A Brief Introduction to Portfolio Firms and Mergers

It has been observed by industry watchers that equity firms play a crucial in helping to amalgamate fragmented sectors of an industry. One of the methods that equity firms implement to amalgamate the fragmented sectors of the industry is by merging two or more firms. Mergers are often essential for the health of the industry as a whole. Say for instance, two firms producing similar products or providing similar services are not being able to perform at par, due to lack of funds. In such a scenario a portfolio firm or an equity management firm can step in by merging the two firms. The combined funds of the two firms now help to promote the products and services offered by both firms.

According to Miles Arnone MA, the Managing Director of Cannon Capital, an equity investment firm, mergers are beneficial for both the weak firms and the equity investment firm. The portfolio firm stands to gain if the merged companies perform at par as the portfolio firm will always be the primary stakeholder in the merged companies. After a merger the brand proposition and brand value of the combined firms improve greatly. Additionally, it will add to brand image of the portfolio firm if the merger is a success.

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Some of the business activities carried out by a portfolio firm post a merger are as follows:

  • Involvement in the business activities of the merged firms: The portfolio company’s management team will not only oversee all the business activities of the merged firms, but also provide consultation service with regard to improving the productivity levels. This is essential to ensure that the merger is profitable for the firms, industry and the equity investment company.
  • Change in hierarchy: According to Miles Arnone MA, it has been observed that a change in the hierarchy of the merged companies often produces positive results with regard to boosting productivity levels. Arnone believes that introducing an efficient management system can ensure a higher rate of employee satisfaction, improve stakeholder confidence and promote brand value. All of these are essential to ensure a higher productivity level.
  • Improved funding: On successful completion of a merger, the funding that the merged companies receive improves. Not only are the funds of the merged companies are combined, but also funding can be acquired from the equity investment firm. Since the portfolio firm, which plays a pivotal role in the merger, too provides capital investment in the merged firms, the production levels increase.

Thus, mergers are beneficial for the combined companies as well as for its employees. The combined employee pool means better knowledge sharing, improved levels of productivity and better division of labour. Company employees can now collaborate with others with similar levels of expertise. This ensures the overall growth of the merged company and its employees as well. Hence, in largely fragmented industries like pharmacy, chemical or construction equipment manufacturing companies, mergers are a boon as it improves the chances of the companies surviving in highly competitive business environment.

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