Accounting/Finance - merger & acquisition.........................?

Question

Does anyone know any of the following questions:

What potential synergies exist in mergers & acquisitions?

What might be the potential challenges?

What ways does the buyer or seller add "protection" against downside risk to the agreement?

Answer 1

Potential Synergies:
1. Boost profit margins by increasing revenue while cutting costs (e.g. LOJ and First Life)
2. Generate rapid growth in a business
3. Increase the size of a company to make it more competitive in the market (First Global and George & Branday, PCFS and MSMB)
4. Geographic Expansion (DB&G and Billy Craig Finance & Merchant Bank Ltd., Nestle and Cremo Ltd.)
5. Acquire technology (Microsoft and Hotmail)
6. Vertical integration into supplier or customer businesses (Alcan (bauxite mining) and Pechiney (aluminum can production))

Potential Challenges:

Mergers and acquisitions require a lot of work to succeed and present many challenges. Some of the more common reasons for the failure of mergers and acquisitions to deliver the promised boost to shareholder value are:

1. Culture Clash: The cultures of the companies are too different and there is a war on for dominance and control. Culture is also a potential problem when a company is acquired and the acquirer's management tries to preserve the target's culture and very little integration occurs.
2. Premium is too High: This case occurs where there is a hostile takeover or a bidding war ensues for the target between two or more companies. The new company is stuck with high-priced assets that dilute future earnings.
3. Poor Business Fit: In some cases mergers are unsuccessful because technologies are incompatible, companies do not fit in terms of lines of business, or they do not have the requisite knowledge about the other company.
4. Debt: In situations where a company borrows money to fund an acquisition or assumes too much debt of an acquired company, too much of the earnings of a company are consumed by interest payments. In some cases short-term financing is used to finance the long-term investment and the company has difficulty refinancing.
5. Regulatory Delays: In instances where regulatory approval is required, any delays may cause staff to become nervous which could lead to the loss of talented employees from both companies.
6. Failure to Deliver on Synergies: Sometimes, the cost savings or revenue boost an acquirer expects to realize from a merger does not materialize. This can result from poor due diligence or overly optimistic forecasting. This shortfall in earnings can leave the acquirer's shareholders worse off than they would have been without the transaction.

Critical Success Factors of Mergers and Acquisitions:

When managed correctly, mergers and acquisitions are helpful tools that managers can use to achieve their business objectives. In order to meet the challenges of conducting a successful merger or acquisition, there are certain initiatives that can be taken. These include:

1. Ensure that there is a strong case for the merger / acquisition from a business strategy point of view
2. Conduct detailed due diligence on all aspects of a potential partner
3. Create a merger planning group to identify and manage merger issues anticipated at all business units and levels of the organization
4. Communicate constantly with employees so that they are not susceptible to rumors or not left in the dark on issues regarding the rational for the transaction or the strategy or structure of the entity
5. Pay attention to the details to ensure that nothing is taken for granted or left unattended
6. Once the deal is finalized, concentrate on implementing the strategy of the merged entity so as to achieve the original objectives of the merger

The following articles will be useful to you:
Mergers and acquisitions: Reducing M&A risk through improved due diligence (2nd link)
Mergers and acquisitions (3rd link)
Mergers & Acquisitions: An Introduction (4th link)