Mergers And Acquisitions: An Introduction And Outlook

M&A or mergers and acquisitions have become a significant part of the corporate world. In M&A, two companies either combine to form a single business, or one buys the other and assumes its operations. With a thriving startup culture and the need to think fluidly to remain competitive, the thought of bringing in new assets or absorbing a competitor is appealing indeed. In this guide, readers can learn the most important considerations for companies going through a merger or acquisition. Also interesting: how to use a virtual dataroom for M&A transactions.


The tech world is a hotbed of M&A activity, but there have been some spectacular failures in the field. Most startup companies are created with the goal of being acquired by a larger firm that can increase the brand’s visibility and give access to important resources. However, not all parent companies are cut out for this sort of responsibility. There are numerous financial and legal factors to think of during M&A, but where digital companies are concerned, there are a few more things to look for.

Differences in Corporate Culture

Digital companies work differently than most businesspeople expect, and it’s driving cultural shifts that pose substantial challenges during the acquisition of companies. From flex arrangements and fluid leadership structures to the elimination of the status quo, employees of tech firms are typically used to environments and management styles that are different from those their new bosses offer. Replicating the successes of a company’s founders isn’t always easy, particularly if the acquirer doesn’t understand what the company’s products are about.

Improvement and Integration Plans

In a perfect world, tech M&A provides long-term benefits to the seller and the buyer. A company that invests in a tech startup must carefully consider how the new technology will be combined with its existing methods and how it can be improved. Few companies are sold at their full potential; many argue that reaching that potential is impossible because there’s so much room for growth and innovation. The acquirer must have a plan to justify the merger and make it pay long-term dividends.

A Realistic Analysis of the Costs and Benefits

The above factors, while important, point to a bigger issue: how will the purchasing company benefit from the new brand’s presence? Due diligence is a bit different here, as most startups haven’t reached profitability at the time of acquisition. The purchase itself is an important stop along the brand’s path to success. Valuations can be extremely high, but these numbers don’t tell the whole story in every case.

To bring a valuable startup into the corporate fold, the acquirer must determine how the new product will create more revenue. There has to be a plan for helping the asset reach its potential; simply buying a digital startup isn’t going to magically change things. The purchasing company must have a reason why the new entity fits their mission, and corporate leaders must be ready to nurture the new acquisition both now and in the long term. Integration after a merger is not an organic process; it takes organized, deliberate effort. If the parent company cannot come up with an integration strategy for the brand, they aren’t likely to benefit from the M&A.

Why Do So Many Mergers and Acquisitions Fail?

As said earlier, there have been many flops in the tech M&A arena, but this is not the only area where a parent company can fall victim to bad analysis and other mistakes. There’s no one reason why a merger or acquisition fails, as each situation is unique. However, certain common factors exist. As shown above, the failure to plan and think about the new brand’s benefits can do a significant amount of damage.

An entity’s success on its own does not provide enough proof that the company will enjoy continued success after a merger or acquisition. There are many examples of companies that overestimated the value added by a new asset. For instance, Teva Pharmaceuticals’ purchase of the generics division of Allergan resulted in overpayment claims from financial analysts and investors. The deal is thought to have failed before it was even finalized, for a variety of reasons. First, Teva was looking for a quick solution to the revenue shortfall caused by the expired patent on its costliest branded medicine. However, there were other factors in play, including increased scrutiny from the EU and US governments and growing public resentment over high drug prices.

It’s still possible for Teva to see long-term profits from the acquisition, although the deal was already in progress when outside factors appeared and made the deal seem less advantageous. Depending on who’s asked, it may be argued that Teva didn’t know what to expect when they got into the deal. As with other business activities, mergers and acquisitions are a highly calculated risk. The important thing is for corporate leaders to do these calculations beforehand, rather than jumping in before analyzing every potential outcome. By focusing on the people who make up the new company and the customers who will respond to the M&A, a parent company can get a fuller picture.

The Landscape for Mergers and Acquisitions: Now and In the Future

Just this past year, there have been a few important M&As that show how companies can benefit from acquiring or merging with another firm. One of the most important is Amazon’s purchase of Whole Foods, which indicates that the e-commerce behemoth is starting to realize that many people still want to make purchases in person. While Amazon’s plans are still a mystery, it’s pretty safe to say that the company would not have spent $15 billion on an unsure proposition.

Some firms have used mergers and acquisitions as a way to work around the conventional IPO (initial public offering) process, which is what Purple Mattress accomplished this past summer. The direct to consumer sector is huge, and Purple merged with a publicly-traded shell company to instantly gain public status and a $1.1 billion valuation.

Another recent M&A, the acquisition of startup MindMeld by Cisco, points out one big reason why mergers and acquisitions are so prevalent. MindMeld is an AI (artificial intelligence) startup company that created a bot that monitors conversations and provides useful information. While the idea itself seems promising, not many are willing to have their conversations monitored in such a manner. However, Cisco may be able to leverage the tool in its corporate communications division. MindMeld may not have found its market on its own, but under the Cisco umbrella, it has a sensible, straightforward purpose. The trend is likely to continue for the foreseeable future, particularly as startup companies continue to get the funding necessary to develop tech that’s appealing to potential acquirers looking for ways to stay relevant as the market evolves.

New Trends

While startup companies may expect to see continued interest from established firms, it’s likely to level out as companies realize that they’re not making the best long-term choices. There are many sectors to keep an eye on, but healthcare is one of the most important (and not only in areas where it overlaps with technology). However, a shifting legal landscape in the EU and the United States can lead to potential failures like the Teva/Allergan purchase. Retail is another interesting industry for mergers and acquisitions; will Whole Foods/Amazon fail, or will it be the end of retail as it’s currently known? The world is going through a major M&A upswing, and it is impossible to predict what the future may bring. It may be that this is just the current state of business, but competition advocates and antitrust groups likely aren’t too happy to see small businesses get absorbed by their larger counterparts.

Why So Many Companies are Turning to M&A

There are numerous potential benefits to the creation of new partnerships. Below are some of the most important advantages.

  • International growth: While many synergies can come from a merger or acquisition, one of the biggest is the opportunity for a company to enlarge its global presence. As companies look to enter growing markets, understanding other countries’ cultures can be a real challenge. One way to get around such an obstacle is to work with a company that’s already established in the region.
  • Diversification: A company that wants to stay around shouldn’t focus its efforts too heavily in any one area. When a company has a portfolio of brands, it may want to acquire a new brand to enter a different retail space. Such acquisitions grow a firm’s reach and allow it to benefit from the established company’s expertise.
  • Competition: While the benefit may be controversial, some companies engage in M&As to eliminate competition. Along with giving the firm an advantage, buying a competitor helps them gain a bigger market share almost instantly.
  • Development of products: Gaining new product insights is another important M&A benefit. Potential advantages are better manufacturing processes, new technology, cross-channel development, and cost reductions that come with sharing facilities and materials.

As with other business deals, there are potential negative consequences to a merger or acquisition. While M&A numbers declined slightly in 2016, that may have been due to a climate of financial and political uncertainty. This year hasn’t been much more stable, but companies are adjusting and returning to their previous high points. Even if the numbers don’t rebound fully, it’s evident that there’s still a lot of activity in the M&A market, and acting on those interests can be the right decision for a company to make.

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