Merger and Acquisition Strategies
Merger and acquisition strategies allow businesses to expand into new technologies, markets, and territories, build new skills.3 min read
Merger and acquisition strategies allow businesses to expand into new technologies, markets, and territories, build new skills, and increase their edge on the competition.
Types of Mergers and Acquisitions
Mergers and acquisitions (M&A) can either be strategic or financial. The latter is a transaction that is primarily done as an investment, to earn quick money, or with another financial purpose.
On the other hand, strategic M&A transactions are done to solve business problems or take advantage of opportunities. For example, this type of M&A may allow the company to:
- Expand into new facilities
- Add a new type of product
- Gain intellectual property (IP) and expertise
- Break into a new market
- Add key skills
- Change the power balance in a market
- Gain industry credibility
A strategic M&A provides value for both firms involved.
Reasons for Strategic M&A
Let's take a closer look at some of the most common reasons for strategic M&A transactions.
- To fill in gaps in client lists or service offerings. These gaps often occur when new laws or external events result in marketplace changes. This creates an opportunity for a strategic merger. For example, after 9/11, changing federal requirements allowed many firms with the required experience to earn valuable contracts in national security and defense by partnering with other businesses and agencies.
- To gain new IP and talent, especially if you need experienced staff in highly specialized areas such as accounting, engineering, and online security. IP is a valuable asset that can allow a firm with a solid portfolio to obtain dominance over market competitors.
- To take advantage of cost and revenue synergies. With cost synergies, you can consolidate two similar entities to cut operations and resource costs. This involves eliminating redundant employees, facilities, and areas of business operation while creating a larger overall budget. Revenue synergies are designed to increase prices, drive sales, or shift the dynamics of the market. Companies may use this strategy to break into new territories, eliminate competitors, enter new markets, expand their audience with cross-selling, and increase sales opportunities.
- To add a new business model, such as shifting from the billable-hours model common among professional services firms to a fixed fee, subscription, or performance incentive model. If you want to offer a new type of service, why not acquire a firm that is already providing that service effectively?
- To reduce the learning curve and save time when plotting a growth strategy. For example, it might take more time and money for your firm to offer a new service than it would to acquire the capacity to do so in the form of another business with an integrated customer base.
Planning a Successful M&A
Each M&A transaction must have an inherent strategy. No one-size-fits-all formula for a successful deal exists, although it helps to have good ideas that are well articulated and specific. When the purpose of an M&A is vague and strategic rationale is lacking, the deal is more likely to fall apart.
Successful strategic rationales tend to fit one of six frameworks: improving a target company's performance, expanding market access to products, gaining new skills and technologies, scaling within an industry, removing redundancies, and helping promising new companies thrive.
To improve a target company's performance, the acquiring company will reduce costs to improve their cash flow and profit margins, often while speeding revenue growth. This is a common strategy among successful private equity firms.
Expanding market access to products is a good strategy when the company to be acquired has innovative products but are too small to expand their market reach. This is a common strategy in the pharmaceutical industry.
Tech companies often purchase other companies that have the skills and IP they need to improve their existing product portfolio. This allows them to avoid royalty payments and gain power over competitors.
Scaling within an industry allows companies to take advantage of economies of scale. This is common for smaller acquisitions since most larger companies are already at scale.
Reducing excess is a strategy used when a specific market sector has more supply than demand. For example, energy companies may purchase and close smaller plants as new competitors come into the market and drive up supply.
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