Mergers continue to grow at an ever increasing pace. The United States Federal Trade Commission reports that the number of filings in 1999 was almost three times the number received in 1993. This same trend is being experienced worldwide. Web property deals tripled from 140 in 1998 to 450 in 1999 with an incredible increase of 700 percent in dollar spending from 1998 to 1999.
America Online's acquisition of Time Warner got this century off to a stupendous start with the purchase being valued at more than three times the total 1998/1999 M&A spending. Webmerger.com is predicting that web mergers and acquisitions alone will reach the quarter-trillion-dollar mark in 2000.
This trend is not just for internet-related businesses, however. Nor are mergers limited to one particular type of business. The list of past and anticipated mergers covers every size and variety of business -- mergers are on the increase over the whole marketplace.
Regulatory agencies are openly concerned. According to Richard G. Parker, Senior Deputy Director of the Bureau of Competition at the Federal Trade Commission (FTC), "antitrust enforcement agencies around the world are in regular and increasing contact with one another on individual merger cases as well as on general issues of mutual enforcement interest." The reason for this concern is, of course, the reduction of competition or conversely the rise of monopolies. Deals that once might have been approved with negotiated settlements or divestitures are now being rejected outright. ("FTC Weighs Stricter Policy on Mergers", The Wall Street Journal, January 12, 2000)
How does divestiture fit into this equation? This is part of the FTC overview process. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires premerger notification of the FTC because of the number of anticompetitive mergers that had occurred previously. One outcome of the approval process may be divestiture of parts of the businesses which may cause anticompetitive actions. Consequently, one part of a merger may include divestiture of certain activities of the business.
The standards for what is or isn't an antitrust violation do not seem to be changing, but because of the complexity of some of the deals being presented, the standards for fixing the deals are. Robert Pitofsky, the Federal Trade Commission chairman, said that the settlement proposals are far more ambitious and complicated that they have ever experienced before.
The FTC is a powerful ally for small business, keeping the market open, allowing you every opportunity to compete for business just like everyone else. This is an important trend to follow for not only will it affect the environment for doing business, but your opportunity to participate in a merger yourself.
As a small business owner, how else does this trend of an increasing number of mergers affect you? Is this a viable way for your business to grow? Is being taken over something you need to worry about? Would buying another business be something to consider some day? What does merging mean anyway? Let's try to answer a few of those questions.
Pluses and Minuses of Merging
To understand whether you would want to merge, let's begin with definitions. There are a number of terms used that frequently get confused partly because of their similarity in meaning.
A full joining together of two previously separate corporations. A true merger in the legal sense occurs when both businesses dissolve and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation.
Taking possession of another business. Also called a takeover or buyout.
Two or more businesses joining together under a contractual agreement to conduct a specific business enterprise with both parties sharing profits and losses. The venture is for one specific project only, rather than for a continuing business relationship as in a strategic alliance.
A partnership with another business in which you combine efforts in a business effort involving anything from getting a better price for goods by buying in bulk together to seeking business together with each of you providing part of the product. The basic idea behind alliances is to minimize risk while maximizing your leverage.
A business in which two or more individuals who carry on a continuing business for profit as co-owners. Legally, a partnership is regarded as a group of individuals rather than as a single entity, although each of the partners file their share of the profits on their individual tax returns.
Many mergers are in truth acquisitions. One business actually buys another and incorporates it into its own business model. Because of this misuse of the term merger, many statistics on mergers are presented for the combined mergers and acquisitions (M&A) that are occurring. This gives a broader and more accurate view of the merger market.
Why would you choose to merge? For the first time in history, acquisitions have surpassed IPOs not only in dollar value, but in number completed. For many companies, the erratic nature of the IPO market is far too risky. Being acquired is often a lucrative long-term growth strategy for a small business.
For the buyer, with the market changing so rapidly, product development has become a luxury that is not always a viable option. M&A has essentially become an efficient means to enter a new market. Buyers are more than willing to pay premium prices to gain market entry for a product that extends or diversifies their product line. Acquisitions can also expand customer bases, providing a more solid overall corporate business base.
One of the greatest challenges for startup companies is having capital when you need it. While an IPO initially may seem to generate large amounts of cash, the founders, who have often mortgaged all they have to get off the ground, cannot count on an IPO for providing personal capital resources. Not only is there a personal lockup time, but many IPOs experience a drop in price after the early rush. Of the 724 technology companies that went public in 1992 or later and remained independent, 58 percent were trading at less than their IPO price six years later. With an acquisition, however, part of the negotiation can include at least partial liquidity at the time of transfer.
Mergers are not without their downsides. They can consume an incredible amount of time and money, legal and tax complications, and problems with mixing corporate cultures. It has been estimated that fully 50 percent never achieve the initial financial and market goals projected. Interestingly, this percent has remained relatively stable over the past 40 years in spite of the growth of mergers as a viable option for businesses.
For the corporate leadership, the whole process can be so overwhelming that the business deteriorates. Stories abound about founders being dismissed and employees let go after the completion of the deal, corporate cultures failing to mix, and markets not responding as expected. The stress of putting this together in a viable manner can take its toll on everyone from the founder on down.