With the continuously evolving economy, business mergers and consolidations are becoming more common. There are instances where one company invests in another and does a takeover; or two companies merge to become one. Many entrepreneurs see these shifts as game-changers that may empower small companies and possibly shake up the competition in the market.
It’s also common to use the terms ‘mergers’ and ‘consolidations’ interchangeably but they have different definitions and business natures. In addition, both acquisition processes have different outcomes and goals. Often, there are also legalities involved in both processes, which makes it important to consult with law experts, such as the Miami business attorney, to ensure a smoother transition.
What Are Business Mergers?
A merger is a business agreement between two or more companies to combine into one entity. This results in one of the companies taking over the other companies involved, which increases its capabilities while retaining its original name. The surviving company will assume all of the assets while the other companies discontinue their operations.
Smaller companies often opt to merge with larger ones to increase their market traction and value. Mergers may also help large companies eliminate competition and grow their brand, thereby increasing their sales and revenues.
Different Merger Types
Depending on the needs of both parties, mergers come in different types:
- Vertical: This may happen between two or more companies producing different goods that comprise the same finished product.
- Horizontal: This may occur between two companies that belong in the same industry.
- Conglomerate: This may take place between two companies belonging to unrelated industries.
- Product Extension: This may happen between two companies with the same products and operations.
- Market Extension: This may occur between two companies with the same products but different markets.
What Are Consolidations?
Business consolidation is the combination of two or more companies to become a new single entity. It’s considered to be transformative since it creates a new corporate structure and adopts the best practices from the companies involved.
Consolidation usually happens between equal-sized companies with similar products, in the hopes of streamlining business processes and management. One notable advantage of consolidating two or more businesses is reducing its operational and overhead expenses.
Merger Vs Consolidation
Entrepreneurs often want to run their own business, free from any external influence or control. However, there are instances wherein businesses need to combine with larger companies or ones offering similar products.
Business mergers involve two or more companies combining through a takeover and the emergence of one surviving company. On the other hand, business consolidation happens when two or more companies combine to create a new single company. Although different in some aspects, both business processes have plenty of benefits.
Mergers are great for companies to increase their product’s market value and eliminate competition. Similarly, consolidations are advantageous for companies to streamline business processes and reduce operational expenses.
Company Size Matters
Small companies may turn to consolidation to improve their financial standing and buying power. This usually improves their production, especially when they have limited resources to fulfil client demands. On the other hand, merging with a dominant company may create better business deals and attract more buyers.
Larger businesses usually acquire smaller brands to create diversity for their existing line-up. Instead of competing with start-up brands, established companies may offer mergers to acquire their product line, which limits their competition in the market. It may also help them infiltrate new markets and get new clients.
Not Just Assets
Going into a merger or consolidation is often a gamble. Aside from acquiring assets, the surviving company or newly formed entity may also get all the liabilities.
As a result, these companies may have a shaky start or become overwhelmed and eventually break apart. That’s why before making any decision, it’s best to weigh all available options. Aside from that, always check the company’s assets in terms of receivables and inventory and perform due diligence to determine their full liabilities.
Due Diligence
The amount of the company’s liabilities can make or break a business deal. Merging with a company with great debt can compromise the acquiring companies. This is what makes due diligence a precautionary measure that needs to be done before entering any business deal. To better understand how it works, here are its three areas:
- Financial: Ideally done by accountants to assess the company’s earnings, operating expenses, and sales history. This report will focus on creating an understanding of the company’s current financial health and its trends.
- Commercial: This is undertaken to gauge the company as a whole. It will tackle the external and internal environment of the company, as well as its commercial appeal. It will also deal with the company’s operational capabilities and its risks.
- Legal: Usually done after commercial due diligence, this aims to uncover any tax issues or ongoing cases. It covers the company’s long-standing contracts and distribution agreements, as well as intellectual properties and patents.
The Takeaway
Overall, both mergers and consolidations have different business natures and processes, which may have their advantage and disadvantages. With this, it’s best to keep in mind that going into either a merger or consolidation may pose different risks. Aside from taking hold of the business’s assets, it’s best to take into account its liabilities and potential risks. That’s why it’s important to conduct due diligence to fully understand the target company’s legal, commercial, and financial matters.