ENT-650: The Merger Exit Strategy

One of the most common exit strategies used among companies is a merger. Although this term is commonly paired with acquisitions, the two strategies are different. A merger involves the total absorption of a target firm by the acquirer. As a result, one firm ceases to exist and only the new firm remains (Bail, 2019). In essence a new company is formed by two companies. Post-merger, two firms once separately owned become a single entity and are thus jointly owned. A simple way to view the correlation is X+Y=Z. During the process of merger, the stocks of these companies are surrendered, and the new company’s stocks are issued. Often times companies with similar sizes will merge. Although the process tends to be friendlier than most other exit strategies, it is imperative that the two companies agree. To ensure there is no confusion there is a process that must first take place (Bail, 2019).

The first step in the merger process is Preliminary Valuation which focuses on the business assessment of the target company. This assessment involves the most recent financials of the target company as well as analysis of the company’s products, capital requirements, brand value, organizational structure, etc. The second step is the proposal phase in which a proposal for the business transaction is given. This is typically done by an issuance of a non-binding offer document. After the proposed offer is accepted company proceeds with planning for the exit. This plan includes selecting the right time to exit and considering all the options such as a full sale or partial sale. Once these steps have been completed the company engages in the final step of creating a marketing plan to help attain the highest selling price (Bail, 2019). The successful completion of these steps led to the 2017 merger between Amazon and Whole Foods. Although these two companies are not small in size, Amazon’s knowledge and expertise in online shopping paired with Whole Foods status as major food retailer made for a great pairing (Pettinger, T., 2019). Although this merger example presented obvious pros, there are always cons to take into consideration with a merger as well.

Mergers can help struggling companies, such as Whole Foods, to benefit from new management and provide access to better resources. The additional profit provided by merger allows for more research and development to take place which ultimately helps strengthen a company. Contrastingly, the increased market share that results from a merger can lead to higher process for consumers and power monopoly. Furthermore, a larger firm in general may struggle with important functioning tasks such as coordination and communication (Pettinger & Black, 2019).  

A merger could be the exit strategy of choice for varying reasons. It is likely chosen because a company knew they were highly valued by potential buyers with an immediate need for their product or services. This reality should not prevent a company from carefully evaluating the situation. Factors such as how much the competition will be reduced by, how contestable the market would be, and the simple objectives of the merger should be reviewed. This consideration will be helpful in evaluating the success of the merger down the road.

Observing how the merger has moved the combined firm toward achieving its strategic goals and objectives is a way to measure success post-merger. There are two areas that can affect the post- merger success – processes and human factors. The merger processes include; growth, lack of planning, strategic, integration, cultural issues, change management and communication. Humans aka employees (people included) can contribute factors such as : uncertainty, feelings, the merger syndrome, and stress. There are several merger processes which affect the human factors or people involved and in time these problems could affect the level of success achieved in a merger (Harrison & Farrell, 2016) .

Regardless of why a merger is choices or the desired end goal a company needs to understand the process. Both parties involved should consider the advantages and disadvantages in order to appreciate and properly conduct the arrangement.

References:

Bail, M. (2019, August 28). Mergers. Retrieved September 19, 2020, from https://efinancemanagement.com/mergers-and-acquisitions/mergers

Pettinger, T., E., & E. (2019, December 03). Benefits of Mergers. Retrieved September 19, 2020, from https://www.economicshelp.org/microessays/competition/benefits-mergers/

Pettinger, T., Black, V., & Armstrong, L. (2019, November 30). Pros and Cons of Mergers. Retrieved September 19, 2020, from https://www.economicshelp.org/blog/5009/economics/pros-and-cons-of-mergers/

Harrison, S., & Farrell, P. (2016, November 24). Measuring Post-Merger Success: Integration Processes And Human Factors. Retrieved September 19, 2020, from https://imaa-institute.org/measuring-post-merger-success-integration-processes-and-human-factors/