Mergers and acquisitions can be seen as threats and opportunities. They are both. They can be a good way to grow both business and profits. They often contain more hopes than the above. The wrong acquisition or merger can weaken a company's operating opportunities for a long time. This is especially true in a situation where the sizes of the companies do not differ much from each other. In individual cases, buying or merging with much smaller companies does not have much impact on the success of the investment target. Too many small acquisitions too quickly can be a problem.
The biggest risks for buyers come from the fact that sellers know more about the weaknesses and strengths of their company. They are also better able to assess the value of the business they are selling. This applies to cases where the operating performance of the sold companies is not in a weak position. The risks for the buyer depend a lot on the competence of the top management, according to Fisher. Bad managers can destroy the investment target with one wrong acquisition. Every merger and acquisition is different. Fisher developed general guidelines for evaluating them.
There are three main sources of problems in mergers and acquisitions. The first is a fight for top management positions. This can cause internal tensions and inflamed relations, even though top management should be blowing out the coals. The second is a situation where top management dominates the business of an industry in which it has no experience. This can lead to a decrease in top management's efficiency. The third situation is the seller's advantage in pricing its business. The buyer may pay too high a price for the acquired company.
Mergers and acquisitions in which the buyer moves down the value chain rarely pose a high risk to the owners. This applies, for example, to a situation where a company that manufactures and sells a final product buys its subcontractors. This applies to situations where the buyer can improve its cost efficiency and quality by doing things itself. Usually, the buyer then knows in advance what he is getting. In addition, the three main sources of problems are usually conspicuous by their absence in these situations. These acquisitions rarely have any significance for the owners. The same principles can be applied to moving up the value chain as moving down. There is an exception to this when a company buys a business that competes with its customers. In this case, the end result is almost always unpleasant for Fisher.
When a company buys a company that is much smaller than itself, the risk to shareholders is small, as is the reward. There are a couple of exceptions to this. The first is the opportunity to develop a new and significant business for the buyer with the help of the acquired company. The second is to get top managers on the company's payroll through this. For Fisher, the best chances for a successful acquisition or merger arise between companies that operate in the same industry and know each other's business inside out, understanding the problems each other faces. The opposite situation, where companies do not know each other and whose business areas are different, is likely to produce a poor end result.
The most successful companies in M&A rarely do so. They do not actively seek opportunities and act when the timing is most favorable for all factors related to their own business. In addition, they focus on companies in industries that are closely related to their core business. Risks increase when a company is constantly looking for opportunities to grow through M&A. This is likely to lead to excessive diversification of business operations and expensive acquisitions. Operational risks increase when the CEO spends a significant amount of time on acquisitions or considers them to be one of his most important things.
Buying a not-so-attractive business may not be wise, even at a low price. The reason for the attractive price is likely that it has nothing to offer the buyer. Fisher considers attractive purchases to be those that are a perfect fit for the buyer. Their price may be high, but they will bring him the greatest benefits in the long run. Buying several weak companies can kill the management's ability to develop the business in the long run. This is usually justified by the idea of diversifying the business, which should strengthen the business being owned, but it has the opposite effect. Excessive diversification creates unnecessary strain on top management. It is difficult to find a single rule of thumb for the amount of diversification, but its speed provides significant clues to the investor as to its wisdom.
No comments:
Post a Comment