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  • Writer's pictureTsitsi Mutendi

MERGERS AND ACQUISITIONS IN FAMILY BUSINESSES: CRITICAL ASPECTS



There is still a view that family businesses are at a disadvantage when they have to face competition with their non-family competitors. This way of seeing businesses controlled by families is noticeable in many people, as the word “family” brings a connotation that organizations managed by the same surname are lean and uncompetitive structures.


The distorted view no longer makes sense today. Magazine Luiza, JBS, Gerdau Aços, and Weg, to name a few examples of family businesses, are names that appear on the list of the 500 largest companies in Brazil released by Exame magazine.


As we want to show here on the blog, a family organization goes through the same problems as a company created in another way. It can be small, medium, or large. The crux of the matter is that companies managed, or not, by families have the same objective: to remain competitive. For family businesses, a very adopted strategy is that of Mergers and Acquisitions (M&A).


WHAT ARE MERGERS AND ACQUISITIONS?

Mergers and Acquisitions (M&A) is a general term that refers to the consolidation of companies or assets through various types of financial transactions. Note that we have two terms (Mergers and Acquisitions), therefore:

A merger is the combination of two or more companies to form one. This means that legally each one’s equity ceases to exist in isolation and the businesses are unified.


Acquisition occurs when a company is taken over by another, that is, it buys its shareholding control. In this case, one organization assumes all operational management decisions for another. An example was the purchase, in 2017, of the technology startup Integra Commerce by Magazine Luiza.


Do you know that story that union makes strength? Well, the reasoning behind an M&A operation is usually that two companies together create more value than if they were in an individual position. In this respect, Mergers and Acquisitions are a strategy adopted by businesses that want to improve their competitive position.


WHY DOES A COMPANY OPT FOR THE MERGERS AND ACQUISITIONS STRATEGY?

Acquisition of companies is generally seen as a growth strategy with a lower degree of risk. Mergers save production costs, especially when two competitors merge.


Among the reasons for choosing to adopt a Mergers and Acquisitions operation, we mention:

  1. Financial synergy for lower cost of capital;

  2. Improve company performance and accelerate growth;

  3. Scale economy;

  4. Product diversification;

  5. Entry into higher growth markets;

  6. Increase market share;

  7. Improve positioning;

  8. Strategic realignment and technological change;

  9. Tax considerations;

  10. Risk diversification.


AND WHEN WE TALK ABOUT M&A IN FAMILY BUSINESSES?

With regard to possible motives for engaging in M&A activities, family businesses may be forced to merge, acquire or even sell the business for some typical reasons (such as the younger generation not showing interest in the business or as a means of giving greater security for family shareholders). Of course, as well as non-family organizations, those managed by a family group can also opt for M&A to strengthen themselves against competitors and the need to accelerate growth.


It Is important to point out that when we compare Mergers and Acquisitions transactions of family and non-family companies, we observe some differences:

  • Family organizations are subject to less external pressure when it comes to making decisions about future M&A transactions.

  • Family businesses tend to be more flexible and quicker in conducting their M&A activities. Likewise, the post-merger integration process tends to be less prolonged.

  • However, most family-controlled businesses lack specialist knowledge and experience in Mergers and Acquisitions compared to non-family organizations.

  • Mergers and Acquisitions operations in family businesses require special care, especially if their management is less professional. Overall, they face some challenges. One of them has to do with conflicts between partners, exacerbated by emotional issues. Disagreements between generations of family members are also another factor that deserves our attention and can result in a loss of competitiveness (especially when two generations cannot agree on strategic issues). Finally, it is important to mention the lack of succession planning, which can result in a reduced useful life or in very unstable management.


FAMILY BUSINESSES AND CARE IN M&A TRANSACTIONS

Family businesses planning an M&A transaction should start taking steps to prepare and stay in shape. They need, at the very least, to have management prepared to manage the changes that will come, reorganize the corporate structure (if applicable), adopt Corporate Governance, and be prepared for succession. The land needs to be very well plowed so that everything happens in the best possible way.


The preparation process Is crucial for all family organizations in any M&E approach. Again, family-owned businesses may not be as professionalized as their non-family competitors. Therefore, thinking about Mergers and Acquisitions means preparing the brand, financial position, and market positioning of the family business, as well as defining who will be responsible for management.


For example, if an acquisition or merger is made between companies in the same sector, the team already has the necessary knowledge. Now imagine that the company to be acquired is in an entirely different industry than yours. In this case, it will be necessary to think about actions to retain the technical, intellectual, and management skills of the organization that will be purchased.

Before embarking on an M&A strategy, the Board of Directors of the family business must assess all possible scenarios for the company’s healthy growth. Each process is unique and each organization has its particularities. Therefore, the most recommended is to rely on the help of experts.


Mergers and Acquisitions are all about synergy. In most cases, M&A processes are related to market strategy, whether to gain competitiveness, enter new markets, diversify products and services, eliminate competition, or grow or gain in economies of scale.


Family businesses need special attention in this process, mainly because they tend to have less professional management. The preparation process, therefore, is fundamental.


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