When should you shake hands with your competitor?

August 31, 2016

Have you ever thought in merging your business with that of your competitor?   Perhaps you have.
In my opinion the only way to bring two competitors together is if the real synergy between the two companies participating in the merger creates value which is greater than what each individual company brings to the table on their own. A well planned merger needs to have the following two results: Increase company value (1 + 1 = 3) and reduce costs and expenses consequently increasing company profitability.

But the first step is to carry out full company due diligence report of each company to understand if the merger would succeed or not. There is very important quantitative and qualitative data to be analysed as well as the weaknesses and strengths of each company. Examples are:  company turnover, number of employees, customer segmentation target, analysis of existing clients, software and processes analysis, company culture and financial performance.
Understanding the founder’s principle behind each company and what each founder wants out of the merger is also paramount.
We need to remember that any business has only one leader who is the visionary and as such the right business leader must be chosen to lead the new merger into the right direction.
The new leader must make sure that key employees from each company keep their jobs at the new company.
Another important factor is: do both companies work in the same sector and have the same kind of clients? It is harder to merge two companies when one company works with premium clients and the other has low end clients.  Ideally, both businesses need to be roughly the same size, target the same sort of clients and sell their goods at a similar price.
It will also complicate things if the founder of one of the companies has ambition to grow the business and the other one does not.  A win-win scenario would be for both founders to have the same ambition and each one of them brings to the table what they are best at.
Each company has its own culture. Each company has its own values, assumptions and beliefs which governs how employees behave in organisations. These values have a strong influence on the people in the organisation and dictate how they act and perform or even how employees dress.
Which company’s culture will be adopted when employees of two different organisations get together? Company culture must be chosen carefully. What will be the best business brand to use going forward?  Should it be one of the existing brands or should it be a new company brand?
What could be the 5 main advantages in shaking hands with your business competitor?
1) Save costs and expenses (Example: Marketing, admin, software and others)
Let me explain what I mean by this.  Each individual company has direct costs such as raw materials.
As purchasing power increases, better prices can be negotiated for raw materials thus reducing direct costs. Each company has expenses such as IT expenses, software maintenance, legal costs and others. All of these expenses could also be reduced.   But special attention should be given to marketing expenses because if both companies are targeting the same customers and they use the same marketing channels, marketing expenses could be easily cut in half.
2)Increase company value:
Most of the time a well-structured company with 60 employees is worth more than two companies with 30 employees each.
3)Reduce costs of switching clients:
It has been proven that the price of acquiring a new client is higher than keeping an existing one, especially in the service industry.   Every time a client switches providers there is an acquisition cost to get this client back. The merger could reduce dramatically these costs as the client’s probability of switching companies decreases.
4)Increase efficiency:
Each company participating in the merger would need to bring to the table what it does best.
Perhaps the processes of one company are better than the other, therefore resulting in an improvement in the efficiency of the company.
Increase in efficiency is also linked to increase in productivity, which results in an increase in profitability.
5)Best use of the support departments:
All companies have a support department such as the finance department, administration department, marketing department and IT. Sometimes these departments are not working to their full capacity so bringing both companies together could mean an increase to their efficiency, which translates to an increase in the company profitability.
Although in theory the pros of a merger outweigh the cons, the key factor is still the synergy that connects the two enterprises. Both must be willing to make efforts that will benefit the new joint venture rather than themselves only. The drive for a joint venture must be a bigger achievement in group rather than a small individual achievement. If things are not going on quite right along the way, communication is always an essential tool to fix things and make sure the goals and commitments remain alive from both sides.




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