Growing a Business After a Merger

A couple of days ago, two CEOs of companies that were merging discussed the cost-cutting and savings that would ensue. What I did not hear was the expected growth that would ensue.

It is always good to watch costs, cut overhead and increase margins. But I think it is better to increase sales while maintaining overhead and margins. I fail to understand the omission of sales growth. Or perhaps this is not a targeted benefit from the merger? Perhaps it is to increase dominance in an industry, eliminate a competitor, acquire synergies that would reduce the outsourcing of critical processes, or gain a succession plan. Or, as the CEOs expressed, be able to get a higher multiple in its Initial Public Offering (“IPO”).

These are all good reasons, but I do not see any sustainable strategies for growth. I see temporary bump-ups in profits and wealth enrichment for the present owners but no long-term strategy for true growth.

I have advised many companies on mergers and acquisitions (“M&A”) from both sides, and long-term success is achieved by growing sales and profits. One without the other is not sustainable. Neither is stagnation. Some M&A transactions are done to acquire technology or skills and to bring in-house services that have been purchased, and that heavily relied on supply chain functioning without any hitches. But these were for acquisitions of smaller companies and not done with mergers of two equally sized companies where a long-term growth strategy needs to be employed.

When two behemoths merge, they acquire greater market share and dominance and can attract larger contracts and sales than either one, on their own, was able to. That is a great reason for a merger. They also have greater access to higher-level managers and technical people and can also pool their marketing capabilities and have greater opportunities for cross-selling and increasing sales to present customers. Further, their size can make them more attractive to acquire smaller competitors that have fewer opportunities to fully exploit their strengths in the marketplace. There are many benefits, but all of these involve growing sales while maintaining margins and overhead.

Mergers (and acquisitions) create excitement for every stakeholder, and the way to capitalize on that excitement is with increased sales and profits.

Next time you hear about an M&A transaction, look for the “Why?” Are the leaders’ purposes to cut costs or grow the company? I choose growth every time over cost-cutting. I like both, but the main concern should be growth.