The Merger Option

As markets change and industries evolve, it is difficult for any company to stand still if it wants to remain competitive and profitable. For this reason, most companies want and need to grow.

Growth brings many advantages. Higher volumes of products and services mean lower fixed and supply chain costs per unit and therefore higher gross margins. Equally, selling and administrative costs are spread over a higher volume leading to higher profitability. Growth also builds confidence in customers, employees, suppliers, lenders and limits opportunities for competitors.

A decision to reject growth is not risk free. It encourages competitors and risks loss of customers. If revenues decline, incremental costs increase and reduce a company's profitability and competitive market position. Therefore most companies actively seek to grow.

When shareholders are unable or unwilling to pursue a strategy of acquisitions, but recognise the advantages and need for growth, they may instead consider the option of a merger.

Green Park Partners can advise you in terms of Preparing a Merger, Identifying Merger Candidates, Managing the Merger Process and Effecting a Merger.

Reason for Mergers

There are generally two types of mergers: (a) horizontal - between competing firms in the same sector and in the same part of the value chain; and (b) vertical - between firms in the same sector but in different parts of the value chain.

Mergers are often described as a marriage since it normally involves two partners more or less equal in strength which have decided to combine their managerial and operational functions to form a new company with shared resources and corporate objectives.

There are a number of reasons that companies pursue mergers:

• Industry Consolidation

  Most industries are fragmented and consist of many competitors. A merger is a tactical move that enables a company to reposition itself (with a merger partner) into a stronger operational and competitive industry position.

• Improve Competitive Position

  One important reason that companies combine is to improve their competitive market position. Merging with a competitor is an excellent way to improve a company's position in the marketplace. It reduces competition, and allows the combined firm to use its resources more effectively.

• Defensive Move

  A merger is an attractive tactical move in any economic environment - particularly in a cyclical down-turn where a merger can be a strong defensive move.

• Synergies

  Reduce costs and improve earnings.
  One of the most common reasons for a merger are synergies - allowing two companies to work more efficiently together than either would separately. Such synergies may result from the ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise and raise capital. Generally, the assumption is that larger firms are more cost-effective than are smaller companies (i.e. e0xhibit "economies of scale").

• Market / Business / Product Line Issues

  Often mergers occur simply because one firm is in a market that another wants to enter or in order to gain a critical size that can justify the expense of geographic expansion. All of the target firm's experience and resources (the employees' expertise, business relationships, etc.) are available by merging with the other party. Whether the market is a new product, a business line, or a geographical region, market entry or expansion is a powerful reason for a merger.

  Closely related to these issues are product line issues. A firm may wish to expand, balance, fill out or diversify its product lines.

• Acquire Resources and Skills

  One firm may simply wish to obtain access to the resources of another company or to combine the resources of the two companies. These resources may be tangible resources such a plant and equipment, or they may be intangible resources such as trade secrets, patents, copyrights, leases, etc., or they may be talents of the target company's employees.

Merger Services

Effecting a Merger

Merging with another company in your industry will certainly bring operational and strategic advantages and put the combined group in a much better position to pursue and secure new business opportunities - and it can at the same time provide a new direction and energise an organisation and solve pending shareholder or management issues.

However, effecting a merger is a complex undertaking and whereas terms may be the key consideration in any transaction - a merger situation raises other important issues such as strategic and operational fit, culture, retained control and influence, and shareholder interaction and relationship.

You may already have considered the merger option and may already know or had discussions with potential merger partners - or perhaps you are unsure what advantages a merger would offer you and what opportunities you have for undertaking such a transaction. Green Park Partners can help you assess your situation and determine what opportunities a merger would offer you - and if it is concluded that a merger is a desirable objective, Green Park Partners can move the process forward and manage the project to a successful outcome.

Assessment and Preparation

We will initially spend time to fully understand your company, market and industry and to evaluate the operational, strategic and financial opportunities that a merger would offer you and your company.

We start by inspecting the competitive market and market position of your company, which includes an assessment of strengths, weaknesses, opportunities and threats. The result defines a direction for expansion, growth, profitability, market coverage in existing activities and for diversification into new areas. We test underlying assumptions and determine the different alternatives that can be pursued. We make a formal recommendation and reach a conclusion as to process and objectives.

As your company is likely to be the initiator of any merger discussions, it is important that the process is carefully prepared such that we can best progress and manage discussions and secure an outcome that meets your objectives.

Merger Case

Discussions with prospective merger candidates will require a carefully prepared proposal formally presenting your company and setting out the opportunities that a merger will represent for both parties.

For this purpose, Green Park Partners will prepare a detailed Merger Discussion Document that describes your company and highlights the strategic and financial opportunities that a merger will offer shareholders. We will present and outline your company as an eligible merger partner and document the strategic and financial rationale for a merger.

The Merger Discussion Document will go beyond a simple description and will in detail document the potential for future value creation in a merged company and thereby enable us to more effectively lead and progress discussions with potential merger candidates. The document will include an evaluation of market opportunity, competitive differentiation, and opportunities for expansion and value creation and often involve a broader review where Green Park Partners may make recommendations on company structure, sales and marketing strategy, balance sheet issues and strategic options - both as a stand-alone company and as a larger combined company through a merger.

In addition, we prepare a full financial model that provides insight for both parties in the merger discussions - and which is based on the business case and how it translates into the financial prospects of a combined company. Our financial models focus on capturing critical operating and economic relationships and are built from the bottom up to address dynamics specific to your company, your industry and aspects relevant to a merger situation. Green Park Partners financial models provide detailed financial projections based on highly sophisticated multi-dimensional scenario analysis.

Merger Candidates

Selection of the best merger candidate is primarily an issue of strategic fit, but also covers financial and cultural issues. Based on the characteristics we are looking for in a merger partner, we will identify the most logical candidates. We will also look to identify the less obvious merger candidates, which may have a particular interest to move into a new market or are looking to strengthen their own efforts at home or abroad. We contact prospective candidates and enter into a dialogue to assess their interest. We manage all aspects of this process, arranging confidentiality agreements, distributing information, responding to questions and organising meetings.

Managing the Process

We will manage and guide you through every aspect of the process, enabling you to continue to focus on your business while we focus on the merger process and all its details and mechanics.

Merger Services:

• Coordinate and execute merger transactions
• Perform due diligence on initiating merger party
• Determine merger case / business potential
• Prepare Merger Discussion Documentation
• Prepare Financial Model / Value Opportunity
• Plan and execute merger process
• Solicit and evaluate merger interest
• Analyse merger transaction valuation, structure and terms
• Structure, negotiate and document merger