Effective mergers and acquisitions strategies should be developed based on the overall development strategies of companies. Therefore, this article will consider common turnaround strategies for companies undergoing such transactions.
Mergers and acquisitions as a way of financial recovery of companies
In the modern world, business entities are increasingly faced with the problem of survival in the context of globalization. One of the options to overcome it is integration processes. The external growth strategy is currently one of the main ways for companies to develop. Mergers and acquisitions (M&A) can be described as a complex socio-economic and political process that affects the interests of all levels of the national economy.
The economic essence of M&A deals is the integration processes that are aimed at achieving competitive strategic advantages within the framework of change management. Therefore, they are characterized by high dynamics and are carried out through the mechanisms of reorganization, restructuring, and establishing corporate control.
As for mergers, the idea of these transactions as a way of financial recovery of crisis enterprises and increasing their value is as follows: a merger with financially sound companies.
A simple merger is understood as the acquisition by one company of shares of another company in such an amount in which the buyer of shares does not receive full control over the other company but acquires the necessary degree of influence on the management of the company and is interested in maximizing the profit of the subject of the purchase. The merging firms remain legally independent.
On the other hand, if a financially healthy firm invests any significant real funds in acquiring shares of a crisis firm, even if at a lower price, then in order not to lose them when the crisis firm goes bankrupt, it can invest additional funds in it. For a company in a financial crisis, this leads to a loss of control and the possibility of dismissal of management.
Common turnaround M&A strategies
The difference between mergers and acquisitions is that the acquiring company acquires a controlling stake in another company. If a stake exceeding 75% of ordinary shares is received, the acquired company loses its legal independence and becomes a division of the acquiring company. On the other hand, if a package of less than 75% of ordinary shares is acquired, the acquired company may not lose its legal independence but become a subsidiary (branch) of the absorbing company.
There are the following turnaround strategies for companies involved in M&A processes:
- interested in improving its condition and future profits, a crisis enterprise can offer critical suppliers and customers (clients) its blocks of shares that are not in circulation. It offers to buy these shares at a price below the market price on account of a delay in payments for deliveries;
- the same, but in exchange for restructuring or writing off the debts of the enterprise in question on non-overdue bank loans;
- sale of blocks of shares at an even lower price to third-party financially healthy companies (not counterparties and not creditors).
In all of the above cases, the takeover is a powerful way of financial recovery, assuming that the owners of the crisis enterprise sacrifice their property and managers – their positions. So, an impeccably thought out and adequately prepared merger or acquisition transaction can become the foundation for the construction and growth of a new company that uses assets rationally and efficiently, which leads to high financial or social results and the development of the company’s image.