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August 04, 2022 5 minute read

Understanding Your M&A Deal Strategy: The Driving Force Behind the Deal

M&A Strategy

Understanding your M&A deal strategy is vital for ensuring all stakeholders are on the same page. Companies often fail to identify and communicate the primary purpose driving the deal. Without knowing what that driving force is, it becomes a challenge to articulate the exact M&A strategy required so that executives and front-line personnel can step up and own it through all phases of the deal.

Unmet financial goals and even failed deals are common when teams don’t have the clear direction a precise deal strategy provides. Fortunately, you can formulate a logical M&A strategy by answering these simple questions about your company’s needs and your target.

Questions to Answer for Understanding Your M&A Deal Strategy

Asking yourself these questions will help you gain clarity about your M&A strategy by working through your company’s vision, its problems, and the benefits of solving those problems. The deal’s value proposition and value drivers will become apparent.

You’ll be able to share the reasons and advantages driving the deal with your team and your target so that everyone works together.

What is your firm’s vision?

Where does your company want to be three to five years out? Understanding how a potential deal fits or doesn’t fit into your company’s vision helps you decide which opportunities to pursue. If you see a great deal but executing it would distract you from your core business activity, getting wholehearted support from other team members could be difficult.

How Does the Deal Benefit You?

What problems does the deal solve for your company, and what benefits does solving those problems generate? Knowing the benefits of solving these problems can motivate your team to own the strategy and the deal. Because team members will clearly understand how the company will benefit and grow, they’ll be able to set individual goals in line with making the deal’s synergies become a reality.

What are the advantages for the Target?

What problem does the deal solve for the target? Answering this gives you value drivers that make excellent selling points, motivating your target to accept the deal and push it through all of its phases to completion as efficiently as possible. Everybody loves a win-win. And the right M&A solutions help everyone win.

Example of Formulating an M&A Deal Strategy

Suppose your young company is reaping the benefits of discovering a technological advancement that allows you to produce a better product more cost-effectively than anything your established competitors have. You’ve changed the industry dynamics, are explosively growing, and are quickly amassing capital.

Your Vision

Three to five years out, you want to be the dominant player in the market. Your team is excited and working hard to achieve your shared vision.

The Problems You Face

You face a high tax burden, low brand recognition, and a lack of distribution channels. Solving these issues would bring your vision within reach.

Your Target’s Problems

Your most significant competitor has a strong national brand presence but consistently loses money amid declining sales because the company lacks innovation. Its customers are weary of seeing the same product repackaged. Capital is becoming more expensive to acquire as your competitor’s debt load increases, and lenders see a higher risk.

The Deal’s Benefits

A deal with this competitor would bring you:

  • The ability to market under an established, widely recognized brand
  • A ready-made distribution network, improving your time to market and accelerating your expansion
  • Tax benefits: using your competitor’s losses to offset your profits

The deal would benefit your competitor by:

  • Granting the company access to new sources of capital
  • Giving the company access to your new technology
  • Returning the company to profitability

Your Deal Strategy

The primary driving force behind this deal is your need for a more extensive customer base. So the goal of your M&A strategy is to improve your product’s time to market by using the target’s brand name and distribution network. The secondary goal is relieving your tax burden.

This would be a strategic deal to increase your sales, grow your market share, and ease your tax burden. It would not be a financial deal that you enter into with the intention to exit at a later point to reap a profit on the sale.

The deal would solve both firms’ problems, and using the vision-problem-benefit model would smooth the task of communicating your strategy to everyone. You could use the model to gather input and secure support through all of the deal’s phases, from sourcing and targeting to negotiating, purchasing, and implementing.

The best tool you can use to keep everyone informed and ensure they work together through those phases is a complete M&A software solution.

Other Common M&A Deal Strategies

There are many different reasons for companies to enter M&A deals, depending on the needs and vision of the participants.

Take Advantage of Economies of Scale

Automakers have often consolidated to spread development and production costs over more cars. They also benefit from financial and infrastructure economies of scale. The challenges of merging two large, established companies begin with human resources. Power struggles and human nature present themselves as people from different corporate cultures are forced to work together. Communication challenges arise.

Remove Excess Capacity

One company captures another to remove production capacity and control supply. This type of merger usually occurs between established companies in mature industries. Successfully executing such a deal is challenging because of the two companies’ entrenched values and cultures. And there’s also the struggle of deciding which employees to let go and which facilities to close.

Gain Expertise and Resources

Software companies often acquire firms for their experts and technologies. The problem lies in keeping the most talented workers, who may decide to leave rather than adjust to new management.

Execute a Business Transformation

Companies merge to create an entirely new business model with a new culture. This type of business transformation is not for the faint of heart. To succeed, CEOs, teams, and advisors require a seismic shift in their philosophy, from merely an operational view into a transformative vision.

Take Advantage of Vertical Integration

A manufacturer might benefit from buying suppliers to control resources and secure better raw-material prices. The same manufacturer could also take over companies that sell its own products in an attempt to retain more of the profits.

Utilize Excess Cash

Putting extra funds to work by buying firms that will help fuel growth can bring higher returns than parked cash. Buying competitors or firms that enable vertical expansion is often the first place companies with excess cash look. Opening new distribution channels like telemarketing or online sales is also a possibility.

While there are many possible deal strategies,  one tool will simplify the entire M&A process and enable companies to avoid mistakes.

Avoiding Errors in Your M&A Deal Strategy

The biggest mistakes in M&A deals arise when you stray from the fundamentals of focusing on your vision, solving problems, and reaping the maximum synergies. Clearly communicating your deal strategy to leadership, the board, investors, front-line personnel, and the target keeps everyone informed and working together.

Having a clear timeline is also essential so that participants know when they must act and how long they have to deliver. Backup plans are also a necessity. Even the best-laid plans can go awry.

The most powerful tool you can use to execute and track your M&A deal strategy is complete M&A software. You can streamline the entire process by:

  • Tracking deals from identification to implementation
  • Keeping your teams organized
  • Instantly accessing dynamic progress reports
  • Building customizable playbooks
  • Organizing teams with powerful project management tools
  • Having all documents in one place

Learn more about pipeline management.

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