Growing Your Company Through Mergers and Acquisitions
Companies have to grow to survive. Sometimes this growth is done organically, through word-of-mouth or advertising. As sales increase relative to the size of the market, the company gains a more significant share of the pie, then invests profits back into the business, allowing for further growth.
However, companies can also grow through mergers and acquisitions. Using these methods allows the company to combine the resources of multiple businesses, but lowers overhead costs due to the potential of shared resources. While they share many similarities, there are also fundamental differences between acquisitions and mergers.
A merger happens when two different companies partner together, typically under an umbrella corporation or business entity, while still maintaining independent identities. For example, if a cereal company and a cracker company decided to merge, there may still be a larger corporate identity they answer to, but the cereal company and the cracker company remain separate.
This allows for shared resources – e.g., office or manufacturing space – and synergy – e.g., discounts on the cereal when purchasing the crackers – but keeps the companies focused on their strengths. So the cereal company continues to produce their nutritious breakfast, and the cracker company still sells their crispy, crunchy snack.
Perhaps the main difference between mergers and acquisitions is that acquisitions result in the formation of one company. Sometimes this company is a brand new one, with a new name and a combined leadership suite. Other times, the purchased company may simply cease to exist, with its employees, inventory, and products folding into the other business.
As an example, an acquisition occurs when a cereal company acquires its competitor. Instead of Cereal Company A and Cereal Company B operating separately, both companies are now Cereal Company A. The sales team from Company B will now sell Company A products, and the manufacturing process for Company B converted for use for Company A products. By combining forces, lessons learned from both companies are shared and efficiencies improved upon, creating higher profit margins than either company had by themselves.
Mergers and acquisitions occur through a wide range of lending options:
- Mezzanine lending, where equity in the company is put up as collateral to the lending agency.
- Equity-based lending, typically used in acquisitions.
- Asset-based lending, the most common form of credit where a bank provides a loan with the company’s assets as collateral.
A company’s growth is dependent on its success and the success of its competitors. By utilizing mergers and acquisitions as a growth tactic, companies can improve efficiencies, share resources, and, sometimes, remove their competitor from the playing field altogether.