Merger and acquisition are phrases used in corporate strategy and management. They are used to describe deals in buying and selling of companies. Both phrases are quite similar although they have some distinguishing characteristics. Buyout (which is also known as acquisition) involves the buying of a firm (private or public) by another. The buying company takes over the operations of the target company and establishes it as its own. In merger, two independent companies or firms make agreements to come together and operate as one company rather than operating separately. Mostly, the merging firms are of the same production potential. After merging, stocks are surrendered and new ones are issued for operation (Reed, Lajoux, and Nesvold, 2007).
A company can consider a merger or an acquisition when it feels that there is a need of improving its financial performance and for diversification. After merging or after purchasing a small company, it can enjoy economies of scale and other benefits that come along with large-scale production. The process of merging or acquisition is simple. In acquisition, firms search for small companies which they deem productive if merged with their firms. Negotiations follow and after making all the payments, the target company ceases to exist and acquires new management. In merges, firms look for similar companies which may be willing to merge. Agreements are reached and they cease operating separately after forming one big firm.
Many steps are followed in mergers but can be summarized into four. The first step in a successful merger is price definition. Price refers to the benefits that accrue to the merging company. The next step is the establishment of the negotiation process which should not take more than six months. If an agreement is reached, the merging companies precede with a discussion of some of the obstacles that might affect their production. Some of these obstacles are the name of the organization and the people who should be given the topmost positions such as a chief executive officer or the chair. Last but not least, the companies should consider the issue of cultural integration (Reed, Lajoux, and Nesvold, 2007).
Many mergers have been found to fail due to their failure to recognize cultural integration. People from different organizations come with different views and beliefs to the new organization not realizing the damage it can bring to the organization. To curb this, mergers should address cultural issues at an early stage before it becomes a challenge to the organization
A Wheel of Opportunity and Fit Chart (WOFC) is a method of creating a strategic plan. In this method, questions are asked about the strength and weaknesses of a particular company, the available opportunities for acquisition, and how these opportunities line with the company’s priorities. WOFC is used to help managers understand the acquisition opportunities available to the company and the process of acquiring them (Reed, Lajoux, and Nesvold, 2007).
Before a company makes a decision to purchase a business enterprise, thorough strategic planning has to be carried out. This is because the process of acquisition is usually financially complex and has to be undertaken with proper planning. Strategic planning is the process of establishing an organization’s strategy and making use of the available scarce resources (such as people and capital) required to chase this strategy.
In strategic planning a company decides what to do, for whom, and how to beat the competition. This process involves the definition of the vision and mission statements, methodologies to be used to pursue the mission and visions, situation analysis such as SWOT analysis (strengths, weaknesses, opportunities, and threat), PEST analysis (Political, Economic, Social and Technological), and setting goals, targets and objectives (Kaufman, 2003).
A mission statement gives the purpose of an organization; it explains why an organization exists. To live up to it, an organization has to incorporate its goals and objectives into the mission statement. Strategies have to be established on how to achieve these goals and objectives and in turn, the mission is accomplished. On the other hand, a vision statement gives an outline of the future of the organization. It shows what the organization wants to be in years to come and provides decision-making criteria (Kaufman, 2003). It is a longer version of the mission statement which explains the significance of achieving the mission. When a mission is achieved, it paves a way for achieving the vision.
After defining the mission, vision, values, goals, and objectives of an organization, the next step is to start strategy planning. A strategy is a cause of action used to achieve the purpose of the organization or the vision. Various levels have to be considered in strategic planning. The business unit is responsible for production; the corporate level manages the business unit and products whereas the departmental level is where the operations of the organization take places such as marketing, human resource, and finance operations (Kaufman 2003). The substantial components in strategy planning are; the business environment, suppliers, customers, competitors, and alliances.
The board of directors plays a vital role in the strategic planning process. They provide information related to the history of the organization including the previous operations, challenges, and obstacles they have encountered along the way. They also help in defining the vision and mission statements.
Kaufman, R. A. (2003). Strategic planning for success: aligning people, performance, and payoffs. New York: John Wiley and Sons.
Reed, S. F., Lajoux, A. R. & Nesvold, P. H. (2007). The art of M & A: a merger, acquisition, buyout guide. New York: McGraw-Hill Professional.