5 Worst Merger and Acquisition Mistakes in Indonesia to Avoid

Indonesia’s mergers and acquisitions (M&A) landscape is thriving, with a notable increase in activity in recent years. In 2023 alone, Indonesia recorded over 100 M&A transactions, reflecting a growing interest from domestic and foreign investors.

While this trend presents significant opportunities, navigating M&A in Indonesia remains complex and demanding. Let’s begin by exploring the meanings of mergers and acquisitions and their key differences.

Merger vs. Acquisition

While the terms mergers and acquisitions are often used identically, it is essential to understand the merger and acquisition differences, as they each have distinct meanings.

An acquisition occurs when one company takes over another and becomes the new owner. This term is typically associated with hostile takeovers, where the target company is unwilling to be acquired. However, acquisitions can also happen amicably, with the cooperation of both parties.

In contrast, a merger refers to the process in which two companies come together to operate as a new entity rather than continuing as independent businesses. Typically, this involves companies of similar size, resulting in what is known as a merger of equals.

What is the Merger and Acquisition Process?

The mergers and acquisitions process consolidates various business entities and assets through financial transactions. The M&A process encompasses all steps required to merge or acquire a company, from inception to completion. This includes planning, research, due diligence, closing, and implementation.

What is an Example of a Merger and Acquisition?

Here are some of the most notable and successful mergers and acquisitions companies from the past few decades, which have significantly impacted their respective industries and showcased the potential for growth and innovation through strategic partnerships:

• Google’s acquisition of Android
• Disney’s acquisitions of Pixar and Marvel
• Exxon and Mobil’s merger is a prime example of a successful horizontal merger.

7 Types of Mergers and Acquisitions

Mergers and acquisitions (M&A) come in various forms, and they can be classified into seven main categories:

Horizontal Merger

This occurs when companies in the same industry and production stage combine. The goal is to increase market share, reduce competition, and achieve economies of scale.

Vertical Merger

In this type, companies at different stages of the supply chain within the same industry merge. This approach helps businesses gain control over their supply chain, enhance efficiency, and cut costs.

Conglomerate Merger

This involves companies that operate in unrelated industries. The main goal is to diversify and spread risk by entering new markets or leveraging different strengths.

Market Extension

Market extension mergers occur between companies in different geographical areas offering similar products or services. These mergers allow the companies to broaden their market reach and customer base.

Product Extension

In this case, companies in related industries merge to expand their product offerings. The aim is to boost the product line and create opportunities for cross-selling.

Reverse Merger

When a private company acquires a dormant, publicly traded company, it can skip the lengthy and complex traditional IPO process. This move allows the private company to quickly enter public markets, gaining access to new opportunities for growth and investment.

Acquihire

This strategy focuses on acquiring a company to gain talented employees rather than its products or services. It allows the acquiring firm to quickly onboard skilled individuals, often in technology or development.

Each type of merger or acquisition has its purpose and methods. A company’s best strategy will depend on its specific goals and circumstances.

How Mergers are Structured

Mergers can take many forms, depending on the association between the two companies involved in the transaction:

• Horizontal Merger: This occurs when two direct competitors merge, sharing the same product lines and markets.
• Vertical Merger: This type involves a company merging with its supplier or customer, such as an ice cream manufacturer merging with a cone supplier.
• Congeneric Merger: In this scenario, two businesses cater to the same consumer base but in different ways, like a television manufacturer merging with a cable company.
• Market-Extension Merger: This merger occurs between two companies that sell identical products in different markets.
• Product-Extension Merger: This involves two companies that sell different but related products in a similar market.
• Conglomeration: This type involves two companies with no overlapping business areas.

Additionally, mergers can be categorized based on the financing methods employed, each with distinct implications for investors:

Purchase Mergers

As the name indicates, this type of merger involves one company buying another, either with cash or by issuing a debt instrument. This sale is taxable, which can be advantageous for acquiring companies due to tax benefits.

The assets acquired can be adjusted to reflect the actual purchase price, allowing the difference between the book value and the purchase price to be depreciated annually, thereby reducing the acquiring company’s tax liabilities.

Consolidation Mergers

This type involves forming a new company by combining both entities. The tax implications for consolidation mergers are similar to those of purchase mergers.

5 Merger and Acquisition Mistakes in Indonesia

Companies often need help with challenges, including regulatory hurdles, cultural differences, and integration issues, which can lead to unsuccessful outcomes.

As a result, failed mergers and acquisitions are not uncommon in Indonesia, especially when companies underestimate the inherent risks involved. However, investors can mitigate these risks and avoid costly mistakes by proactively seeking expert guidance throughout the M&A process.

Not Familiar with Regulations

A merger and acquisition is only possible when the resulting entity complies with local laws and regulations. Therefore, you must have a solid understanding of your industry’s compliance requirements.

For example, mergers and acquisitions between popular companies need to have a strong grasp of the compliance environment in their industry. A deal can fall flat easily due to your unfamiliarity with M&A legislation.

Failed Due Diligence

This is one of the biggest mistakes in mergers and acquisitions in Indonesia and is avoidable. Many companies need to take due diligence seriously and scrape the surface of their target companies.

Due diligence doesn’t just involve the target’s financial aspects of the target it also takes the company’s potential and reputation, employee satisfaction and retention, company model, risk adjustments, and future objectives into account. Take your time with financial statements.

Follow Your Heart But Not Common Sense

Investors and business owners sometimes can let their desire trump their logic regarding mergers and acquisitions in Indonesia. An intelligent investor should never let desire or excitement outdo the facts and realism of M&A deals.

No matter how excellent a company may be from the outside if an M&A transaction doesn’t make any legal, financial, or other practical sense, it will eventually come to nothing.

Pay More than You Should

Sometimes, investors or entrepreneurs are so eager to wrap up a merger and acquisition deal that they pay too high a price. In other words, they pay more than the deal is worth. To avoid this pitfall, acquirers should spend more time and effort negotiating the transaction with the target company.

Do remember to figure out how and when the resulting company will turn a profit before closing a deal.

Not Having a Professional Team

One small mistake can sometimes lead to detrimental outcomes or failure during a merger and acquisition activity. However, having a qualified professional team and specialists can help prevent this misstep.

Before negotiating an M&A deal with anyone related to your target company, discuss your M&A plans with a team of experts, including a lawyer, an accountant, PR professionals, and specialists.

Why Should You Use a Consultant For Your Mergers?

M&A consultants are crucial in facilitating smooth and successful M&A transactions. They guide companies through the financial, operational, and regulatory hurdles that may emerge. They act as support personnel, offering logistical assistance rather than taking control of the deal.

Essentially, consultants serve an advisory function. They are not meant to replace lawyers, accountants, or senior managers but provide a stabilizing influence. Their extensive external experience empowers you to make the most informed and profitable decisions.

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