Business trends and new technologies develop so quickly that, combined with the expected growth from IT companies; there are times when simply keeping a software product up to date is insufficient to meet investment expectations.
The lack of focus in a merged company means each of the original entities will be pulling in opposite directions.
Growing a company organically or bringing new products to market is not always sufficient to maintain a leadership position or grow market share. This is particularly true of a listed entity. In the technology business size counts, and there is no doubt that if a merger puts a company in a position of leadership in the market, the benefits reaped by the combined company are far greater than the sum of the two parts.
This is true in terms of market share, in the ability to adequately finance research and development, recruit and retain staff, open up new markets and import fresh skills. In addition, the synergy created between the entities with regard to customer base, product offering and creative resources provides the ability to bring product to market quicker and adds sheer marketing clout. Without this there is no basis for a merger between two companies.
On the defensive
Sometimes a merger is even chosen as a defensive measure against global competition. It is also not a bad idea to merge in order to build a stronger defensible position in your own backyard.
The trend to merge and acquire is particularly evident in emerging countries and technologies, where smaller startup companies either merge, or are acquired by others, to form larger entities. It is also evident that markets dominated by a larger number of smaller operations are in a state of transition.
The Internet or cell service provider has been a typical example, where within a few years the "rats and mice" were eliminated and the market dominated by a few larger service providers. Today this consolidation trend is evident in the customer support industry.
When the process of consolidation starts, if you can`t be among the top five or 10 players holding the bulk of the market, you will lose out. To compete with the much larger research and development budgets and to fight for adequate marketing space, it would be time to consider a merger.
A matter of strategy
This may appear an obvious statement, but the fundamental decision concerns the strategic importance of the deal. Some companies acquire businesses only to add earnings to their bottom-line. While combined revenues are a vital component, they cannot be the only reason to do the deal and they often cloud judgment. The businesses together may have different focuses, which, when combined, would dilute your core focus. In the short term the new company`s books may look good, but in the long term the partnership can only be unhealthy.
There are many businesses in the industry in the post-merger euphoria stage, but I`d anticipate the dissension will begin when one of the merged entities has a fallout, which in turn has a quick knock-on effect on the rest of the business.
The lack of focus in a merged company means each of the original entities will be pulling in opposite directions; not exactly what a 1+1=3 merger is supposed to do.
Once the match between the two companies has been made, the next step is to get 100% buy-in to the vision from the merged entity`s management. If you don`t have them coming with you, the deal is not worth it.
Another seemingly obvious statement is the vital importance of doing adequate due diligence on the companies - legal, financial, technical, customer satisfaction and human resources.
The people factor
Mergers do take place where some of these aspects have been omitted, and most often it is in the HR area. This is foolish beyond anything, as the people are the business, and if the cultures and the people are incompatible you instantly lose the most valuable asset of the deal.
Spend some money and contract professionals to do such work. To retain the new staff after the acquisition, have them participate in a share incentive scheme using the same model as used with your existing staff. Always convince the acquired entity to have their staff participate in the rewards of their merger or acquisition, even if the staff did not form part of the shareholding in their company prior to the acquisition.
When you buy the company, you are not buying last year`s results. You are buying its prospects for future earnings.
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