Mergers and acquisitions are two staples of the business world. There are many examples out there of companies that have merged with another and gone on to do amazing things – and cases where they haven’t. One type of merger is where you join with your biggest competitor but why would you do this?
Types of merger
First, let’s take a quick look at the most common types of merger, and the main reasons why companies decide to join forces.
- Synergy is the combination of business activities with the aim of increasing performance and decreasing costs. It is often involves merging with your biggest rival because both companies will have much overlap in factors like locations, personnel, and stock.
- Diversification is where the company wants to expand into a new area and merges with an established company to achieve this.
- Growth is where a company merges, or acquires another, to increase their market share – these are known as horizontal mergers.
- Increasing supply chain pricing power mergers is where a company buys or merges with a supplier to help cut down costs.
- Eliminate competition merger is where you buy a business to get the customers and products of that company.
Why merge with your biggest competitor?
It may seem strange to think about merging with your biggest competitor – after all, you are both fighting for the same customers, they are the ‘enemy’ in business terms. You don’t want them to succeed because that means you might be failing. So, why would you want to join forces with them?
It is important to remember those principles about mergers, particularly synergy. If you merge with your competitor, you improve your profit due to de-duplication. Each company has its office, different teams, stock, storage and so on. By merging with a competitor, you can remove the duplication and save money.
How it works
There are many ways to handle a merger, but one of the most common is for you to give 50% of your company’s stock for 50% of the other companies, to make a new company. It might sound like there’s no benefit, but with the principle of de-duplication, 50% of the new combined business is worth more than 100% of the old company.
That’s because cash flow improves, and costs go down. Two companies with £100,000 in revenue and £20,000 profits would combine, but their new turnover and profits would be more than £200,000 and £40,000 due to the de-duplication process. It is where the idea of 2+2 = 6 comes from in mergers.
When you enter the merger, it is also important to consider your exit strategy. Any business will sell for a multiple of its profit, so, if you plan to sell the business, the newly merged company with its increased profit will make more money for everyone. Consider this when you go into the merger so that you are well positioned for it, when the time comes. And don’t forget, your best customer is the person who buys your business from you so always be on the lookout for them.