Why Industry Analysis is Needed in a Merger, Lisa Ramotar Explains
Industry analysis is a necessary investigation in the world of mergers and acquisitions. In some cases, a company may be overly exuberant in its pursuit of another business that it does not think of how its purchase impacts the industry structure or even whether it is an industry that offers strong competitive positioning. Lisa Ramotar explores the purpose of industry analysis and its importance.
Lisa Ramotar, a level three CFA candidate with experience as an economist and Manager consultant, knows that mergers go wrong because companies only look at their own internal dynamics. They fail to explore how the merger will affect the industry – and how the industry will affect the success of the merger.
The reason for industry analysis, Lisa Ramotar explains, is to understand what the trends are within the industry and how the industry is structured. This includes identifying the demographic structure of the industry, what the industry is currently demanding, who are the major players etc.
When a merger takes place, the goal should be for the company acquiring the company to add value to themselves and to the industry. Lisa Ramotar suggests that the most common reason given for acquiring a business is to expand both the customer and product bases. In some instances, a horizontal merger allows for two companies that produce similar products not only to expand their market share but allow them to find synergies. In other instances, a vertical merger may occur that allow some level of integration within the overall supply chain. For instance, if a steel manufacturer purchases an iron ore company it is a backward integration that will allow control and constant supply of input for the manufacturing company.
Lisa Ramotar explains that industry analysis is critical as it identifies who some of the other major competitors are within the industry. When a merger affects the operations of the merged or acquired company, it may affect how the end customer is served. In a less concentrated industry with similar product offerings, customers may just move their business to a stable competitor. In a more concentrated industry with few competitors and higher switching costs, it may be hard for customers to initially switch. However, as Lisa Ramotar notes, high switching costs should not make the merged company complacent with reducing initial inefficiencies that may come from a merger since should such inefficiencies linger for longer periods customers will find alternatives. Often, we find that newer and less established industries have significantly fewer merges than older more established industries. Some of the reasons for this as given by Lisa Ramotar is that newer industries may have newer companies, but even if established companies operate, the fact that the industry is new tends to place more focus on developing correct strategies and making the industry itself competitive. When an industry is more established especially if it is at the mature stage of its life cycle, more mergers may occur because of the need for consolidation and extraction of more profits, explains Lisa Ramotar.
Along with industry analysis includes an understanding of market perception. When a merger is announced, if the market’s consensus is that the merger does not add to the strategic value of the acquirer then there may be a deeper investigation of the acquirer. Lisa Ramotar explains that certain questions are asked about the company, such as why did they need to acquire the other company? Were they failing prior to the merger? In some instances, a merger is viewed as a last-ditch effort to gain a footing in the marketplace.
Lisa Ramotar recommends that all companies do their due diligence and even conduct industry analysis prior to a merger. Even after moving forward, suggests that the industry be closely monitored for the impact of the merger on the industry structure.