NINE MILE

Management Consulting

Mergers
February 2013

& Acquisitions

www.ninemileco.com
Copyright 2013. All Rights Reserved. The Nine Mile Management Consulting Group

Nine Mile Management Consulting Group Mergers & Acquisitions Mergers Mergers are a form of co-operation. When companies decide to merge, they desire to form a coalition, just as you would find in a political infrastructure, when two or more political parties join forces in order to achieve a common goal. The most common purpose for a merger or corporate coalition is to achieve a payoff. A payoff is that which is proposed by the coalition once it has been formed, and usually centers on moral precepts of trust and loyalty. The payoff is more or less the perceived benefit that two or more companies believe will be achieved once the coalition has been organized. Game Theory Game theory tells us that coalitions should not be formed unless there is a fair payoff between all members. A group should systematically form under conditions that are fair, which is to say, no member in the group should receive a lesser payoff than any other member. Key in this equation is also the idea of incentive, which is to say, what motivates each member to join, and how will each member achieve an equal share of what they want? One of the main incentives for joining a coalition is the potential payoff, which must be greater than the payoff a company would achieve acting alone. Clearly, a company would prefer not to cooperate if it was discovered a coalition yielded less profit; but then again the incentive of obtaining a bigger payoff is why companies merge in the first place. Game theory also teaches us that cooperation is effective if and only if the coalition has non-defective members. In other words: no member in the coalition can develop an incentive to split from the group, where the coalition is found to be advantageous for the members to cooperate, and, in theory, a greater payoff for the members is achieved. Diversification Of course, mergers are common for companies looking to expand their customer base and generate more revenue, and are often advantageous when companies expand their marketing and distribution scope. There are many reasons why companies merge. In the first place, mergers are organized in order to improve the quality of a companys performance due to collaboration, or what is often called diversification. Diversification, if we consider a company merger,

February, 2013

involves two or more companies who have the opportunity to collaborate for mutual benefit. In other words, companies who would otherwise have acted alone, now join together in order to increase their chances for success by diversifying their business. Strategic Incentives According to game theory, participants who decide to collaborate will do so in anticipation that their efforts will be rewarded, which is to say: if they decide to form an organized partnership with another company, it is because the framework of the partnership is mutually beneficial and will not be detrimental to the advantages that a company could achieve independently. As an example, look at a computer hardware company and a computer software company; a merger between these companies would be mutually beneficial since there is an overlap in their market base. They are both serving the data and technology industry. Software companies produce the intellectual resource that computer hardware companies need in order for their products to operate. Therefore, it provides a strategic incentive for these companies to collaborate. In the first place, they can increase their size through manpower. This means that they can tackle more projects and perform more tasks that have to do with enterprise and growth; sales can be reinforced, and more ideas to do with improvement and innovation can be achieved. An article by professor Gerald Faulhaber suggests that the relative size of a company implies its effect on future growth, which is to say, when a company merges with another company in essence it has already benefited from introducing new products and a diversified work force along with a greater marketing presence that on its own it would have failed to accomplish (Computer Industry Mergers and Acquisitions, University of Pennsylvania, 2009). Doubts & Fears Companies have doubts and fears about combining their resources into one company because of the constraints and loss of independence that they believe will be compromised when the restructuring or reformatting of their company takes place. But the implications of companies who merge are positive when we consider the evidence. Even though doubts and fears are natural because companies do not want to lose a stake in what they have worked hard to earn, Patrick A. Gaughan, the
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Nine Mile Management Consulting Group author of Mergers, Acquisitions, and Corporate Restructurings, illustrates how mergers can offer companies leverage and provide them with sustainable long-term advantages. He states: Mergers allow corporations to secure more capital, hold stock in other corporations, and expand their lines of business operations, thereby creating a fertile environment for firms to contemplate mergers (Page 34, Mergers, Acquisitions, and Corporate Restructurings). Of course, competitiveness is another factor that companies consider when they entertain the idea of a merger. Retention of a healthy and expandable labor force, maintaining synergy between all levels of management, and evaluating various portfolio-hedging strategies are some of the considerations that companies must make before entering a joint alliance. The stages involved in evaluating risk and the potential financial constraints that could occur while companies combine the bulk of their resources is a vital integration process. It can be a time consuming and exhaustive process but an essential one nevertheless when we consider the future advantages a collaborative enterprise can leverage once it has been strategically organized, and all of the risk factors have been acceptably evaluated. As Edward Whitacre, Jr., former CEO of AT&T once remarked about mergers: The merger is a logical next step that creates substantial value for customers and stockholders. It will benefit customers through new services and expand service capabilities. At Nine Mile Management Consulting, let us provide you with the expert advisory advice, analytical knowhow, and proven risk management techniques to develop the right merging strategy for you today. Phone 1.800.873.9118 to speak with a consultant. www.ninemileco.com

February, 2013

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