Beyond The Handshake: An Overview Of Merger Integration Strategies

The success of an M&A transaction ultimately depends on the merger integration strategies that the participants adopt. Dealmakers typically have different rationales for entering into an acquisition or merger.

They may enter into collaborations for economies of scale, to capture new geographical markets, or to cater to underserved customer demographics. Economizing and expanding the scope of their operations, cross-selling in other verticals, and integrating supply or sales chains are also benefits.

Even as dealmakers discuss the terms and conditions of the transaction, they should start planning the integration process. Having a detailed step-by-step protocol is crucial to achieve synergies and ensure that both parties derive value from the deal.

Including the legacy company’s stakeholders in the merger integration strategies will result in having everyone on the same page. The integration will progress seamlessly with the minimum of hurdles. The merged organization will quickly start earning revenues and profits from the deal.

Considering how crucial the integration is, parties in the M&A deal should also work out the optimum approach. Here are some of the best options:

• Maintaining complete or partial autonomy
• Complete absorption
• Pooling resources from both organizations
• Holding merger
• Reverse Merger

The optimum approach depends on several factors, such as the business landscape where the companies operate and individual business models. The unique company cultures, risk factors, core drivers that bring value, and the management’s priorities also influence integration.

Ready for more information about the best merger integration strategies merging companies can adopt? Let’s dive in.

Maintaining Autonomy

Dealmakers can negotiate and enter into a structured merger where both participants maintain their individual operations and autonomy. While they may combine some of their resources to derive value, they achieve a balance between centralized control and autonomy.

Accordingly, such mergers can have complete or partial autonomy. The boards of both companies, management, and other stakeholders can determine the autonomy they want to maintain. And work out managing the business organization’s scope of operations and functions.

Their merger agreement clearly specifies the areas where the parties consolidate and the precise type and amount of resources they’ll combine. Its clauses outline the degree of flexibility in operations and the duties and responsibilities the management will hold.

With the direction of M&A advisors on both sides of the table, the parties discuss different terms. For example, powers awarded to the members, management divisions, voting rights for stakeholders, and ex officio positions. They also outline member appointment protocols and nominations.

A subsidiary merger is one of the merger integration strategies where the target company continues to operate independently. Post-merger, the seller acquires the brand name, financial support, and any other pre-determined resources the buyer will transfer when acquiring.

Typically, the acquirer assumes ownership but does not take on any liabilities. Integration is limited, and the owner may include some of the financial reporting for taxation purposes.

Alternatively, the acquirer may purchase a company for tax benefits, IPs, assets, and revenues to function as a subsidiary. Or as an instrument to hedge against potential losses. However, the target maintains a legal identity.

Since the acquired company maintains a separate identity, the buyer can opt to divest or sell it as is. Or liquidate the company and sell its assets for a profit.

Complete Absorption

Complete absorption is one of the most common merger integration strategies, where the companies combine to form an entirely new entity. In this case, the acquirer entirely assimilates the target into its existing structure, taking control of its assets and liabilities.

The targeted company ceases to exist post-merger with a formal legal dissolution of its activities, but without being liquidated. Typically, the acquiring company issues securities, which act as an increase in its share capital.

Shareholders, owners, and employees of the purchased company receive these securities by way of compensation for their contribution. Such merger integration strategies are irreversible, and extensive negotiations and planning go into them.

The management teams from both companies work out the optimum approach for reorganization to achieve synergies. Mergers like these usually occur between firms or brands that have existing and profitable capital relationships.

When drafting the merger agreement, the target’s stakeholders and management vote on and approve the transaction. The proposal and agreement documents must be filed with and get approval from the FTC and the Department of Justice.

The type of industry where the merger takes place will determine the relevant authorizing agency.

The merged company can take advantage of the collaboration post-merger to gain a competitive edge. A strategic alliance can result in accelerated growth and synergies that can help in long-term success and profitability.

On the downside, dealmakers may have to raise significant amounts of funding for the partnership to survive.

Complete absorption merger integration strategies must factor in the typical challenges M&As face. Drastic corporate culture, mission, and vision differences can affect workforce synergies.

Dealmakers can institute open communication lines and extensive planning to ensure that integration progresses smoothly.

Pooling Resources or Symbiosis

When companies engage in symbiotic integration, they maintain their organizational autonomy but also have high interdependence. Such alliances focus on combining resources, such as Intellectual Property (IP), funding, and talent.

The key objective behind such merger integration strategies is to develop innovative practices for conducting business. Or for delivering better customer service or ideating new product lines that can give both collaborators a distinctive advantage.

Like most mergers, dealmakers hope to achieve economies of scale and synergies. This is why they may consider horizontal mergers, pure conglomerates, mixed conglomerates, or congeneric mergers. And then, you also have acqui-hires, market extensions, or product extensions.

These mergers are similar to autonomous mergers, where the companies maintain their individual branding. But share know-how for a bigger market share. Participants can avail of several additional benefits, such as improved product quality and a bigger product portfolio.

They can ensure the more efficient use of available resources complete with lean working practices for cost efficiency. Eliminating duplicated processes by pooling operations can lead to lower pricing and quick market expansion.

Achieving standardization across the board prompts companies to maintain top-notch customer service. Manufacturing components for end products or streamlining delivery to end users, as in the case of vertical mergers, is also a benefit.

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Holding Merger

A holding merger is an M&A transaction where the holding company acquires ownership of the target. If the holding company has a running business, it is considered a mixed holding company. Acquirers may own 100% of the target or purchase just adequate stock and membership interests.

This ownership awards them controlling rights and they maintain a management team to oversee the target’s operations. The acquirer can appoint or remove board directors or managers and make key decisions for its operations. Any policy-making is the management’s responsibility.

A holding company takes full control of the target’s finances, including purchasing or selling equity shares to raise funding. Alternatively, it can divert funding to the target. Any revenues the target earns can be diverted to the holding company.

These revenues can be in the form of distributions, rents, dividends, interest payments, and any fees from back-office functions. Larger corporations and brands may have several smaller companies under a common umbrella if they operate within a particular vertical.

Such brands can adopt merger integration strategies where they own multiple business units selling a particular product category. For instance, a skincare range that includes a complete range of adult hair care products and a skincare range.

Next, the holding company may purchase a company that produces baby skincare products and include it in its branding. The holding brand may offer perks like intellectual property, research labs for developing new products, and skill sets.

Targets could also take advantage of equipment and workplace premises and offices. Other than funding, they can benefit from innovations the holding company undertakes and get protection from liabilities.

Reverse Mergers and SPACs

A Special Purpose Acquisition Company (SPAC) has a single primary objective–to acquire private companies and take them public. These firms don’t have any products or operations but launch an IPO as a publicly traded company.

SPACs raise money from regular investors and then use the funds to buy smaller companies. As a result of the acquisition, the private company can go public without incurring the expenses associated with an IPO.

Alternatively, private companies may purchase a public company by way of a reverse merger deal. They target a company that is essentially a shell company that does not have any assets or products and is non-operational.

Going through a reverse merger or partnering with a SPAC allows dealmakers to navigate regulatory and compliance hurdles seamlessly. Restructuring and reworking their market strategy can shorten the time needed to go through the IPO process.

Before adopting these merger integration strategies, dealmakers must undergo meticulous due diligence. They would want to research the SPAC’s liabilities and research potential pitfalls. Other areas to explore are value for the shareholders and their motivations for investing in the SPAC.

Navigating Integration is Challenging

Identifying the objectives of the M&A transaction is the first step in devising a detailed game plan for the integration process. Without this planning, the risk of the M&A failing reaches an incredible 70% to 90% rate.

To avoid this possibility, dealmakers must start off by instituting open lines of communication for all tiers of the organization. A special team overseeing the integration is always advisable since they can delegate communication to specific people.

Answering questions and delivering updates on the progress of the negotiations is crucial for keeping the workforce engaged and involved. Open communication also eliminates any uncertainties that can arise about job security and salary structures.

Aligning the company culture, mission, and vision is another aspect of successful integration that dealmakers must work on. This factor can be particularly significant when the seller’s company has a complete management change. Or dissolves to become a part of the acquirer’s organization.

Integration can be challenging in tech or digital product companies that are IP-driven. Coordinating two distinct teams with unique workflows and functioning needs a well-thought-out strategy. More so, in the case of acquihires, where the acquirer purchases a company for its talent and skillsets.

Achieving optimum synergy requires the management to make tough decisions and carefully monitor the integration’s progress. At the same time, they should infuse agility and be prepared to pivot and change strategies.

Merger integration strategies in symbiotic collaborations also need extensive restructuring. Both participants may also have to work out the legal ramifications of their resource sharing. This factor is particularly relevant in the tech vertical, which involves intangible assets and IP.

The Takeaway!

The type of merger determines how integration will progress after the deal closes. The optimum plan depends on the degree of integration between the participating companies. For instance, if the target will maintain autonomy post-merger, the collaboration will be distinct from a complete absorption deal.

Then again, organizing the integration will involve a whole different set of dynamics in a symbiotic partnership. Than if the acquirer is a holding company primarily concerned with the target generating a profit.

Then again, integration strategies are immaterial in the case of a reverse merger or SPAC deal. Here, the objective is solely to take the company public and does not involve any kind of integration.

An M&A transaction involves several different aspects, and devising optimum merger integration strategies is a crucial step. With the advice of expert M&A advisors and other professionals, dealmakers must work out the best protocols. That’s how they can ensure long-term scalability and success.

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