As we well know, all companies have their own specific strategic goals and go through their own lifecycles. But, it’s fair to say that the most common objectives across the board are business growth and creating shareholder value over time. In my experience many companies look at strategic options like partnerships, joint ventures, mergers or takeovers, to help them reach their shareholder objectives, more efficiently and effectively.
The typical scenario is that two organisations decide that there’s a lot of value from them coming together – as I like to say “One plus one is more than two”. The impetus can either be that one business has run into issues or constraints that are costly for them to overcome by themselves, or that might be holding them back. Or more typically they can see that they fit well with another firm and there could be a lot of benefits in going to market together. They may have different products which fit neatly together and can be sold to a similar customer group or they can simply increase their scale and relevance in the marketplace giving them a better platform to grow and expand further.
Whatever the driver, there are a few options when it comes to strategic moves that organisations can make to achieve growth and drive efficiencies.
Joint Venture and Strategic Partnerships
The overall premise of a Joint Venture (JV) is two companies deciding to go into business together where they combine their skills, expertise or product set in a new self-contained entity that they both own shares in. Both companies contribute assets, employees, resources etc. to try and achieve a better outcome for both, whether it be growth, some cost savings or better financial impact.
The beauty of a Joint Venture, is that either business is not immediately giving up ownership or control of their company. So, if a JV doesn’t work out, it’s a lot easier to unfold. I often like to think of a JV as a “testing the waters” before going down the path of a Merger which has the potential to become quite tricky when things don’t work out.
Another path that’s more informal than a JV is a Strategic Partnership. This is where two companies focus on a particular venture or project by combining their expertise and/or assets. This may be to achieve additional revenue or realise some efficiencies. I often suggest that businesses consider Strategic Partnerships as the first step in their journey working with another business. It is also a great way to find out if the two businesses have similar or complimentary cultures – crucial to a successful merger!
The most important thing that a business needs to consider when looking at a JV is to assess how much investment and resource they want to put into it as a way of scoping out the opportunity. It’s really important that this is decided upfront, as this can help the business think about the risk and the potential reward and give a framework in which to consider how much investment (time, money, resource) they’re going to put into the other combined entity.
A Merger is typically thought of as a friendly deal where two companies come together and become one company. Structurally, from a legal perspective there’s typically an acquirer and an acquired company, where one entity buys the shares in the other. However, both sets of shareholders continue to have management roles and influence on the direction of the company. The two organisations combine their skills and experience and work out where there might be some efficiencies and duplication of systems and roles, along with some cost savings of course. It’s important to note though, that if each entity has got very distinct capabilities that fit well together, then sometimes there is no reduction in employees and they might actually need to go on a hiring spree.
Bringing two companies together has a number of benefits from extra revenue – selling more to existing customers, going after new customers or selling different types of products – to efficiencies in operations. This can all have a positive impact on the revenue line.
There are other important elements that also need to be decided – What’s the new company going to be called? Will they have two separate brands or a completely new one? Where will the combined workforce be located?
There’s also quite often, what I call social aspects, that get in the way of mergers. Sometimes both company owners have an emotional bond to the company or the brand name and even though it might make a lot of sense to put these two groups together, it doesn’t end up happening because neither are willing to give up their brand name or both CEOs want to stay in their respective roles and can’t agree who should go into a different one. This is why I believe that one of the most important aspects when considering a merger is cultural fit. I’ve seen a lot of scenarios where the financial benefits are extremely compelling but it’s all fallen over due to a lack of alignment in purpose and values.
A critical element of a merger being successful is cultural fit and the most simple and best way to know if the two companies are aligned is for shareholders and management to spend time with each other. Get to know the other company – how they operate, what they see as important, what their values are. I always advise companies to do their due diligence and talk to a range of people within the organisation to make sure everything lines up.
The way to differentiate between a Merger and Acquisition is a merger is initiated by one party but both parties are very open to the idea and willing to explore it and do so in the spirit of coming together and working out what works best for both. An acquisition on the other hand involves one company (the acquirer) coming in and taking control and integrating the other (the target).
There are a number of reasons why a company would want to be acquired. They can be very well performing but their shareholders are open to being bought out because they’re interested in pursuing other opportunities. Other times, the target business is underperforming, and the shareholders ultimately agree to the acquisition because they feel that the company is not heading in the right direction.
Whatever the catalyst for the takeover for the acquiring company, it is absolutely critical that they do the right level of due diligence to make sure they know what they are buying.
For the acquirer, I always say “Do your due diligence” and understand the trade-off between the potential upside in value versus the risk you are taking. For the target I say “Know your Worth” by making sure you’ve got a strategic plan for the business and a view on its value – this puts you in a better position to negotiate.
About the Author
David Royal is passionate about drawing on his 25 years of international experience to advise businesses and help them achieve their strategic objectives. David is able to help clients articulate their strategic options and associated financial impacts to help them achieve growth and drive efficiencies.