How do mergers and acquisitions create value?

There are many routes to growth, but when organic expansion is harder to come by, time is short, or markets more competitive, mergers and acquisitions are a powerful tool. By combining two businesses, the acquirer can gain access to new markets, products, and services, or the acquired company can realise the value of their business.

While the benefits for revenue, scale and service expansion are significant, mergers and acquisitions are also expensive, risky and time-consuming. Creating value requires a careful focus on company selection, planning and execution to make the most of your opportunity.

Hassan Behcet explores how mergers and acquisitions create company value, how to maximise your success and how the right support can make a difference to all the stakeholders involved.

What is the difference between a merger and an acquisition?

Mergers and acquisitions (M&A) are two commonly used strategies for expanding, restructuring, or consolidating your businesses. While the image conjures up images of multinational corporations and Wall Street raiders, M&A is a factor of every stage of the business market, as companies grow, combine and fold into each other based on the changes in the commercial environment.

• In a merger, two businesses combine to form a new company. The shareholders of both companies typically exchange their shares for shares in the new company.
• In an acquisition, one business buys another business, with the acquiring company typically paying cash or shares for the target company.

What are the advantages of mergers and acquisitions as a growth tactic?

For business owners looking to grow their business, M&A comes with particular risks – it’s capital intensive, complex and not guaranteed to reach the goals intended. However, it also has distinct strengths which are hard to match with other strategies.

• Speed: M&A can be a quick way to grow a business, the acquirer can immediately gain access to new markets, products, and services that may have been beyond their reach or scale.
• Predictable growth: When executed properly, acquirer due diligence can provide an in-depth understanding of the target company's financial performance, helping one side to forecast future revenue and profits.
• Combined potential: For businesses with complementary services, M&A can open the chance to add new products or services to the acquiring company's portfolio, helping them to reach new customers and grow market share.
• Extra resources and skills: In markets where talent comes at a premium, acquiring a target company can be the most practical way to gain a group of experienced employees with specialised skills, helping a business improve and expand its operations.

What makes a good target company for an acquisition or merger?

The success of an M&A project is largely dependent on finding the right target – the better the choice, the easier the task of merging and integrating the two organisations. Key attributes to consider include:

• Robust customer base: Your target company should have a secure and robust customer base that can ensure a reliable revenue stream for the acquiring entity post-acquisition to offset the costs of the M&A transaction.
• Solid financials: The prospective company should exhibit financial stability and soundness, with a demonstrated history of compliant financial practices, comprehensive financial data and a clear view of the assets, liabilities and processes underpinning the company’s performance.
• Integration feasibility: The level of ease in integrating the target company's systems and people into the acquirer's operations is a critical consideration post-deal. This can include the technical work of merging management data and systems, but also overlap in staff culture, working practices and reporting.
• Synergistic potential: In an ideal scenario, the combined operations should create more value than each company could independently, offering a strategic advantage for both parties. Look for services that can complement your own, new skills among teams and mindset considerations that can add to your existing approach.
• Unique market positioning: The target company should have a distinct, specialised position in the market that opens new avenues for the acquiring business.

How to maximise value in a merger or acquisition?

While there's no such thing as a guaranteed win in M&A, there are several strategies the acquiring company can use to increase the likelihood of adding value during a merger or acquisition:

• Ensure the right fit: The acquirer should make sure that the target company is a good fit for its own business, with an aligned ethos and culture that creates minimal friction for combining the two entities.
• Check your due diligence: Ensure you have as much as information on your side as possible from conducting thorough due diligence on the target company to identify any potential risks or problems as early as possible.
• Plan for integration: Make sure that the target company's technology, infrastructure and reporting structure is compatible with your own approach to harmonise the integration of your operations and ensure visibility over the two organisations.

It’s also essential to remember that finishing the deal is only half of the M&A project – once the company is acquired, then the work begins of successfully combining the businesses, which can bring its own major challenges.

The acquirer will need to understand the new business’s customers, technology and organisational structure and look for opportunities to build a more efficient combined business, all while retaining existing clients and avoiding disruptions in service.

Creating M&A value with Haines Watts

Haines Watts has wide experience helping businesses with all aspects of mergers and acquisitions, from tax advice and due diligence to financial planning and forecasting. Our technology and reporting experts can also help businesses to integrate their systems and operations after an acquisition in the most efficient way possible.

With the right support in your corner, Haines Watts can help you to maximise the value of your business while mitigating risk.

To find out more about our approach to M&A, get in touch with our team.