Mergers and acquisitions are often mentioned in the same breath, but the merger of two UK companies works in a very different way from a takeover.
If your small business wants to join forces with another to create a new company, this presents its own unique set of challenges.
Merging two companies as equal partners is a delicate process to manage – indeed, true mergers are relatively uncommon, as more often one company tends to be the junior partner.
Even more than an acquisition, a merger needs to be mutually beneficial, with the goals and demands of both companies given equal weight.
But if you can get the balance right, a merger may have the advantage over an acquisition by preserving the best qualities of both companies, without one superseding the other.
The merger process step-by-step
Every small business merger is different, but most follow a similar process.
This process involves a number of separate tasks, mostly driven by the senior (larger) business in the merger, but involving both.
Here are the basic steps of a merger (the order may sometimes vary):
- Select a target company and agree to begin merger negotiations
- Appoint qualified accountants and a legal team
- Conduct due diligence on the other company
- Finalise a valuation of the smaller company
- Arrange any necessary finance for the deal
- Agree a merger in principle (subject to contract)
- Finalise the deal
- Communicate the changes to staff
- Create an integration plan for combining the two businesses
- Announce the deal to the public
Before the merger ask yourself…
Why are you doing this?
Make sure you have clear reasons for wanting to merge, and your goals for this merger especially.
This inevitably means in-depth discussions with the owner(s) of the other company, as your vision should be fully aligned by the time you agree to the deal.
Define your goals and success factors clearly, with the help of a diverse group from across both companies.
Maybe you want to scale your business, grow your market share, or eliminate a competitor. Or maybe the business you’re merging with has certain systems or distribution channels that you want to benefit from.
Whatever your objectives, keep them front and centre of your merger strategy. This clarity of vision is important as you steer your combined teams through the changes to come.
Is your business ready?
It’s vital to make sure your business has the financial health required to merge with another.
Appoint accountants to conduct a thorough internal audit, so you can determine whether your business has the liquidity and robustness it needs to carry out a deal.
This should also reveal how much finance (if any) you need to raise to complete the deal – corporate finance accountants can help here.
Last but most importantly, both you and the merging company should conduct due diligence on each other to test the strategic fit of the merger and prevent unpleasant surprises.
Due diligence in a merger
As you approach your chosen partner in the merger, you need to make absolutely certain that this company is the right one to merge with you.
This requires a rigorous examination of the company's accounts, activities and processes, an undertaking known as due diligence.
Areas covered by due diligence should include:
- Company accounts
- Sales figures
- Intellectual property (patents etc)
- Strategic fit (i.e. how well will the two companies blend and complement each other?)
- Material contracts and commitments (e.g. is the target company legally obliged to anything that might cause you problems later on?)
- Legal proceedings (are there any pending, or in progress?)
- Employee and HR issues (what are the employee commitments? Are there any potential redundancies? etc)
- Tax (are there any investigations past or pending?)
- Regulatory issues
- Environmental policies
- Any property owned by the company
The above is only a partial list. Not all will apply to all mergers, but some mergers may include issues not covered here.
The smaller (i.e. selling) partner in the merger should compile a document (a disclosure schedule) that covers the relevant subjects thoroughly and honestly, while identifying any potential problems to be addressed.
The two partners in the merger should agree beforehand on the scope of the disclosure, so that it does not place too large a burden on the selling company.
Due diligence is time consuming and can be costly, but never skimp on it.
Discovering unpleasant truths about your target company is best done before they are a part of your own. To adapt a popular saying: merge in haste, repent at leisure.
The effect of a merger on shareholders
A merger can have a major effect on the share prices of both companies involved in a merger.
Broadly speaking, shares in the smaller company (the one being acquired) rise in value, while shares in the larger partner tend to experience a dip.
This dip should only be short-term, but shareholders will still need to be prepared for it with clear communication.
Post-merger, it is common for the new company’s share price to rise above the level of either of the parent companies (other economic conditions notwithstanding).
Another thing to bear in mind is that shareholders of both parent companies will now have less overall influence (as they own a smaller proportion of the new company).
This dilution of voting power may be felt most of all by shareholders in the smaller parent company. Again, shareholders should be informed of this well in advance.
During the merger you should:
Keep open channels of communication
You’ll be merging not just processes and operations of your two companies, but the cultures too.
Therefore communication is paramount. Keep it clear and open – in fact, err on the side of overdoing it.
Staff can become uneasy even at the rumour of a merger, and rumours spread fast.
Give the maximum reassurances you can, and push the benefits constantly – alongside any practical information you need your people to take on board.
The working group established at the start of the process should lead the transformation, and keep all relevant parties in the loop.
Good communication can make everyone feel like part of the great adventure.
No merger goes completely smoothly, nor to plan. The key is to move quickly and learn as you go, adapting your approach as needed.
Nevertheless it’s still important to set milestones and targets across the new company, with incentives for employees to assist integration, while holding managers to account.
Pay attention to detail
It could be the small, everyday details that will determine how successful your merger is.
Do your best to ensure that your staff are shielded from the upheaval, so they can continue with their duties as seamlessly as possible.
Keep them happy by attending to the little things (e.g. can they still book holiday?) and you’re less likely to get discontent in the ranks.
The biggest challenge of a merger is often not the deal itself, but what comes in the weeks, months and even years that follow.
You want to ensure that the whole is greater than the sum of its parts, and that means working out in detail how the two pieces will fit together – and hold together.
Here are some basic guidelines for successful post-merger integration.
- Keep staff informed
News of a merger can cause anxiety and uncertainty, particularly to the staff of the junior partner. Clear communication can minimise this and help to retain staff. For key employees, you may want to provide additional incentives.
- Have a consultation system in place
Employees should have a system in place whereby they can ask questions and provide feedback. If you employ 50 or more people, then if more than 10 per cent of them request such a system, then you must provide one by law.
- Identify cultural differences as part of the due diligence
Lay the groundwork for integration long before the deal is signed. Make yourself aware of any differences between how the companies operate, and think about how you will meet this challenge.
- Look for problems
Don’t just hope for the best – actively seek problems out. Be a pessimist and look for what could go wrong. For example, could there be personality clashes between senior people doing similar jobs? Anticipate such issues and prevent them as far as possible.
- Recognise the natural leaders and use them
Not all the leaders in your company are in official positions of power. Just as important are the co-workers whom people respect and look up to. Such people can be very valuable in maintaining morale and communication in a merger – so use them.
- Don’t move too fast
Give the merger plenty of time to settle in. Prioritise the most urgent changes, and leave the less critical ones until the first phase is complete and employees are used to their new ways of working. Communicate all changes in plenty of time, emphasising the positives and the role they play in your future success.
Be prepared for what may happen afterwards
Protect your business if things go wrong
The unfortunate reality is that some mergers fail. If this happens, it’s most likely to occur mid-integration, during the critical transition period.
Do all you can to make this a success, but don’t stake everything on it – ensure that both you and the other company have a contingency plan.
The contract between you should have a clause that deals with failure, from how failure is defined to what should happen in those circumstances.
Each company should have its own solicitor so that you can agree the terms of that clause.
The best way to minimise the chances of such failure – and maximise the benefits of a successful merger – is to take the necessary legal and accounting advice at every stage of the process.
With a combination of business vision and technical insight, you can make your new company greater than the sum of its parts.
Now find out about raising funds for corporate transactions.
If you found this article helpful, you might also want to take a look at our article on how to buy out a business partner, too.