices are here to stay.
The activities associated with mergers and acquisitions have slowed down in recent times but some investors are always keen on entering into mergers and acquisition of struggling businesses.
The irony of the situation is that the most successful companies are the ones that experience failure when it comes to mergers and acquisitions.
There are certain factors that investors should consider before acquiring any particular business. Companies should be very careful when making certain investments so that shareholders are not hurt in the process.
The first thing that companies should look out for before acquiring a business is the balance sheet to ensure that the wealth of shareholders is protected. The balance sheet reflects the actual capital of a business. The income statements are very reliable when it comes to determining the viability of an acquisition.
The amount of profits and sales displayed on the income statement can give a false impression about the actual state of a business. Managers should also ensure that their company cuts its costs after acquisition.
Mergers are very advantageous because the merged company can be able to negotiate for larger discounts because the quantity of its supplies becomes large. The acquirers might get excited with a promising deal and in the process end up not reaching the expected target when it comes to savings.
There are some new costs that come up after the integration of two companies. Merging systems that are not compatible comes with a lot of new costs. Managers with the responsibility of facilitating acquisitions and mergers have limited time to carefully analyze the processes and come up with substantial cost cuts.
These kinds of complications may slow down the growth of a merged company during the initial stages. The reason why it is difficult to cut costs in a merger is that most of the anticipated savings are normally factored in the selling price. Careful negotiators ensure that the value of savings is shared between the two parties.
Acquirers always aim at improving their revenues through the creation of numerous opportunities that can give them value for their investment. Customer profitability is another aspect that acquirers should pay attention to before striking any deal.
Customer profitability should be measured in the shortest time possible to determine whether the acquirer goes on with the deal or not.
There are four major steps that are normally used to measure customer profitability. The first step is to determine the profitability of all the services and products. All the possible costs should be determined for an acquirer to come up with net profitability of a particular business.
The second step is to determine all the market segments and customer preferences. Customer profitability is normally calculated in the third step by deducting all the customer related costs from customer profitability. The fourth and final step involves accounting for all the unassigned costs such as the overhead costs.
The main reason why acquisitions are done is to actually gain customers. Although there are reasons that might motivate a company to buy another company, everything finally goes back to customers.
The acquirer aims at maintaining the existing customers and at the same time use the acquired capabilities to attract new ones. It is important for company executives to understand that the level of profitability of acquired customers is not necessarily the same.
Companies can decide to shut down those customers who are not very profitable and use the resources to provide better services to the most profitable customers. This kind of move can turn around the fortunes of an acquired business.
Some of the ways that companies use to discourage less profitable customers include changing customer service and marketing strategies. In another scenario, companies can decide to come up with new strategies that might change their unprofitable customers into profitable ones.
An acquirer who is creative enough has the ability to increase the share-owner value through turning the company disasters into profits. It is important for an acquirer to get the real facts about the company to be acquired for them to be aware of what they are going to get from the deal.
It is therefore advisable to be very wise when it comes to mergers and acquisitions. Company executives should understand that mergers and acquisitions are not the only ways through which a company can grow. Acquirers should only enter into deals that create economic value.