Strategic and Commercial Aspects in a Merger Deal

  • Dec 17, 2019 AEDT
  • Team Kalkine
Strategic and Commercial Aspects in a Merger Deal

“While mergers are much like marriage and de-mergers are like divorce, the constructive efforts of both parties are highly desired to taste any fruitful outcome.”

Merging of two businesses sounds interesting, and in most cases, markets react to such announcements optimistically. However, there are many cases when merged entities have failed to deliver the expected value.

Investment bankers will try to get every deal completed because that’s one revenue stream of the investment banking business. Nonetheless, the stakeholders of any business have all the rights to decide on any prospective deal.

The role of competition commissions, judicial scrutiny, shareholder approval etc. is paramount, and the parties undertaking these roles should examine the nature of the transaction and its potential far-reaching impacts over the future.

Strategic Aspects of a Merger

Advanced Planning

Planning is a vital starting point in any activity. Likewise, it plays an even critical role in mergers. Any intention of a merger should be backed with a strong rationale and defined outcomes. And, these outcomes should be considered for both entities to generate an incremental value from both businesses.

Planning also includes steps such as reviewing the due diligence, enumerating potential risks, regulatory implications, sales & marketing, salaries, organisational culture, information systems, financial implication etc.

It also incorporates the planning for the path to success or the integration plan that is aimed to deliver the shareholder value. Corporations emphasise on practices, including integration process, business under a new entity, expected profitability, synergies, margins, brand value improvement, etc.

Speedy Governance

From announcement to completion of the deal, the work undertaken by the entities is just the start of a larger project. After the merger becomes effective, the management is tasked with a vital project that was initiated when the deal was announced.

And, the entities need to start acting on the processes that would deliver the expected synergies, combined strength, organisational benefits etc. Such transitions not only lead to additional costs and time but operational changes as well that might disrupt existing procedures.

The process of transition or integration remains a crucial part of the deal, and the time taken in this process impacts the overall expectations from the deal. Management needs to have a strategic roadmap that would deliver a speedy integration, and in turn, lead to an expected value of synergy in a time bound manner.

Delay in the integration process will not only cause delay to the expected value but lead to additional costs too. Hence, speedy and efficient governance is likely to deliver the expected value in a time bound manner.

Value Creation

Value creation is the foremost reason why the organisations initiated the merger in the first place. And, it is the principal priority for almost any business, be it small scale, large scale, medium scale, services, manufacturing etc.

Possibly due to the lack of strategic management, there would be many businesses that fail to deliver the expected value. Mergers are intended to improve the competitive position of the business through combination, unification, solidarity, and transparency.

Mostly, value is denoted by the liquidity, solvency and profitability and mergers are planned to improve these metrics, and in turn, the value of the share/stock in the market. These metrices address the major concerns, including the ability to pay short-term obligations, long-term obligations and generate profits.

Commercial Aspects of a Merger

Similar Products & Services

When both entities are engaged in the delivery of similar products and services, the commercial viability of the transaction increases. It helps both the companies to achieve greater flexibility and operational efficiency.

It also increases the chances of implementing best practices from both businesses, and it provides ample opportunities to learn with each other. Ultimately, companies with similar products and services could deliver the potential value much faster.

Potential Synergies

Any expected synergies from a merger depend upon the processes and activities that both entities are following. And, if the merger were to provide synergies, the extent of similarities in the activities and processes is likely to drive the potential synergies in the combined business.

Having a similar commercial business allows both the companies to deliver maximum results through synergies. Moreover, the expected synergies from a merger transaction are likely to depend on the extent of commercial similarities in both businesses.

Customer Value

Highly successful mergers often have similar products and services. Also, the combination of two businesses, and the synergies achieved through the combination could drive overall customer value.

A merged entity could achieve expected value through the combination of beliefs, expectations from daily business activities, etc. These are not limited by human capital, skills and talent which could be the distinguishing intangibles in shaping up a champion organisation.

API Sells Stake in Sigma

On 16 December 2019, the announcements by both companies – Sigma Healthcare Limited (ASX: SIG) and Australian Pharmaceutical Industries Limited (ASX: API) confirmed that API had sold around 137.26 million shares of SIG.

API stated that the commercial and strategic rationale of the transaction does not appear compelling anymore, which led to the sale of the interest in SIG. And, offloading stake in the company would allow API to emphasise on its core priorities to deliver shareholders via its core business.

Back in March this year, Sigma Healthcare came up with a bold conviction that merger offer was not in the best interests of the Sigma shareholders. Meanwhile, the company completed a strategic review, and it is working to deliver cost-savings and business optimisation.

On 16 December 2019, API last traded at $1.30.

On 16 December 2019, SIG last traded at $0.595.

State Street & Charles River

State Street Corporation is a diversified financial services company based out of the USA. Some of its major services include asset servicing, custody, middle-office, asset management services, investment management etc.

Last year, the company announced the acquisition of a front-office focused company – Charles River Development. The acquisition was intended to increase the value for customers, as it would allow State Street to offer all services under its roof to the large institutional investors for money management.

Alternatively, with Charles River acquisition, State Street could offer its client a suite that would be utilised for an end to end services, starting from trading activities to settlement, and all at one place.

With such a strategy in place, it could be expected that the customers are likely to select an offering that is capable of delivering all services are at place. And, this would allow the customers to cut costs on the same services from multiple service providers.

Therefore, State Street might be in a position to capture additional market share with all-in- one suite in place. However, the integration, realised synergies and implementation would play a critical role in delivering shareholder value.


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