A merger is the consolidation of two or more business organizations into a single entity whereas an acquisition is the transfer of ownership of an entity’s stocks, equity interests or assets. It’s generally done with the objective of increasing market share and plant size, geographic expansion, diversifying product and services, gaining market power, or enjoying benefits of economies of scale.
However, the benefits are accompanied by a multitude of risks. Many mergers have gone wrong in the past and have faced adverse effects. The merger of America Online (AOL) and Time Warner is considered the worst failure of all time. The two media giants saw immense opportunities in merging with each other but neither had anticipated the culture clash between the two companies or their fate at the hands of the dot-com bubble burst. The latter forced the American economy into recession and AOL to a goodwill write-off of nearly $99 billion in 2002. AOL lost numerous subscribers and its share price fell from $226 billion to about $20 billion.
One should address the following risks during mergers and acquisitions:
Differences in Culture
Many have observed culture clashes and they are the most common reason for the failure of mergers and acquisitions. Employees are the core strength of an organisation and if there is no integration among them the organisation is destined to fall apart. Hence, one should check the compatibility of the two companies before the merger.
Inefficient communication and lack of transparency
The company should clearly communicate the terms of the deal to the other firm. One should fill the communication gaps and share all details pertaining to each firm’s market share, consumer base, product/service details, and the personnel. This will ensure that there arises no discrepancies after the merger, leading to discontent within the firm. Having perfect knowledge about customer behavior of the other firm will enable them to strategize accordingly, so that no customer is unhappy with the merger.
Miscalculations in the evaluation of assets
One should reach to a perfect agreement before merging or acquiring many complex calculations which is valuable for both the parties. Manipulation of calculation or error in calculation can lead to heavy losses of the combined entity.
The organization may lose many employees during a merger. Inability to assess the value of its employees leads to companies firing the wrong people.
There are may laws and regulations that companies need to comply with during mergers and acquisitions. Failure to do so can lead to legal actions by governing bodies. They should also comply with wage and hour laws relating to termination of employees. Prior knowledge of the litigation is vital. The knowledge of involvement of the other firm is vital as it can affect the profitability of the firm.
Mergers and acquisitions pose great scope for growth of companies through expansion and diversification. The company can mitigate the risks associated with it by prudent planning and compliance management. Costs of merging can be overwhelming but suitable measures can help reduce it. For instance, using a compliance management software like V-Comply can prove to be cost-effective as well as efficient.Add to favorites