Too big to fail? When mergers and acquisitions grind to a halt

In this guest article, Keith Spedding, Partner and expert in business transactions and growth at Shakespeare Martineau, discusses the best way for directors to prepare for a merger or acquisition, and how the market might affect its success.

With the recent decision to prevent publishing firm Penguin Random House from acquiring Simon and Schuster in the US, questions have been raised about consolidation within certain industries. While the publishing industry may be an example of consolidation, with concerns widely raised about the ‘Big 5’ becoming the big 4, how can directors across all industries better prepare for mergers and acquisitions (M&A), and keep market influences in check?

There are four main reasons why directors may consider a merger or acquisition. One is to strengthen themselves in a particular sector to form a larger entity that increases their market share. Another is to take out a competitor with a similar result, whilst a third could be that the company simply wants to explore a new market or area. Finally, often the case with smaller companies, directors often look to M&A in cases of retirement of senior leaders wishing to step down from their role.

Although there are many advantages to M&A, such as increasing market share, gaining economies of scale, reducing competition, and adding expertise to name a few, it is important to consider the market position of the buyer and target early in the process. From market competition regulations to an overreliance on one main customer or supplier, directors should always consider potential ramifications for both their customers and the wider market when making strategic M&A decisions.

A positive outcome from an acquisition can be increased economies of scale, and an improved negotiation position with suppliers. For example, should a merger or acquisition result in increased scale, a business can look to ‘bulk buy’ parts, products, or ingredients for a reduced rate. However, in recent years, authorities have become much clearer on the restrictions facing companies if their M&A activity goes too far and reduces the options available to customers, particularly consumers beyond what is deemed reasonable.

Directors should be aware of a perceived lack of competition which can become enhanced as their business reaches a certain size or when it represents a certain percentage of its market segment, which is typically set at 25%. Once this threshold has been crossed, a business may be subject to external reviews by the Competition and Markets Authority, who may have questions about the reduction of competition within that particular sector.

This may also invite complaints from within the market sector whether from other suppliers or customers. This is because it reduces the pool of suppliers for customers to work with, leading to less choice and higher risk should disruption to that supply occur, or the business becomes unable to carry out its obligations.

Directors also need to be aware of the National Security and Infrastructure Act (NSI), which was passed in early 2023. This act allows the government to intervene in certain acquisitions that could harm the nation’s security.

Under this Act, directors are legally required to tell the government about acquisitions of certain entities in 17 sensitive areas of the economy, known as ‘notifiable acquisitions’. These are made up of a wide range of sectors, including technology, security, and data infrastructure, and it is best that directors seek expert advice immediately should they be considering a deal in one of these areas, and the sectors are drawn very widely.

For M&A to be a success, an integration plan is vital, and without appropriate planning, a transaction could end up as a costly mistake. Directors must not only consider how the two businesses will work and operate together but also how the potential merger or acquisition will fit into the overall strategy for the business.

The cost and management time required for a company to successfully merge with or acquire another business is often underestimated, and having a strong integration plan from the start will help to mitigate risks of delays or other challenges, such as the integration of technology and systems.

It is equally important for directors to take the appropriate time before starting the process to consider if the M&A will truly add value to the business as it stands, as well as to their future intentions for the company.

Due to the current economic crisis and the unknown future of the market, the nature of M&A can carry a high risk. As a result, directors must take care to clearly communicate the benefits of merging with or acquiring another company. There can be immense pressure to meet targets or the expectations of shareholders or other stakeholders, making it all the more important to evaluate whether any move towards a deal is truly the best way forward for the company and find a balance of opinion and advice.

With the right preparation and due diligence, mergers, and acquisitions can take a business to the next level, broaden horizons and gain all-important market share. However, activity must be carefully considered, market influences reviewed, and correct advice taken at the start of the process, to avoid costly delays and eliminate any unexpected surprises during the deal-making process.