The Challenge for Corporate income in mergers and acquisitions

When looking for ways to increase business income and profitability, a solution may be to consider a merger or acquisition.

  A merger involves the mutual decision of two companies to combine and become one   entity, with the goal of producing a company that is worth more than the sum of its parts. A takeover, or acquisition, usually involves the purchase of a smaller company by a much larger one. This combination of “unequals” can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, in the face of resistance from the smaller company’s management.

Mergers and acquisitions are often seen as ways of gaining market share, reducing competition, increasing income and diversifying into new markets. But while mergers and acquisitions are different in principle, they are not very different in practice, as the problems that ensue in combining two organisations are essentially the same.

Joining together two organisations into one is a complex process, which needs to be carefully considered before any action is taken. Whether achieved by a merger or acquisition, the conjoined organisation is rarely the sum of two parts but usually something less; how much less is determined by a number of different factors.

A study by McKinsey concluded that companies often focus too intently on integration and cutting costs following mergers, so much that they neglect day-to-day business, prompting nervous customers to flee and causing revenues, and profits to suffer.

According to KPMG and Wharton studies, 83% of mergers and acquisitions failed to produce any benefits – and over half actually ended up reducing the value instead of increasing it. Businesses undertake mergers and acquisitions for a number of reasons, but all embark upon the process in the expectation of the benefits that they seek will be achieved. So why do so many fail?

In a merger, there will always be one dominant partner, so that for all intents and purposes, mergers and acquisitions have the same result, in that they always end up with one chief executive , one head of finance and one head of corporate income.

The head of corporate income has responsibly of implementing the merger of two separate business development organisations and systems, while maintaining the required level of income for the business. What should the executive do in such circumstances, to ensure that they can maximize the sustainable profitable income potential of the merger or acquisition for the long term?

First they need to undertake a full appraisal of the business objectives of the merger or acquisition, and have a full understanding of their authority and responsibilities in the new organization.

Mergers and acquisitions can provide many new income opportunities for the combined organisation.  First there is the income potential of the combined sales of the two original businesses. Then there is the sum of the two customer bases, and perhaps the opportunity of an immediate access to new markets and new products or technologies. The combination of the two businesses may also result in a bigger market share and reduced competition.

While there may be many positive potential outcomes from a merger or acquisition, there may also be some negative consequences which need to be considered. If the two businesses are competitors then it is likely that some rationalisation of the product range will be necessary to eliminate competing products. Product rationalisation may alienate and lose some customers through loss of product and identity. Not all customers are willing to accept an alternative product to that which had been their original choice.

As each constituent business will have its own sales organisation and business practices, managers will have to decide whether each organisation will remain autonomous or need to be merged into a single entity. The ability or inability to merge sales organisation successfully will have a major impact on income generation. The ability to manage change successfully will be of major importance. There will be necessary changes to business practices on both sides, but inevitably, the junior partner will have more changes to procedures which may conflict with that business’s corporate culture. This in turn may produce potential disaffection of staff that were formally competitors, who may then leave taking their market and customer knowledge with them.

Generating income is fundamental to the existence of every business, Therefore the success or otherwise of a merger or acquisition is heavily dependent on the ability to integrate the income producing operations of the constituent organisations. What should the executive, charged with the responsibility of integrating and managing these separate operations, do to effect the desired result?

1. Be clear on the objectives of the business model for the new combined organisation in terms of intended synergies and financial results, together with a clear plan for its execution.

2. Be mindful that different organisations have different business cultures and practices, which takes time to change. Whether perceived as positive or negative, sudden and significant change may demoralise staff, cause resentment and can lead to distraction and confusion. By retaining the moral and commitment of employees, the level of customer service may be maintained and the impact of reorganisation on both employees and customers, minimised.

3. Initiate and maintain constant communication.  Regular and effective communication helps maintain morale and commitment and helps prevent damaging rumour which can be destabilising.

4.  As people drive results, it is critical that all sales and sales support staff  are involved in developing and executing the transition and integration plan. Ensure that customers are also kept aware of changes, to maintain their confidence.

5. Ask questions and seeking feedback, whether to yourself, direct reports, peers, management, customers, suppliers, or business partners. This will undoubtedly lead to important revisions to the plan and will result in an improved transition to integration.

The effective execution of a merger or acquisition depends on the people from both organisations to implement the process. Therefore motivating and managing effectively all the people involved in getting and maintain business and income is essential if the required levels of income and the other corporate objectives are to be achieved.

© N.C.Watkis, Contract Marketing Service 24 May 2012
Contract Marketing Service, (Profit Development Specialists)

May 29, 2012  Tags: ,   Posted in: business development, Business Marketing, business performance improvement, business performance indicators, business performance management, business performance measurement, marketing management, marketing performance measurement, performance management, Uncategorized

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