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Merging vs. Operating Two Different Companies

I am part of a company which has made the strategic decision to acquire another company. There are two possible implementation strategies for this decision:

(A) Merge the acquired company into my company. The results of this strategy
will be one company containing the elements of both companies.

(1) What are the pros and cons of this implementation strategy?

(2) How will I know if the strategy is working?

(B) Operate the acquired company as a separate business entity. The results of
this strategy will be two separate companies under one senior management
"umbrella" (the senior management team that is responsible for running
both companies)

(1) What are the pros and cons of this implementation strategy?

(2) How will I know if the strategy is working?

Solution Preview

(A) Merge the acquired company into my company. The results of this strategy will be one company containing the elements of both companies.

Every acquisition is a risk, of course. The trick is to manage the risk, and a proven way for entrepreneurs to do so is to ally with an equity partner that brings extensive deal-making experience and contacts as well as access to capital. Even well-financed acquisition deals face long odds if they proceed with inadequate guidance. And a deal that turns bad can be much worse than no deal at all. So the first strategy is to be well informed and well guided by those who know the business and risks of mergers.

(1) What are the pros and cons of this implementation strategy?

Pros
- Potential to increase shareholder value - that of achieving cost and/or revenue benefits.
- Improve channels of delivery
- While improving sales and revenue, it can also provided a competitive advantage over the competition. For example, the proposed merger of mobile phone carriers VoiceStream and Cingular Wireless could improve service and add features, experts said, but the deal could also hurt competition in the telecommunications industry (Source: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2002/08/21/BU76999.DTL&type=business)

CONS

- Lack of experience about the risks and activities of mergers and acquisitions - choose to go the monetary role which ignores the importance of others experience and expertise.
- Lack of agreement about the best strategic implementation strategy - Other executives has learned the hard way that when the merging of two businesses doesn't go smoothly, talent soon quits and projects drag out.
- Possibility of destroying shareholder value - Several solid studies report that as many as 75% of all mergers actually destroy shareholder value instead of achieving cost and/or revenue benefits.
- Partner decides to micromanage - Like most entrepreneurs, the American Dental Partners founder would not have welcomed pressure to acquire just for the sake of growth. "You want to make sure you bring in a partner who's not going to micromanage," he says. Company builders who sense that a potential equity partner may push too hard for acquisitions just to spur growth will be smart to delete that firm from the shortlist. The critical point is this: the entrepreneur runs the acquisition show, and must be comfortable with all likely deals ((Source: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2002/08/21/BU76999.DTL&type=business)

(2) How will I know if the strategy is working?

Is it working? You initial reason and objectives for the merger are being actualized. The real indicator that the strategy is working would be this; has the merger had resulted in increasing shareholder value, that of achieving cost and/or revenue benefits for the firm. Has the company gained a competitive advantage? Have channels of delivery improved? If you can answer yes, then your strategy is working for now.

Are partners on the same page - working strategically together toward to the best of the company?

For example, studies by consultancy Bain & Co. show that the patterns followed by leaders of successful mergers look much different than those who fail. Thus these ...

Solution Summary

This solution discusses two potential strategies e.g. operate the acquired company as a separate business entity or merge the acquired company into your company, including the pros and cons for each strategy and how to measure if each strategy is working. 1933 words plus sources.

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