M & A Needn T Be A Loser's Game

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M&A Needn’t be a Loser’s Game Mergers and acquisitions are a function of corporate finance which deals with the purchasing, selling, division and combination of different entities in order to in-organically grow a company. Mergers & acquisitions (M&A) occur when a company desires growth without the capability or ability to do so on its own. Many companies use this method of growth in order to improve their own financial performance which can be lacking due to increasing economies of scale, decreased revenue, decreased market share or even increased taxation. As common in marketplace as M&A is, not many firms have been successful in this venture, which is mainly due to the misunderstanding of three major concepts; the Pareto principle, customer centric purchasing and overestimation of returns. The article highlighted three different concepts that many companies overlook when going through the process of mergers and acquisitions. The first concept deals with the Pareto principle, or in most cases commonly known as the 80-20 rule. The Pareto principle states that roughly 80% of the effects come from 20% of the cases and in finance this translates to 80% of the profits come from only 20% of the their customers. In order to successfully complete an M&A the purchaser has to understand that “a small group of customers typically accounts for all of a company’s market capitalization, while another group reduces that value significantly (pg. 72).” If the purchaser main concern is to gain profit from the deal without fully analyzing the company and without any insight as to where the bulk of the revenue is generated from they can misinterpret the information and ultimately make the wrong choice and purchase a bad investment. Without understanding the economic value of these different segments of customers the purchaser will not understand that the company’s value is reflected almost entirely due to the aggregate value of their customers. This targeted customer value is important for a purchaser to be aware of but it can also be a pitfall if the company acquisition plan is entirely customer centric. Many “companies buy companies for many reasons, but the most common is to acquire customers (pg. 75).” Merely increasing the number of customers a company has visibility to will not guarantee that they will become more profitable. Focusing on the purchase of quantity of customers and not quality of customers leads to corporate ignorance and what is commonly seen on the market today, failed mergers and acquisitions. However if a company is able to increase their customers while understanding and locating the most profitable ones they can come out of the deal successfully. This is a concept that my current workplace employs when pursing new companies to acquire. Most of the companies we seek to acquire have a different customer base than what our company currently reaches. Purchasing these new companies not only increases our market share but entitles us to enter new industries we alone could not successfully undertake. However, though we are gaining additional customers substantial analysis is completed to guarantee there is no overlap or duplication of duties between our current sales and marketing company and the company we are currently in the works of purchasing. In addition a massive amount of work is done to ensure that the customer base we are undertaking is not only profitable but has the ability to grow. Therefore increasing customers is an important goal but it is not the only goal. Another important concept that is commonly misunderstood is the overestimation of returns. Many companies that have experienced a significant amount of loss for a considerable amount of time believe that if they purchase a rapidly growing company within the same industry they can leverage that into cost savings or increased revenue. This outlook however could not be more incorrect. Take for example the case of The Learning
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