Okay, so we know that the McBrain & Company business model is dedicated mainly to fostering small business growth, but hey! Let’s face it, you should not remain small forever, and at some time in the future, you might need to take the next big business step. Quite frankly, organic growth just does not seem to cut it quick enough these days, particularly in a business climate like Nigeria’s where even modest profit declarations are gradually becoming hard to come by.
So, what better way to think of the next big step than through a merger, or better still, an acquisition? Though, this may be a business idea you might plan on effecting five to ten years down the line, nothing stops you from giving it serious consideration now. After all, if other companies have executed it successfully, why shouldn’t you?
So, here we go…We hope you learn from it.
Ever decided to take a stroll through the central business districts in any of Nigeria’s major cities? Besides the hustle, bustle, and exchange of goods and/or services and endless haggling, ever noticed something rather odd about any of these localities, particularly the brick and mortar establishments that usually line both sides of most of the streets? Well, we have. On more occasions than one can cares to count. And it is the fact that no one out there is offering a unique or totally novel business: banking and brokerage firms are mostly lined in concrete rows; and law firms are either across the street, or even across the hall, from one another. Even in less formal settings like Idumota or Ladipo, vehicle engine parts dealers form clusters everywhere. Businesses peddling online services are aplenty and quite frankly, sometimes it becomes mystifying to tell one product or service offering from another.
Of course, monopolies give terrible business advantages that do not benefit any free economy. However, these are cut throat financial times fraught with, crumpling turnovers, dwindling profits, and uncertain economic policies and upheavals. And competitors are stealing or wooing what little precious clientele, we can barely hold on to, with mouthwatering offers that we would find particularly ridiculous to even consider, let alone propose. In this cutthroat commercial environment we find ourselves, the time may have come for you to consider a not-so-novel, more aggressive business tool to ensure your enterprise stays ahead of the horde, particularly as new competition now seems to practically sprout by the day.
As earlier stated, the idea of mergers and acquisitions have been around since the initiation of business itself eons ago, but it seems businesses, especially the small companies, have been conned into foolishly believing that this a tool for only the biggies… Rubbish! Small as your business might currently be, you should seriously consider this route to business supremacy. Complicated as it seems on the surface, it could certainly make life, and of course business, much easier to bear if successfully executed, especially with professional help.
Thus, in this series, we will try our best to simplify, a complicated but far-reaching and interesting topic, with the sole objective of enlightening your business path. First, let us break it down, shall we?
What is a Business Merger?
A business merger is a deal to unite two or more existing companies into one new, bigger, company. There are several types of mergers and also several reasons why companies undergo mergers. Most mergers unite two existing companies into one newly named company. Mergers are commonly done to expand a company’s reach into new segments, gain market share or further exert market dominance. All of these are done to please shareholders and create value.
In 2015 alone, the global worth of mergers was announced to be a whooping $2 trillion. The largest mergers in history have totaled over $100 billion each. Mergers continue to be a popular way to grow revenue for companies of varying sizes. They are usually done to gain market share, expand to new territories, and unite common products.
Types of Mergers
There are three common types of company mergers:
• Vertical Merger
Horizontal mergers involve companies that offer the same products or services to the same kinds of customers. If you own a supermarket, for example, and you combine with another supermarket in your neighborhood, that is a horizontal merger. Horizontal mergers offer “economies of scale,” meaning that average costs decline as the company does greater volume of business and it increases revenue by offering an additional range of products to existing customers. Such mergers also increase market share. And they offer opportunities for cost savings by eliminating redundancies; where the original companies each needed their own purchasing department, advertising budget, benefits program and so on, the merged firm only requires one. This lets the new business exercise greater control over pricing.
A vertical merger combines two companies that are involved in producing the same goods or services but at different stages of production. Say you own a manufacturing company that makes items out of plastic, merging with a company that processes raw plastic would be a vertical merger. It improves business efficiency by synchronizing production and supply between the two companies and ensuring availability of the items as needed. When companies combine in a vertical merger, competitors could suddenly face difficulty in obtaining important supplies, thereby increasing barriers to entry for new businesses and potentially reducing the profits of existing competitors.
Concentric mergers, also called congeneric mergers, occur between companies within an industry that serve the same customers but do not offer the same products or services. If you owned a catering company, for example, and you merged with a business that rents tables, chairs, event tents and party equipment, that would be a concentric merger. Both companies appeal to customers who have events to plan, but not in the same way. Concentric mergers diversify the combined company’s offerings and allow the firm to benefit from areas of shared expertise. These mergers can also drive new business, because the firm becomes more of a “one-stop shop” offering more of the services that both companies’ customers are typically looking for.
Six Compelling Reasons to Consider a Corporate Merger
Creating a larger company gives the combined entity more strength in the marketplace. Volume purchasing is one advantage. The larger entity purchases more of a given item than each company did by itself, so manufacturers give the combined company volume discounts.
Merging allows a company to acquire customers quickly rather than taking more time and spending money to get established in a new market. The strategic decision to expand across a region or even into another country is one reason mergers and acquisitions take place. Bank mergers are often motivated by geographic expansion strategies.
Retirement of Owner
Many mergers successfully take place because the owner wants to retire and reap the rewards of all of his years of hard work in building the company by selling it to another, larger company. He may also elect to sell only a portion of his shares and keep the rest if he believes the company he is merging with will further build the value of his investment in the ensuing years.
Through all stages of the manufacturing process, a chain of transactions happens in which several companies play roles in creating the finished product and moving it through the distribution system. Along the way, each company earns a profit. A company may decide it will be more efficient and profitable to control the steps in the process itself. An oil refining company may decide to develop the capacity to drill for oil rather than purchase the oil from a supplier. One way to quickly develop this capacity is to merge with, or better still, acquire a company that already has drilling rights, production equipment and a transportation infrastructure to deliver the oil to refineries.
Just like individuals, companies have different relative strengths. When they merge, each can take advantage of the other’s core competency. One company may have achieved excellent brand recognition in the marketplace but have products nearing the end of their life cycles with limited opportunity for sales growth. The other might be a newer company with an exciting and innovative product line ready to be introduced, but with limited marketing or distribution channels in place. Combined, they can quickly build the second company’s sales by taking advantage of the first company’s marketing strengths.
Pull Together a Fragmented Industry
Some industries are characterized as being fragmented, meaning there are a number of smaller companies all vying for market leadership. Individually, they may not have the brand strength or financial resources to achieve a position of dominance. A strategy of merging two or three of these smaller companies can create a more profitable combined entity because duplicated staff functions can be eliminated and production capacity can be shared.
To be continued…
About the Author
Whenever he is up nights, Brain Essien faffs around the internet gathering materials for detective novels he is not sure when he’ll ever publish. He likes to play investment and brand strategist in the mornings. and website architect/builder in the afternoons. On the weekends he likes to throw on a few apparels and gadgets and go bounce people out of their own parties if they become a handful. Besides that, he loves reading detective novels, building muscle, daredevil racing, video games, shadow chess and cooking.