Breaking down the resurgence of M&As in times of economic uncertainty

In the past year, the inflation crisis that has affected many economies, including the high-tech industry worldwide and in Israel, has led numerous companies and investors to re-evaluate their investment strategies. The sharp rise in interest rates has significantly impacted their risk capital, prompting them to re-examine and even change their investment strategies.

As part of this economic trend, mergers and acquisitions are making a comeback for investors. When interest rates rise, the money is "more expensive", and sometimes acquisition options fall for significantly leveraged companies. While the risks associated with mergers and acquisitions are high, the potential rewards are equally significant, making it an attractive option for able and willing organizations.

Sagive Greenspan.

Why choose a mergers and acquisition strategy?

In the world of business, acquisitions rarely occur by chance. Rather, they result from a comprehensive analysis of the organization's situation by company management and the CEO. This analysis defines the strategic and organizational needs that will be addressed through the acquisition.

Several key reasons can lead to management's decision to acquire a company:

1. Market share growth (book of business) is one of the most common reasons for the acquisition. Companies can achieve greater market share by expanding geographically, accelerating geographic expansion by acquiring a local company, or leveraging existing operative activity to favor the acquisition.

2. Acquisition of a competitor - This is another common reason for initiating a merger and acquisition process. It is made to "eliminate" competition, increase purchasing power, expand the customer base, and penetrate new markets. Like any acquisition, the goal is to create real value by integrating the strengths of both companies so that 1+1=3 or at least greater than 2.

3. Acquisition of a company operating in a similar field (operational synergy) - By examining the possibility of using existing infrastructure and integrating activities, the operations of both organizations can be streamlined. The possibility of creating value by canceling parallel infrastructures in the acquired company, such as merging two financial departments into one or combining management resources, will also be examined.

4. Portfolio expansion is one of the most justified reasons to invest in acquiring a company to expand the organization's activities into new fields. Acquiring a company to expand the organization's offerings opens the door to new markets and customers and often generates new values for existing customers.

5. Human resources enhancement - This reason is more common in acquiring service-rich companies, where human resources are the main asset. Precise and quality growth in human resources can enable the company to expand rapidly and accelerate organizational and business development processes.

6. Acquisition of technologies or infrastructures - Many technologies are based on registered patents required by the acquiring company to facilitate further development. The acquiring company gains control over the future of the product or technology and secures itself from the risk of another company buying it. Sometimes the use of the purchased product is so deep and wide that the company acquiring wants to protect and insure itself against another company's purchase of the product. This move makes it possible to avoid the risk of using the product by competitors.

7. Tax benefits - Improving the tax status is a common interest for both acquiring and acquiring companies. The merger and acquisition process can help reduce losses and lower the tax burden, among other things, by allowing for the possibility of transitioning to a country with lower tax rates. Tax savings, along with synergy and optimization processes, allows for the expansion of technological investments and sometimes even enable the purchase of additional companies within a short time frame.

The reasons for acquisition are often entirely different from the acquired company's perspective.

1. Need for Liquid Capital - Entrepreneurs may consider bold moves to ensure their company's future when raising capital is difficult, and pessimism rules excessively. To enhance the company's competitive edge or amplify its product superiority, there arrives a pivotal moment when the company may opt for an acquisition or merger. Even if the company is profitable but not at a level that allows it to be independent of investments, acquiring or merging with another company can sharpen its competitiveness. When a company chooses to merge with another company, the acquired company can benefit from the advantages of the acquiring company and bridge the financial gap. Additionally, if the acquired company's technology matches the technology that the acquiring company is looking to develop, it can significantly save on development costs. This opens up the potential for much higher growth for both companies.

2. In-depth developments and stepping into the big players' field - As the tech industry moves beyond the hype and massive fundraising of 2021, a prominent trend has emerged: the realization that niche solutions are no longer viable. In response, leading technology companies and organizations are looking to merge with companies that will enable them to embed comprehensive technologies. Another factor driving this trend is that technology startups often offer excellent solutions but face a significant entry barrier when trying to reach big customers. Therefore, they are interested in teaming up with players who will facilitate access to new markets. On the other hand, international companies often face challenges when collaborating with smaller firms, particularly those focusing on core systems. Mergers enable them to surmount these obstacles.

3. Utilizing the advantages of being a part of a larger organization - As companies advance and develop, they often realize that to increase sales, they need to win over larger organizations and make their technology a central axis of their operations. However, this is easier said than done, as selling to companies with billions of dollars in revenue vastly differs from selling to companies with millions. In addition, the logistics of service and support for these giant companies are also vastly different. Transitioning to the next customer segment necessitates organizational shifts that an acquired company may struggle to execute. As a result, the appeal of merging with a complementary or prominent industry player grows.

4. Organization restructuring - Sometimes, the management or owners of the acquired company seek a new leader to take the helm and lead the company. Still, they struggle to find a suitable candidate. In such cases, they may opt for a merger to fulfill this need.

5. Survival - This is particularly characteristic of a company facing difficulties due to an economic crisis, market changes, or management of the company that caused it to incur significant financial losses. This rationale becomes increasingly accepted as global markets become volatile and economic crises become more frequent.

Beyond the contract: The role of personal chemistry in merger and acquisition success

A key factor that frequently influences the outcome of mergers and acquisitions is the chemistry between the management in both parties. It is essential that the acquiring and the acquired companies thoroughly assess one another before finalizing the agreement if they possess the willingness and capacity to collaborate effectively over an extended period.

Does a cultural alignment exist between the companies? Are there influential individuals, aside from entrepreneurs or CEOs, within both companies who support the merger and plan to stay on board? These aspects, among others, are the foundation of the merger. Beyond the agreement between parties, the unwritten nuances, such as interpersonal relationships, are crucial for shaping the post-merger landscape.

How to pass the reality test of post-merger integration

The real work of a merger and acquisition begins after the acquisition has taken place. Post-Merger Integration (PMI) is a critical process that aims to maximize the effectiveness of the merger by creating synergies between tasks, resources, and organizational infrastructure. Just as the success of a startup does not depend on the idea but on the execution, so do mergers and acquisitions. The planning and implementation are the ones that will determine whether the merger procedure will be crowned as a success.

Successful integration requires a well-structured plan involving various stakeholders in the organization who can thoroughly examine the product roadmap, work plans, the post-merger company vision and present a vision according to which all departments of the organization will act, the day after.

Effective integration requires continuous coordination between all elements of the organization, from financial management and approval procedures to salary and purchasing policies and strategic product marketing and sales plans. The process also involves coordination with existing customers who may have feedback on the new product offerings, and their input should be considered.

Even if a pre-acquisition examination showed compatibility between the technological aspects, integrating different organizational cultures is still a significant challenge. To minimize uncertainty, it is best to begin integration at the most basic level of work methods, including technical integration and management practices, and symbolic integration, such as company events or announcement meetings.

In times of uncertainty, the option of mergers and acquisitions is more relevant than ever

Over short and medium term, promoting acquisitions and mergers as growth engines is important and critical, but a proof of feasibility and significant revenues in the foreseeable term is required.

It is important to remember that statistically, most mergers and acquisitions fail to meet their promises, mainly regarding financial gains. However, the risks can be minimized by identifying rational reasons for the merger and creating the appropriate infrastructure to assimilate the acquired company.

In summary, despite the current uncertainty in the Israeli and global investment landscape, the business sector can overcome various crises and challenges. In the aftermath, the option of mergers and acquisitions will emerge as one of the most prominent growth tools.

The author is the CEO of Priority, which develops smart organizational management platforms for international corporations and small companies in growth processes.