M & A Strategies
Mergers and acquisitions strategy or M&A strategy is a company’s approach and method for combining or acquiring other businesses to achieve certain goals, such as expanding market share, accessing new technologies, or diversifying product offerings.
To understand M&A strategies, it’s important to distinguish between two buyer types: financial and strategic buyers.
Financial buyers
Financial buyers engage in M&A transactions with the goal of financial return. These are professional investors, often from private equity firms, who stick to the following process:
Acquisition. They choose target companies, identifying and purchasing the best financial option.
Performance enhancement. They work to enhance the target company’s performance by implementing measures to reduce costs, improve cash flow, and boost profit margins. The primary objective is to enhance returns on invested capital.
Exit strategy. They sell the acquired company or list it on the stock market with an initial public offering.
Strategic buyers
Strategic buyers are companies that regard M&A as a logical extension of their broader growth strategy. In strategic mergers and acquisitions, one company buys another to pursue specific strategic aims, such as:
Synergy realization. When starting the M&A processes, companies often focus on cost synergies. However, studies demonstrate that a failure to consider revenue synergies from the start of M&A may slow the realization of value by a year or more. To prevent it, companies involved should develop cross-functional teams to create realistic plans for achieving goals.
Market expansion. The most visible sign of a company’s growth is market presence, often quantified through metrics like market share, customer loyalty, and brand recognition. When Microsoft purchased Linkedin for $26.2 billion, it entered the professional networking and social media space, broadening its market access beyond traditional software and technology.
Access to new technologies and intellectual property. Without innovation, businesses are left behind. That’s what happened to hundreds of large companies, including Kodak, which was so focused on the success of photography film that it missed the digital revolution. That’s why pursuing technology-driven M&A opportunities is a must, especially for tech companies and the pharmaceutical industry. It allows you to get the technology quickly without the need to develop it and helps avoid royalty payments on patented technologies.
Strategic planning in M&A
When the objective of an M&A lacks clarity and a well-defined strategic rationale, the deal falls apart. Take, for instance, the merger between America Online and Time Warner, which was valued a t $350 billion in 2000. Despite initial expectations for success, the new entity failed. The inability to see the future of the internet, understand the landscape of the media industry, and identify cultural misalignments led to the collapse of a merged company.
That’s why, before starting the M&A process, careful strategic planning is essential. It involves outlining the objectives and actions necessary for a successful transaction. Consider the following:
Clear objectives. Define the strategic objectives driving the M&A, whether it’s entering a new market, acquiring technologies, or realizing cost savings through economies of scale. For example, when acquiring LinkedIn, Microsoft formulated its goal as “to grow the professional networking site and integrate it with Microsoft’s enterprise software,” indicating market expansion as their key strategic objective.
Thorough due diligence. Prepare to conduct comprehensive due diligence on the target company, evaluating its financials, operations, IP, and legal aspects. Seek advice from professional services firms that can help identify potential risks or opportunities associated with the target firm. Also, leverage tools such as virtual data rooms to ensure secure and efficient information exchange.
Employee retention. According to EY research, 47% of employees leave after a transaction. The number grows to 75% within three years. To minimize the human capital loss, both the target and acquiring firm are recommended to nominate the 20% of critical talent in each business area and prepare retention packages for them. It’s also essential to develop a comprehensive M&A communication plan to provide employees with a clear vision for the company’s future.
M&A regulatory compliance. During M&A, both target and acquiring companies become subject to regulatory scrutiny and legal considerations from bodies like antitrust authorities or competition commissions. The aim is to assess the transaction’s potential impact on market and price competition to prevent monopoly and ensure compliance with relevant regulations. To mitigate legal complexities, seek advice from legal experts specializing in M&A.
Types of M&A strategies
Companies may employ various M&A strategies, depending on the objectives they want to achieve.
Horizontal mergers - Two businesses that operate in the same industry and share the same product lines and markets (direct competitors) They merge to eliminate competition, reduce costs, and achieve economies of scale by combining similar operations
Vertical mergers - Companies at different stages of the supply chain merge to improve supply chain efficiency, reduce operating costs, and enhance control over the production process
Market extension M&A - Companies selling the same products in different markets They merge to expand market reach and increase customer base.
Product extension M&A - Companies offering complementary products or services in the same market. They merge to diversify product or service offerings and cross-sell to existing customers.
Conglomerate mergers - Two companies with unrelated business activities They merge to increase market share and diversify businesses.
Cross-border acquisition - Companies aiming for global expansion and international market access They merge to expand into new markets internationally.
It may happen that after carefully analyzing a deal, the buy-side or sell-side decides that merger and acquisition strategies don’t present the best choice for the company’s organic growth. In this case, it may consider oher options, such as an alliance, joint venture, or franchise.
An alliance is a collaborative partnership between two or more companies that involves the sharing of resources and expertise. In joint ventures, two or more businesses come together to undertake a specific project. Franchises grant the right to operate using an established business model.
Some companies might also opt for a divestiture strategy that involves divesting some acquired assets or business units to grow and increase market value.
Key takeaways
M&A strategy involves a company’s methods for combining with or acquiring other businesses to achieve specific goals like cost and revenue synergies, market expansion, or access to new technologies.
Mergers and acquisitions business strategy types include horizontal, vertical, market-extension, product-extension, conglomerate, and cross-border acquisition strategies.
Strategic planning is vital for successful M&A, emphasizing clear objectives, thorough due diligence, employee retention strategies, and compliance with regulatory requirements.
To achieve cultural alignment, which is so important in M&A, consider early cultural due diligence, a comprehensive cultural integration plan, leadership alignment strategies, and regular feedback sessions.
The most common risks companies should address in M&A are uncertainties in economic times, target overvaluation, and poor due diligence.