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What are the biggest risks in a merger?

Growth, expansion opportunity, and marketplace are three of the biggest issues affecting any business. All three of these are constantly in flux. A business needs to adapt to keep up. This may mean changes in structure, management, technology or even mergers and acquisitions.

There are many reasons why one company will acquire another company. A few of those include eliminating competition, acquiring complementary assets, achieving economies of scale, or entering a new territory. Investment, however, always comes with risk.

Three common challenges following a merger

The acquiring company in a merger has a lot to gain, but few mergers are seamless. The business-themed website Investopedia lists three of the biggest challenges.

  • Integration problems – While the goal of a merger is to combine two successful entities into a single efficient body, mergers often do not work out this way. Sometimes the economies of scale are not as compatible as previously thought or new logistical challenges override the perceived benefits causing administrative costs to outweigh the benefits.
  • Overpayment – The bottom line affects all. If an acquisition is based on predicted value instead of market value there can be substantial losses if the market fails to develop. There is additional risk if this involves new or developing technology that may have added unexpected liability costs. If the acquisition losses money there can be serious consequences.
  • Company culture – Every business is a brand. In addition to a product or service, there are people and a way of doing things. There are three possible outcomes for company culture in a merger. One is that the acquiring company culture absorbs the new company. The second is that the two companies truly merge in a union, creating a new collaborative, successful culture. The third possible outcome is that the cultures are incompatible.

The framework for a successful acquisition

There are many well known examples of acquisitions and mergers throughout US history. Some have been very successful, such as Disney and Pixar, but others have damaged both companies, such as Sears and Kmart.

Any business transaction requires astute research, business savvy and a thoughtful plan to guide through the process. It is important to weigh pros and cons, and to exercise both excitement and caution. Ultimately, the success of any merger will depend on the company’s ability to plan ahead, to adapt to change, and to make strategic decisions that limit loss.

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