1+1=1.5 The merging maths
In today's economy, many companies seek ways to improve operations, and acquire or merge with other companies to increase their market share in a sector. However, organizations have been doing this for decades: mergers and acquisitions (M&A) are by no means an invention of our time.
While mergers and acquisitions have been done by companies since a long time ago, no matter which era you choose, there is one element that cannot be ignored that easily. There are many cases where after a merger or an acquisition agreement between two businesses, the end result is not equal to the equitable addition of the value of the two companies. In other words, the maths equation "1+1=2" is not proven true in a business setting, where acquisitions and mergers are taking place.
Most of the executives know this "math problem", but often they don't know what they are losing in the process.
The Angels' Share
It is said that the Gauls invented barrel making during the 5th century BC. To this day, French vineyards still use wooden barrels to preserve the precious production before selling it all over the world. However, millions of bottles of wine disappear from barrels every year. How? During the ageing, alcohol and water evaporates in what is poetically referred to as "the angels' share" ("la part des anges"). For instance — for Cognac production — the angels' share is about 2% of total inventory, or the equivalent of 22 million bottles per year.
A similar concept can be applied to M&A. During an M&A process, intangible assets — employee skills and know-how, informal relationships that feed creativity and new ideas, high-performance work organizations — can literally evaporate. However, these are the keys to a new competitive advantage, and their disappearance is very costly to the organisation. Even if a certain financial loss could be acceptable in a M&A project, intangible assets and information that drive the innovation process can and must be protected.
The Challenge to Make 1+1=2 (or more!)
It is a rare occasion indeed that the merger or acquisition procedure results in an equitable addition, whether that be in relation with the total number of employees, turnover rate, financial resources or other critical factors.
What is required to turn the tables in favor and ensure that the rare "1+1=2" resulting formula is true, is for companies to think in terms of high end operational effectiveness and enabling innovation.
If you are thinking of being part of a merger or are about to acquire another company to get new patents or just to ensure expansion and cover a wider geographical area or market share, then contact a business management consultant for professional help.