Small Business Adviser

There are three main types of mergers which are as follows

(1) Horizontal merger – where two business in the same activity or subsector link up. For example, the merging of two commercial banks.

(2) A vertical merger – where firms in the same industry but located at different points of the vertical activity chain link up. For example,a brewery merging with a company that operates several bars or liquor stores.

There are also two major subdivisions of vertical mergers namely

(i) Vertical forward or upwards integration-for example , a manufacturer taking over a distribution chain or outlet

(ii) Vertical backwards or downwards-a manufacturer merging with a supplier of raw materials

(3) Conglomerate/Diversification – where a company merges with another in an unrelated industry or activity so there is no carry over of specific capabilities. The case of diversification rests on spreading the risk by not having all your eggs in one basket and the advantages of managing firms as individual strategic business units(SBUs) within a portfolio.

Mergers - rationale

The merger may formalize well-established joint ventures or strategic alliances which may already have been in existence.

The potential partners would have done their homework to ensure that the merger allows them to:

Ø Eliminate unnecessary competition and to harmonize operations; thereby cutting costs focusing attention and energy, and combining to unlock value

Ø Combine resources and skills to the best effect

Ø Offset each other’s weaknesses and augment each other’s strength.

Ø Achieve economies of scale

There are also situations where two or more companies may merge in order to pre-empt a hostile takeover bid of one the parties involved. The hope is that the merged company will be more difficult to attack or that the rationale behind hostile takeover bid will no longer hold water.

However, it is pertinent to note mergers may fail if the following factors are ignored.

Guiding Principles

Having guiding principles that are linked to the merger’s strategic intent. They cannot be a merger just for the sake of it. They must be a strategic intent and guiding principles must be developed based on the strategic intent.

Feedback To Stakeholders

All stakeholders must be given information during the formulation, implementation and finalisation. This ensures that no stakeholder group will be surprised with the final product.

Set stretching targets

Stretching targets will help ensure that the integration team will push as far is possible for cost savings and revenue generation.

Clear Financial Benchmarks

There must be clear financial benchmarks built into the merger implementation plan. A very detailed plan which ignores the financial aspects is like having no plan at all.

Merging cultures

A merger may also involve the merging of two groups of employees whose working cultures will be at variance. Ignoring the cultural aspect will be fatal. It is critical that management set a clear vision that is understood by both sets of employees and there must be ‘buy in’ events which must be held as part of the implementation plan.

A merger must be thoroughly thought through to avoid pitfalls.