Timing is essential when entering an M&A agreement

With a slight downturn occurring in most of the metal manufacturing, supply, and service sectors, some in the industry have reached out to their friendly competitors and others to discuss the possibility of forming strategic associations, partnerships, and even mergers.

The most practical perspective on strategic partnerships is that they become an association between two companies by which they agree to work together to achieve a strategic goal. This often is associated with long-term supplier/customer relationships. Having a common strategy is only one of many reasons to merge operations, however. Cost savings is another, and sharing management is another strong reason for doing a merger.

Two companies together are more valuable than two separate companies – at least, that’s the reasoning behind mergers and acquisitions (M&A).

Merging in downturns

The rationale behind M&A is particularly alluring to companies when times are tough.

Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

What is the distinction between a merger and an acquisition, though? Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. Mergers have different variations.

Benefits of M&A

Synergy is the magic force that allows for enhanced cost efficiencies of the combined businesses. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

• Staff reductions. As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing, and other departments. Job cuts typically include the former CEO, who leaves with a compensation package.
• Economies of scale. Yes, size matters. Whether it’s purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment because, when placing large-dollar orders, these companies have a greater ability to negotiate prices with their suppliers.
• New technology acquisition. To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
• Improved market reach and industry visibility. Companies buy other companies to reach new markets and grow revenues. A merger may expand two companies’ marketing and distribution, giving them new sales opportunities. A merger also improves a company’s standing in the investment community: Bigger firms often have an easier time raising capital than smaller ones.

With all of that being said, achieving synergy is easier said than done … it is not automatically gained once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two.

From the perspective of business structures, there are numerous kinds of mergers, with the type of merger being distinguished by the relationship between the two companies that are merging. A few types are:

1. Horizontal merger. Two companies that are in direct competition and share the same product lines and markets.
2. Vertical merger. A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.
3. Market-extension merger. Two companies that sell the same products in different markets.
4. Product-extension merger. Two companies selling different but related products in the same market.
5. Conglomeration. Two companies that have no common business areas.

Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp., 1 King St. W., Suite 714, Toronto, Ont. M5H 1A1, www.mercantilemergersacquisitions.com.