A common trend is occurring in businesses today. Businesses are no longer able to thrive in the marketplace with just a few product offerings. They have begun diversifying their portfolios in order to stay competitive. Mergers and acquisitions are no longer the exception—they are now a crucial component in a business’s strategy.
You have probably considered combining some form of assets, capabilities, markets, and talent pools to create more value. To give you more direction, we’ve compiled three guiding principles to help with understanding how successful mergers and acquisitions work.
- The companies must be able to govern the collaboration
- There must be an even distribution of value created
Create More Value Together
The objective of a merger or an acquisition is to create more value joined than the sum of each company’s value individually. The combination of the two companies needs to produce synergy. If this was a math equation, it wouldn’t necessarily look like the typical 1+1=2. With a merger and acquisition, we want to see synergy in the form of 1+1=3 or more.
To understand this concept, we’re drilling down into the benefits of the merger or acquisition. Are there added cash profits, lower costs associated with learning, or sustainability benefits? If so, those are the types of analytical data you can analyze to see if this is a merger to pursue.
What factors can drive the creation of joint value? Analyze the fundamental strategies from each of the companies to see if combining resources can help yield an overall benefit to both.
Manage Collaboration Effectively
For a merger and acquisition to be successful, there needs to be unity in idea and management styles to ensure that both companies’ cultures are able to mesh well together. Excellent partnerships have occurred with companies with great cultural differences, while failed partnerships have occurred with companies that had many cultural similarities.
Conflicting interests and incompatible strategies can lead to an unharmonious relationship for each company. Some considerations to take into account reflect higher level decisions, including how much will be acquired, or how to share investments. Ensuring value from a merger and acquisition will depend on how the deal is managed initially. The most successful combinations occur when companies focus on collaboration in selective areas, and have a shared goal.
When mergers and acquisitions occur, it is important that while 1+1= 3 or more, the share of synergy is made should be divided up accordingly (ex. 1+1=1.4+1.6). The split in in shares does not matter, but each party should earn a fraction that is greater than the value they produced prior to the merger.
Determining how to split the profits is difficult—even as much as managing the collaboration effectively. Based on how each company is doing after the acquisition, value should be allocated appropriately. Divisions of gains over time is bound to change, and is quite common in mergers and acquisitions. Learning to share the value in proportion to success is a critical step for both companies.
Applying the Three Laws
The three laws can be applied to different companies in various industries. By applying the three laws, companies are able to have an effective merger or acquisition. As an example, the companies Daimler and Renault were dealing with similar issues in their strategies—they felt like organic growth had slowed down, and were looking to increase its global footprint and production levels. The two companies approached mergers and acquisitions in different ways, which led to different outcomes.
Daimler aimed at diversifying its portfolio with its acquisition of Chrysler in the US, and purchases of 1/3 stake of Mitsubishi in Japan and a minority stake of Hyundai Motors in Korea. Daimler hoped this complex business venture could help the company achieve its goal of expanding its global reach.
Renault, on the other hand, chose a different route. It focused on nurturing its relationship with Nissan, which was a top player in Japan, and it acquired 1/3 stake of the Japanese automaker.
While both seem like excellent strategies in a merger and acquisition, the outcomes that unraveled for each were radically different. Because Daimler acquired partners that were less powerful players than itself, it wasn’t able to successfully sync with its acquisitions. Renault was similar to Nissan in production volumes, which enabled easier collaboration, and an equal partnership that contrasted that of Daimler’s partnerships.
Daimler later divested Mitsubishi and Chrysler after heavy investments in both companies. By contrast, Renault was able to turn Nissan around, and integrate it successfully into its global strategy. Renault’s profitable partnership with Nissan still echoes to this day, and even Daimler has invested in the combination.
Understanding the three laws and applying them effectively will pave the path towards a fruitful partnership in today’s economy. For more information on a simpler way to combine infrastructures, read our merger and acquisition page, or request information.