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FAQ: Business Organizations and Transactions

Will a merger or acquisition help the business?

Up-and-coming businesses may be looking for more cash to develop new products and ideas. Small-business owners may be looking to profit by selling their enterprise. Established companies may be looking to gain entry into a growing market to reach new customers. Large corporations may prefer to obtain a steady and consistent supply of parts by bringing a supplier inside. Medium-sized companies may want to leverage their business by merging together.

Whatever the reason that a business contemplates a merger or acquisition, the costs and benefits of the transition should be considered. Many companies find it difficult to turn down a merger or acquisition if it appears to benefit them, but frequently, mergers do not go as smoothly as planned. Companies considering mergers need to be aware of the potential downfalls of a merger.

How are mergers and acquisitions defined?

Mergers and acquisitions are similar in that two or more companies are combined, usually to leverage the power of both. In a merger, both companies dissolve and, typically, a third business is formed. The assets and liabilities of both original companies are transferred to the new business. In an acquisition, one business takes possession of the assets and liabilities of another business. Acquisitions are also referred to as "takeovers" and "buyouts."

What are the advantages of a merger or acquisition?

Mergers and acquisitions can bring many advantages to the businesses involved. For sellers of an acquisition, the transfer can bring liquidity to an owner who has poured resources into a growing business. Mergers and acquisitions are also less risky than initial public offerings (IPOs). For buyers, a merger or acquisition can be a safer way to enter a growing market because the buyer's business does not have to invest in research and development phases to gain entry into a new market.

What are the disadvantages of a merger or acquisition?

For many companies involved in a merger or acquisition, the transition to a new company never fully achieves the goals envisioned before the merger or acquisition. For some companies, the large costs involved in a merger or acquisition were not worth the benefits. Companies may be too different for a seamless merger: Products may be dissimilar, services may not gel and even unique company cultures can doom a merger. Companies of similar size may not transition well to a single entity in a takeover bid. Founders of an acquired company may not be willing to cede leadership roles. For these reasons, companies presented with a merger or acquisition opportunity should seriously consider whether the ultimate goals of a merger or acquisition will be achieved.

How can a merging or acquiring company work toward success in the transition?

Companies attempting a merger or acquisition may place concerned employees in the position of receiving little or no news about their positions and roles at a time when job stress is highest. Studies have shown that productivity drops during and after a merger or acquisition and employees face low morale as questions about equal treatment and pay abound.

To ensure a positive merger, companies should attempt to keep employees informed on the status of the merger, even if the communication is brief. And even before the merger, companies should start planning to address differences in company culture and organize to bridge gaps in employee relations. With planning and communication, merging companies can produce positive results.

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