BusinessMerger vs de-merger: what’s better for your business?

Merger vs de-merger: what’s better for your business?

M&A deals totalled $2.6tn in 2017 and are predicted to reach a record high of $3.2tn this year. What are the risks and benefits of mergers and de-mergers?

With any relationship, there are highs and lows, advantages and pitfalls – within the corporate world these high points may be marked by the marriage of a merger, while the lows could be represented by the divorce of a de-merger.

M&A deals totalled $2.6tn in 2017 and are predicted to reach a record high of $3.2tn this year. It would seem that the market for mergers is stronger now than it has ever been. However, with one in three marriages ending in divorce, M&A deals seem to follow a similar pattern, with 70% failing to get off the ground at all. As a side-effect of the growing M&A marketplace, it would seem that the de-merger market is growing just as rapidly, with deals totalling over $100m in 2014 and $250m in 2015.

It is with this in mind that we delve into the risks and benefits on both sides of the coin, and put all the facts together to help you decipher what’s best for your business.

What’s the difference between a merger and a de-merger?

Before we dive into risks versus advantages of each scenario, we first need to clarify the difference between a merger and a de-merger. A merger is when two companies combine their assets and join together to form one company, rather than remaining as separately owned entities. In turn, a de-merger is a form of corporate restructuring where a business is split up or broken down into several individual companies, often with much more specific or niche offerings. These companies can then either operate as a separate entity to the parent company or be sold off and merged into a third company.

But why would you want to merge or de-merge?

Most commonly mergers are entered into to help a company fill a current gap in their products, people or resources, or to try and enter a new market in which they don’t currently operate.

De-mergers may have an inherent negative perception around them due to the nature of splitting up a company. A well-executed and thought-out de-merger however can help a company to raise capital for a project and reduce the risk to the larger company as a whole by selling off parts of the business that are no longer profitable. They can also be used to reorganise the business in order to refocus on the needs of a changing market, and so can be equally as positive and constructive as a merger to a company’s growth.

What is there to gain, what are the risks?

Now that we’ve defined mergers and de-mergers, and looked more into the motives of each move, we can focus on the advantages and risks of each. We’ll start with the positive side of mergers.

When two companies merge, they both take on the other company’s resources and disposable capital. As mentioned before, this can help them to fill any gaps in the services they offer, as well as to grow the client base to whom they can offer those services. It can also be a very effective way of adding talented staff to your team by retaining the best staff from the acquired business. A merger also offers the opportunity for a company to see how a new business model pans out in the real world, saving time and money in the process.

However, mergers are not without their pitfalls. When two companies merge there may be a culture clash, where the idea and opinions of one partner do not mesh with those of another, or where judgements on work ethic and management styles differ. In turn, this can create a difficult working environment for both parties, which can then permeate through all levels of the organisation, and ultimately affect the morale of the staff. Another issue that may arise is that the merger can become a distraction from the main business focus, creating marketplace confusion and leading to a loss of brand strength if too much is taken on too quickly.

Moving onto the pros and cons of a de-merger, we can again see some very valid arguments both for and against the idea. De-mergers offer the opportunity for the company to refocus their business and get rid of parts of the company that is no longer profitable or may no longer fit the company’s market focus. A de-merger also reduces the risk of liquidation, as by splitting the company into smaller segments allows them to be sold off if necessary, which in turn raises shareholder value. As the splitting and selling off part of the business will ultimately end with savings, it also follows that eventually the company will also see a higher rate of returns.

However, as with mergers, de-mergers also have disadvantages. There are inevitably going to be increased costs across the new businesses as they each set up as an independent company, each requiring staff, office space, and equipment, all in addition to the initial legal costs of separating the business in the first place. There is also the added negative impact of cutting jobs and the possibility of losing key team members, due to a lack of financial stability.

Final thoughts

In conclusion, when choosing whether to merge or de-merge it is about weighing up the options and your motivations to see what model will produce more strategic growth for your company. If you’re lacking in resources and staff, merging would open up the opportunity to gain market knowledge and capital from what could otherwise be a competitor within your market. This scaling up of your company means you’ll take up a larger space in the consumer market, making you a more formidable player, but at the cost of giving up singular control of the business. De-merging, on the other hand, will allow you to remain a singularly owned company, while also raising capital. However, you will become a smaller fish in a bigger pond.

Ultimately, the decision comes down to how much control you want to have over your company and at what scale you want your company to act in the marketplace.

Indy Coles, senior researcher for corporate finance at AJ Chambers.

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