Whenever a business is faced with the prospects of a merger, whether it is initiating the offer or another company is looking to merge with it, all of the pros and cons must be considered. While a potential merger might be a good strategic fit or allow a company to expand into new markets, the disruption in business or the difficulties of integration might outweigh whatever synergies are gained.
To be able to understand the pros and cons of a potential merger, the first thing that must be understood is the goals of each company. Will a merger accomplish what each company desires? Once the goals of both companies are understood, management can begin to list the pros and cons of the potential deal.
Expanding the business is often one of the driving forces behind mergers. For example, if a bank has operations in the Midwest but wants to expand into the seemingly lucrative Florida market, the easiest thing to do is to identify a small regional bank operating in Florida and propose a merger. This merger could provide an instant market presence and an instant customer base to the Midwestern bank. The Florida bank could benefit because it would get access to the large Midwestern bank’s efficient operating processes and cheaper capital.
Vertical integration is another potential benefit of mergers between suppliers and producers. By vertically integrating a company, the company can control both their upstream and their downstream. They don’t have to worry about sourcing raw materials or parts because they own the company that supplies them.
On the flip side of gaining market share and improved margins is the huge con of actually integrating the two companies. Due to the differences in systems, processes, and even corporate cultures, companies can have a difficult time getting the two companies to work together.
As a result of the difficulties in merging operations, systems, and employees, business disruption can occur. This can take the form of erratic inventory levels, late shipments, and missed deadlines. These disruptions can ultimately affect the company’s revenues, margins and profits.
All the Pros and Cons
Evaluating all the pros and cons of a potential merger are important for the success of the endeavor. Each situation will be unique but a systematic, thorough approach should be used whenever a company is considering an offer. By understanding the goals of each organization, management will have an easier time understanding whether they should complete the deal.
- Contemporary Strategic Analysis; Robert M. Grant; 2008 edition
Jonathan Roe enjoyed a liberal arts education at Miami University where he studied philosophy and business. He is currently working on an MBA at the Weatherhead School of Management in Cleveland, Ohio, while working full time as a corporate banker. Relying on his wide-ranging education, he writes for a variety of companies.