Mergers and acquisitions, (M&A) is basically the process of two companies becoming one.
Mergers, which are usually friendly, occur when two companies join forces. They typically see a merger as mutually beneficial and recognise advantages the other business offers in terms of increasing sales, efficiencies, and capabilities.
Acquisition, as the name implies, refers to a business being purchased by another business and they can be friendly or hostile.
Companies acquire or merge with one another for various reasons. They may seek cost-cutting measures, an avenue into diversification, or looking for a greater market share.
Other reasons for acquisitions include:
· Opening a gateway to a foreign market.
· Taking advantage of a firm’s technology.
· Taking advantage of particular workforce skillsets.
· Enhanced capacity. This can lead to the avoidance of capital expenditure.
· Healthy finances. A potential acquisition will have well-organised financial statements, which allows for smooth due diligence.
Why is due diligence so critical?
Due diligence is important in establishing whether the target company is in sound financial health, but if it is not, can the acquiring or merging firm deal with the debt and turn it around?
Things to consider and pitfalls that can occur when making a business acquisition or merger:
· If the asking price is wrong, many acquisitions or mergers fail, so make sure the price is right.
· Beware of any debt load. A target company with an unusually high level of debt should be treated with caution.
· Should that not be an obstacle, hiring a top-level chief executive will set it on the road to success again and by stabilising the firm, ensure there is little or no financial drain.
For legal purposes, make sure you obtain proof that the target business owns key assets, such as property, equipment, intellectual property, such as copyright and patents.
It is important to make you have details of any past, current or pending legal cases, also look closely at the impact of a change in the business’ ownership on existing contracts. Your accountant can provide expert advice in this field.
For help and advice on mergers and acquisitions and related matters, contact our expert team.