With economic trends which continue today, it can be pretty difficult for businesses to survive. A prime example is the airline industry that continues to suffer due to the global recession. We saw it start most recently with the 2008 merger of then Continental Airlines with United Airlines. Then, US Airways and American Airlines announced that they were planning to merge. As we all know, the global recession does not limit itself to only the airline industry. This is why it’s important to know what to look for when considering a merger with another company.
Know how to pick your target
In the book, “Mastering the Merger,” authors David Harding and Sam Rovit confirm that 70 percent of major mergers fail, which is why it’s important to target deals that will advance your main business operations. To begin, you should create an investment thesis that explains how and why an acquisition can improve an existing core business. In order to create a good investment thesis, you need to understand the basis of competition within in your industry.
Conduct Your Due Diligence
Take the ‘due diligence’ process very seriously when determining whether a target is a fit for your company. In order to accurately determine a target’s value, you need to have a thorough understanding of cash flows and how to read financial statements. Keep in mind that your target has more than likely been trained to dress the value of the business. In the book, Harding and Rovit said, “half of the executives surveyed, discovered their target had been dressed up for sale.” You may not have the ability to see this clearly, if you don’t have an extensive background in reading financial statements accurately.
Additionally, make sure you measure the true synergy value of your company and the target. Harding and Rovit said, “two thirds of acquiring executives said they had overestimated the synergies available.”
You need to start with evaluating cost savings – to measure synergy. Then you need to evaluate the time it will take to reach a successful synergy revenue. Finally, you need to subtract any negative synergies (service interruption, customer losses, and employee turnover) from your estimate. Then, you should test your findings against what makes business sense. If you find doubt or uncertainty, then you should be prepared to walk away from the deal.
How to make the integration process work
By this stage in the merger, you will have to make decisions such as, where operations need to be integrated and where the merging companies’ operations can carry on separately. Following are the four principles that will help when making these decisions:
- Create the integration plan months in advance;
- Integrate quickly in critical areas;
- Place significant importance on the cultures;
- Keep the strength in the operations of each of the merged businesses.
If you make certain all decisions are in line with the investment thesis, integration will be substantially easier and more successful.
The LuAnn Capital Group is a global Mergers and Acquisitions advisory firm with focus on selective industries.
In every step of the mergers and acquisitions process, we pay attention to our clients needs. We listen. We respond. We’re more accessible to our clients than larger companies, whether the issue is small-business valuations, small-business marketing tips, exit strategies or other aspects involved in the process of selling a company.
You will benefit from our extensive network of contacts and resources connected with business acquisitions and business mergers. Our competitive pricing model enhances our consulting services, which are geared toward value incrementation and a successful business exit strategy.
The culture at our company is built on a commitment to client-centered service and adherence to the highest standards of personal and professional integrity. The confidential and professional representation we provide leads to a smooth and successful partnership.
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