M&A deals: opportunities and risks

New record levels of M&A deals are recorded, as is the volume of deals worldwide. The fact that mergers and acquisitions are currently so popular can be explained by a variety of factors.

M&A: Mergers and Acquisitions as growth drivers

The reasons for M&A transactions are manifold. The money holdings of corporations worldwide are high, and it is easy to obtain outside capital.

In addition, rapid growth can often only be achieved through external company purchases and takeovers (acquisitions) or mergers. Furthermore, the desire to buy instead of being bought leads to real buying frenzy among many managers.

Managers in a shopping frenzy - more than just shopping addiction

In addition to the simple goal of company growth, there are many other reasons that motivate managers to buy a company. In general, a distinction can be made between two types of investors - the strategic investor and the financial investor.

1. Strategic Investors

Behind the overriding goals of the strategic investor (such as growth, diversification, technologies and cost leadership) are motives such as the acquisition of a new product line.

The goal can also be to buy up a competitor and consolidate the market. And access to new technologies or patents or even the circumvention of customs duties can also be reasons for a company acquisition.

As a rule, the goal is to integrate the acquired company or part of the company into the existing company and thus to make it last for a long time.

The buyer's side hopes for great synergy effects from this, which can be exploited. These can be realized through consolidations and mergers.

2. Financial Investors

A financially driven investor usually has other goals.

His aim is to maximize EBITDA in order to subsequently sell the company at a profit.

The holding period of the acquired company is therefore short, which means that full integration into the existing company is not recommended.

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Mergers & Acquisitions - different interests of the parties

Buyers and sellers also usually pursue different intentions.

Many company owners have laboriously built up their company and thus have a very personal and individual view of their company and the upcoming sales process.

Understandably, the buyers of the company often have a completely different perspective because they have a completely different starting situation - as the example of the financial investors shows.

When the M&A deal is hanging by a thread

The objectives of mergers and acquisitions on the buyer and seller side could not be more different - this does not make such transactions easy.

The price conflict is one of the biggest difficulties of a deal whose hurdle has to be overcome: The seller's primary goal is to maximize profits, whereas the buyer aims at a reduction of the purchase price.

Transition Service Agreements (TSA) define the rules for the transition phase and set out in the contract. However, these TSAs also represent a conflict that should not be neglected.

  • The seller aims for a clear definition of TSA with little liability and a short time frame.
    If the company owner has decided to sell, the sales process should normally be completed quickly.
  • The buyer on the other hand looks forward to a smooth Day1, which is to be achieved with the help of the TSA.

Such conflicts of interest between company sellers and buyers can endanger the successful completion of an M&A process and cause promising transactions to fail. These conflicts occur in all phases and are commonplace in practice.

How to prevent the failure of an M&A deal

The way to successfully conclude an M&A transaction is therefore often arduous and associated with many obstacles. But how do you circumvent potential deal breakers and prevent failure?

IT Due Dilligence: Prevent the hangover after the (buying) frenzy!

In addition to defining the goals (such as EBITDA maximization or cost leadership), a detailed risk assessment should also be carried out in advance.

From an IT perspective, the risks of an M&A deal include various difficulties in integrating different IT system landscapes.

Different release statuses, unresolved liability issues, expired licenses or outdated hardware can jeopardize the calculated and hoped-for synergies and lead to serious problems.

Therefore a comprehensive and carefully conducted IT due diligence is necessary. This ensures that the risks and opportunities of the M&A deal are known at an early stage and can be controlled in a targeted manner.

On track for a successful M&A deal

One of the tasks of a consulting company such as GAMBIT consists - in addition to the execution of an IT Due Diligence or other consulting services - in the mediation between the two parties involved.

This often includes the translation of perspectives, problems or risks and, above all, the finding of compromises.

Especially the finding of a compromise can help to make the M&A deals possible so that in the end, both buyers and sellers of companies can achieve their goals and the transaction can take place.

Once the hurdles of finding a compromise have been overcome and the transaction is completed, the technical carve-out can take place at the seller's site and the post-merger integration at the buyer's site.

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Meinolf Schäfer, Senior Director Sales & Marketing

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