Mergers and acquisitions (often known as M&As) are significant undertakings for any business. They typically require a great deal of time and funding to be successful.
The aim of an M&A will almost always be to progress the parent company’s development and improve profitability. However, it can be a long process, with many consequences for your financial position in the meantime.
When we discuss the repercussions of an M&A, they will fall into two categories: the impact during the process and the effect after the deal closes.
Our blog explores the financial implications of a merger or acquisition, both during the initial stages and post-completion.
- Capital structure
- Return on investment
- Cash flow
- Share value
- Market share
- Economies of scale
- Profitability
- Access to finance
Capital structure
Once an M&A has been completed, the acquiring business’s capital structure will shift. This is mainly dependent on how the deal has been designed. For example, if the M&A is funded entirely through cash, it will reduce the reserves the business has.
Few companies will have the cash to cover the whole transaction. Most will rely on debt to get there. While this is a great way to raise the funding you need to acquire a target business, it will leave you with significant loans that needs to be repaid over time. Repayments place pressure on your cash flow and there needs to be significant headroom in your projections to lenders that these payments will be met.
The higher debt load stemming from the process can be justified if the M&A improves cash flow and profitability. However, you must be confident you will meet the repayment schedule and strive to do so continually.
Return on investment
An alternative option for raising the funding you need for an M&A is through equity. In this case, you bring in investors who will expect a rate return on investment for their support.
In some cases, you may have existing investors in either your company or the target company you have merged with or acquired. They will have similar expectations.
The financial implication of this is that you need to provide the appropriate level of ROI in the agreed timeframe. A dividend policy will need to be agreed with your equity investors as well as the nature of their investment. This should highlight whether it is 100% equity or a mix of equity and loan notes, which can affect future profitability.
Cash flow
In the immediate aftermath of an M&A, there is likely to be new burdens on cash flow. Examples include the repayment of debt associated with funding the merger or acquisition and the overall cost of the deal, which may deplete reserves.
On top of this, investment is often required to integrate your and the acquired business in the form of staff training, amendments to processes and changes to supply or equipment. There’s also potential disruption to revenue while you adjust to the new norm.
All of this impacts cash flow, which you need to be prepared for and able to cope with. Additional external funding may even be required to lessen the effect. Hopefully, this soon balances out and eventually improves as your company adjusts and the positive results take hold.
Share value
Following a merger or acquisition, it is in the interest of all parties that your share value increases as the M&A proves to be successful and profitable, which in turn makes you more attractive for future funding.
That is why it is key to make sure that the acquisition is the right fit and added value is created during the process of integration with your own business.
Market share
When you undergo an M&A, the idea is to retain and grow the target company’s customer book to grow your sales base. This may allow you to take a more dominant role in the marketplace. This increases your market share.
The benefit of having a higher market share in an industry means that you gain increased economies of scale which bring down your cost of sale per customer. This gives you an edge over your competitors, enabling you to continue to grow your sales book.
Economies of scale
After a merger or acquisition, you will have more extensive operations and, ideally, increased demand to deliver.
This allows you to access economies of scale, through improved pricing by ordering larger volumes of raw materials or supplies. It also includes being able to access a larger market at a comparatively lower cost per customer in say the sales and marketing costs of your company.
It also enables better cost management across your business, which increases profit margins.
Profitability
One of the primary objectives of an M&A is to drive profits. By growing the size of your business and your sales base with the tools you need to meet demand efficiently, you will improve profitability.
However, this isn’t a given. It requires the right deal, outstanding leadership, efficient processes, planning and careful navigation of the all-important transition period.
If you do it correctly, you will experience the financial rewards – which will appease shareholders, further fuel growth and open opportunities for your business.
Access to finance
During the M&A, you will acquire the assets of the target company. These will improve the overall value of your business.
Improving your value has many benefits, including driving up share value and making your business more attractive to buyers, especially alongside growing profits. It also enhances your eligibility for funding.
In many cases, lenders or investors want to work with successful or high potential businesses that offer a great return on their loan or investment. Having a highly valued venture will convince them to support you .
If external finance is part of your business plan – as it should be – the addition of assets, growing sales and profits is integral in getting the support you need to meet your goals.
Conclusion
A merger or acquisition is a key tool for your business, enabling you to fulfil your growth objectives, improve sales and drive your company’s value.
However, you must understand the full impact of an M&A, including the variety of financial implications that may occur during the acquisition process and beyond.
By taking account of the financial implications, you can ensure you are prepared with the support you need and make plans for your business accordingly.
Funding for a merger or acquisition is not easy and it is a case of determining the right options, this is where we can help you. Based on your unique circumstances, we will approach the market to identify the best solution for you.