Mark Hauser Discusses Mergers and Acquisitions and Details 3 Factors That Can Derail an M&A Transaction


Mark Hauser
Mark Hauser, co-managing partner at Hauser Private Equity, highlights the most common factors that can determine the outcome and success rate of mergers and acquisitions.
Photo : Mark Hauser

Growing a successful company often begins with a distinctive product or service that meets an existing market need. Founders who blend creativity, dedication, and the ability to adapt to changing economic and market conditions are well-positioned to achieve their goals. Over time, these business leaders can become a respected force within their industries.

However, organic company growth isn't the only way to achieve industry and marketplace prominence. For generations, mergers and acquisitions (or M&As) have brought two businesses together in specific ways. Private equity principal Mark Hauser explains the basics of mergers and acquisitions. He details company motivations and discusses three ways an M&A transaction can be doomed before it closes.

Mergers and Acquisitions Defined

The phrase "mergers and acquisitions" (or M&As) describes the consolidation of two firms, or their primary assets, via financial transactions between the two entities. Private equity expert Mark Hauser explains that merger and acquisition activities can take several forms.

A Merger of Equals

First, Company A can merge with same-sized Company B, resulting in the creation of an entirely new business. Both companies' stocks are surrendered, and the new entity's stocks replace them. No cash is involved in the transaction. This action is frequently called a "merger of equals."

However, this type of merger is relatively rare. Two equal businesses aren't likely to enjoy mutual benefits from combining corporate resources. Both companies' CEOs aren't likely to voluntarily relinquish some authority in pursuit of these benefits.

A Friendly Acquisition

Alternatively, Company A could acquire (or buy) Company B or some of its major assets. Company A will completely absorb Company B, potentially resulting in Company B's liquidation. If Company B agrees to the acquisition, and its shareholders and Board of Directors approve, this is called a "friendly acquisition." This ideally leads to cordial cooperation between the two entities.

A Hostile Takeover

Let's say Company A signals its intent to acquire Company B. However, the latter firm does not want to be acquired. Therefore, Company A must obtain a controlling interest in Company B by buying a large stake in the firm. Completion of this transaction essentially forces Company B's acquisition. Private equity expert Mark Hauser states that this transaction is called a "hostile takeover."

5 Reasons Companies Engage in M&A Transactions

Businesses undertake mergers or acquisitions for varied reasons. Mark Hauser details five key motivations behind these transactions. A specific M&A transaction could be based on multiple company motives.

Drive Increased Business Growth

A merger or acquisition can serve as a growth strategy. Upon an M&A transaction's completion, a company can increase its product lines and customer base. The firm can also expand its human capital and intellectual property resources. Both tactics can provide a foundation for the company's expansion.

Remove Competitors from the Picture

In a crowded business landscape, each company is focused on outperforming its competitors. By definition, a merger or acquisition removes a competitor from the picture. Through this action, the M&A partner is well-positioned to take the other firm's market share and utilize its customer base.

Enable Operational Synergies

When two firms integrate business operations, each company benefits from the other's strong points. Therefore, operations costs decrease as performance efficiencies increase. However, it's easy to overvalue potential synergies, making objective evaluation necessary.

Reduce Supply Chain Obstacles

A successful merger or acquisition provides the merger partner or acquiring company with increased materials channels. This helps to decrease supply chain bottlenecks that can hold up product manufacturing and delay product delivery to distributors and/or customers.

Optimize Shareholders' Value

A publicly held firm seeks to deliver good value to its shareholders. A carefully planned merger or acquisition can enable improved company performance. This leads to higher shareholder value and may set the stage for longer-term investor retention.

How Shareholders Are Affected by M&A Transactions

In the days before a typical merger or acquisition, the acquiring firm's shareholders will see their share values temporarily decrease. Mark Hauser notes that the target firm's share values typically rise at the same time. These two actions reflect the acquiring firm's capital expenditure needed to purchase the target business.

After the merger or acquisition concludes, the stock price typically surpasses the value of each pre-takeover company. If economic conditions remain positive, the merged company's shareholders generally see positive long-term performance and corresponding dividends. That said, both companies' shareholders may see their voting power diluted because of more shares released in the merger transaction.

3 Factors That Can Derail an M&A Transaction  

Every major business transaction will ideally be preceded by both parties' careful planning and due diligence. That said, private equity principal Mark Hauser notes that three glaring missteps can shut down a well-intentioned merger or acquisition. He offers a resolution strategy for each error.

Lack of a Compelling Motive

When a CEO and other executives can't clearly define the reason for the merger or acquisition, other ambiguities may emerge during the transaction. These uncertainties can result in unnecessary delays and/or expenses.

To avoid this issue, Mark Hauser says company leaders should first engage in rigorous strategic planning. By revisiting the firm's goals and determining whether the M&A route is the right way to achieve them, the path forward will become clear.

Choosing the Wrong Acquisition Partner

Company leaders determined to complete an acquisition may go to considerable lengths to do so. Even if all signals indicate that the target firm is not the best fit, the acquirer's leaders forge on to a subpar conclusion.

To avoid this expensive mistake, the acquirer's CEO and senior executives should discontinue their efforts until the right acquisition target emerges.

Engaging in Due Diligence Shortcuts

Every substantial business transaction demands thorough due diligence. Before launching a merger or acquisition, a firm's operations, financial, and accounting leaders should analyze every aspect of the potential transaction.

Turning to shortcuts to speed the process along means key issues will be missed. This can potentially lead to troublesome problems once the M&A transaction is complete. Company leaders can avoid this mistake by refusing to compromise their high due diligence standards.

Making Company Operations the Top Priority

While engaged in merger or acquisition logistics, a company could take its focus off its own operations. This could result in missed business opportunities, slip-ups in production or distribution activities, or undiscovered financial errors.

To avoid these subpar outcomes, Hauser Private Equity co-founder Mark Hauser states that the company's CEO and senior executives should prioritize the firm's day-to-day operations. By maximizing the company's results, the firm will be a stronger M&A partner and a more respected force within its industry.

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