Mergers and acquisitions are a class of economic processes of business and capital consolidation occurring on macro- and microeconomic levels, as a result of which larger companies appear on the market.
Depending on the nature of the merger (integration), the following types of company mergers are distinguished:
1. Horizontal – a merger of companies engaged in the same type of activity.
Advantages: increased competitiveness.
2. Vertical – a merger of the companies which are engaged in different kinds of activity. In such a transaction, often one of the companies supplies raw materials. The other one is engaged in the production of finished goods.
Advantages: reduction of the cost of production, an increase in profitability of production;
3. Parallel (generic) mergers – the union of companies that produce interrelated goods. For example, one of the firms produces computers, and the other produces components for the same computers. This kind of joint work improves the quality of the manufactured goods.
Advantages: concentration of the technological process of production within one company, the possibility to optimize production costs, an increase in the profitability of the new company (compared with the sum of the profitability of the companies involved in the merger);
4. Conglomerate (circular) mergers of companies – a merger of companies not connected between themselves by any production or sales relations. A merger of this type is a merger of a firm in one industry with a firm in another industry that is neither a supplier, consumer, nor a competitor. There is no obvious benefit to such a merger, and it depends on the particular situation;
5. Reorganization of companies – a merger of companies involved in different areas of business. The benefit of a merger of this nature also depends on the specific situation.
One of the challenges that comes with design services is the cyclical nature of the services business. When the economy tightens and corporates are watching their operational expenses, the first step will be to halt any external contracts/contractors which are not deemed absolutely essential.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers.