16.02.09 BIG MEANS MORE LIKELIHOOD OF ATTRACTING BANK FUNDING

 A merger is, in theory, a tried and tested method of expanding operations, often increasing long-term profitability and market share. It is an effective strategy for participating firms to achieve economies of scale, widen their reach, acquire strategic skills and gain competitive advantage over others in the marketplace.

In today’s banking climate, big also means there is a likelihood of attracting funding. Looking down the FTSE 100, the names of Associated British Foods, British Tobacco, British Sky Broadcasting, Diageo, GlaxoSmithKline all grew to the size they are via merger. Merger has allowed them to share technology, implement the best of class from both operations, create worldwide brands and tackle global markets that create shareholder value far greater than the individual companies could ever have achieved.

The joining up of complementary products and services also allows these companies to compete in more markets and sell more to each individual customer.

While this all seems like good business sense, the idea of a merger usually doesn’t come up very often in the boardroom of an owner-managed business. Since merging is such a daunting prospect, it is often seen as a last resort, if considered at all.

The availability of inexpensive bank debt and the retirement of the “baby boomer” generation meant that, in the owner-managed business sector, we have seen a dramatic rise in the number of acquisitions and disposals over recent years, and the corporate advisory sector has enjoyed the increase in activity. These have largely been financed by bank debt and this is no longer an option, so what now?

The need to grow has not gone away with the bank funding.

Should the owner-managed business sector turn its attention to the idea of a merger to continue historical growth levels without having to spend cash from its own coffers? The main issue that prevent mergers from working, in my experience, are all about personalities rather than business issues.

This usually manifests itself in the inability to agree relative values. Rarely are two businesses at the same stage of their development lifecycle or have matching revenues and profits. Both sets of directors will no doubt have their own view of the future and how best to exploit it. All of this can lead to tension and disagreement and, ultimately, stand in the way of the deal.

So to carry out a merger in the owner-business sector requires patience.

Let’s consider it’s a courtship. In dating, you meet someone, get an idea about what he or she is like and, if there is mutual interest in becoming better acquainted, you continue to develop the relationship.

 A merger follows a similar process. Organisations get to know each other, see if there’s some compatibility among their respective motivations and goals for merging and, if so, continue to explore developing a relationship.

Initial courtship may take the form of meetings between board examining potential benefits of merging, reviewing projections and what consolidated items might look like and discussing potential obstacles. Both parties must consider how the merger balances out each organisation and supports the realisation of each other’s goals.

 As the courtship continues, both sides will discover new things about the other - and find the need to compromise.

As in a courtship, and no matter how much preparation has been done, there will be surprises – some good, some bad. The merger may even be called off, then back on and back off. In time, disagreements will feel less like negotiations and more like joint decisions. Similar to a personal relationship, there are likely to be strongly held opinions about the merge from “relatives” on both sides. These can include customers suppliers and staff.

The new company will need to work to communicate the benefits to these parties in order that they can understand and support the transaction.

Unlike marriage, the resulting new company will not keep its separate identities. A successful merger results in an enhanced performance and operation that absorbs the previously unique ‘identities’ so that the new organisation operates as a single entity.

Publication: The Press and Journal
Author: Chris Horne