Diversification, Mergers and A cquisitions

12 Pages 2919 Words

, management deadlock ensues, revenues fall, the stock plummets, and inevitably a slew of shareholder lawsuits challenges the ill-matched combination. The hard part, of course, is being able to predict ahead of time which scenario will play out after an acquisition. The challenge in making an acquisition work, which determines whether the future will be heavenly or hellish– is managing the process correctly. This involves paying close attention to factors ranging from setting clear-sighted goals and knowing what to look for during due diligence to recognising the circumstances in which it makes sense to walk away. While there is no golden nostrum that suits all situations, experts explained that focusing on a few basic principles could greatly improve the chances of making a merger/acquisition succeed.

In selecting a target when embarking on an acquisition strategy, companies should consider whether the acquisition would let them extract value in three ways. First, the takeover should make it possible to lower costs through economies of scale and better cost management. Second, the acquisition should be able increase the combined companies market power by spreading the stronger brand name over a wider product or service base. And third, the takeover should help the acquiring company change the competitive game.

Once a target has been identified and a deal has been initiated, the critical phase of due diligence begins. A crucial objective at this stage is to spot potential deal-breakers, or issues that are so serious that the proposed acquisition would have to be abandoned. One reason why many acquisitions flop or fail to deliver on the promises envisioned by corporate architects is that “executives fall in love with the acquisition and want it to work at any cost.” That mindset is often a recipe for disaster. In fact, most people who manage takeovers for a living do a competent job of technical analysis. The reason why the ...