April 05, 2014

Identifying Potential Mergers

Have you ever wondered how companies know when they should merge with other companies to increase the value of both? There is a delicate balance that has to be found here, and professionals in the industry know how to decide when two companies need to merge and when they would be better off on their own. A mistake in either way can be a disaster, so a lot of research always has to be done first. If you read the John Ferraro E&Y portfolio, you will see that he has a lot of experience in this market, but there are some things that anyone can know, even without experience, that may help when looking at potential mergers. If you are curious, just ask yourself some of these questions first. 

1. Can the services of the new company be created internally?

If you are the owner of a company, you may be tempted to merge with another one because you want the services or products that they offer. For example, perhaps your company builds smartphones and you want to add a fingerprint scanner to them, so you are thinking about merging with a company that makes scanners so that both technologies can be combined. This might be a good idea, but you have to first figure out if you could just create a division within your company to do the same thing. Depending on your needs, you may only need a division and not an entire company. 

2. How much are both companies worth on their own?

You also have to look at the net values. Are you both similarly successful, or is one ahead of the other? What is that going to do for the working relationship? If a small company merges with a large one, the workers and owners may feel that they are being overwhelmed by the larger company, and they could resent it. Try to get a feel for where both sides stand before moving forward. 

3. Is the second company making a disruptive technology?

You may need to consider disruptive technologies. Are they making something that is drawing people away from your products? For example, if you make chemical cleaners, are they making different cleaners that do the same job but cost far less money? You may want to merge with them so that you can get into this new market with them, rather than letting them take all of your business away. 

4. Will the market support such a large corporation? 

The market is only so big, and there are only so many consumers. If you come together, are you suddenly going to find that you cannot make enough sales to support the size that your corporation has become? After you merge, you do not want to have to drastically reduce your workforce to save money because your sales projections just do not fit the market. 

5. How important is direct experience? 

Finally, how important is the experience that the other company has in their specific area? Is this something that your company could develop, or do you both really need each other? If experience is crucial to the process on both ends, both companies could probably have a lot to gain by merging since they bring their own unique skills and experiences to the table.

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