Build Your Bottom Line With These M&A Strategies
Mergers and acquisitions are inherently high-risk, high-reward propositions. An estimated 70% to 90% of all M&A deals fail. Yet top executives continue to pursue the strategy, and for good reason. A well-executed M&A deal can help companies lower costs, raise profits, and expand into new markets.
Creating value from an M&A deal hinges on identifying strategic goals and effective execution. To assist you with your next M&A deal, use the following guide to identify key processes and strategies you can undertake to enhance M&A efficiency.
What Is M&A Strategy?
M&A strategy refers to the purpose behind the deal. What’s the driving aim that you’re trying to achieve? Common M&A strategies focus on the following:
- Lowering costs through scale
- Acquiring new clients
- Acquiring processes, patents, or other intellectual or physical property
- Expanding into new markets
- Advancing toward business goals
- Achieving synergy
A 2019 study by Deloitte identified effective integration as the number one variable behind M&A success. An M&A strategy will outline exactly how the acquired company will fit into existing processes to increase profitability in the long term. Integration can take many forms. In the case of a classic horizontal integration such as the 2020 merger of T-Mobile and Sprint, the two major mobile networks took advantage of economies of scale to bolster their 5-G infrastructure updates.
In this example, the two companies identified specific goals that the merger would help them achieve, such as dramatically expanding their 5-G network to cover 99% of all Americans within the next five years. Meanwhile, the 2002 acquisition of PayPal by eBay provided the e-commerce giant with greater payment efficiency capturing additional value in the sales process.
M&A Strategy Framework
Unfocused thinking inevitably leads to unfocused deal-making. Developing an M&A strategy framework will help keep your deal on the right track. In recent years, surgeons have increasingly adopted the use of checklists prior to, during, and post-surgery. Despite all their education and expertise, the average surgeon still derives measurable benefits from going through a step-by-step checklist.
An M&A deal is no different. Although the teams involved are typically made up of high-level business operatives, many of whom have MBAs and decades of organizational experience, identifying a sequence of clear benchmarks to hit helps to keep the purchasing party on track. Prior to beginning negotiations, it’s vital that the acquisition team conduct a thorough analysis of the business to identify potential strengths, weaknesses, and synergies.
The Daimler Example
Special attention should be paid to how the two companies will integrate with one another. Daimler’s 1998 acquisition of Chrysler has gone down in the annals of M&A history as a spectacular failure. The business deal looked great on paper. Both auto manufacturers were wildly successful in their respective markets, and the supposed “merger of equals” would provide each with much-needed international exposure, while also granting both parties access to valuable technical knowledge.
The deal quickly soured. In just three years, the combined value of the two companies equaled that of just Daimler at the time of the merger. Over the course of nine years, Chrysler’s value dropped from $35 billion to $7.4 billion. One large reason for the deal’s failure was Daimler’s decision to overhaul Chrysler’s lean production model in the name of reducing redundancies. Rather than recognize the value Chrysler created through its fast production cycle, Daimler inadvertently made its processes more complicated and less efficient.
Cross T’s and Dot I’s
A competent strategy fit review will reveal which business processes should be kept and which need to be overhauled. Afterward, it’s imperative that the buy side team undertake a risk analysis to better understand the cost of a potential deal failure. If the deal appears financially sound after these two steps have been taken, then it’s time to structure and price the deal. Finally, it’s time to conduct due diligence. A careful analysis of the acquired company will give you the opportunity to spot any last-minute red flags.
During the negotiation stage, you should pay close attention to your pricing. Overpayment routinely tops the list as one of the most common reasons for M&A failure. Exercise caution when estimating unrealized synergies and pre-revenue companies. Now comes the crucial bit. Having reached a deal, integration failure remains an all too common problem for companies going through the M&A process.
Effective execution takes time and effort. Allocate your resources accordingly and communicate expectations with your executive team members. As you proceed through the integration process, keep in mind that cultural integration is just as important as procedural and system-based integration. Poor cultural fit can tank an otherwise fantastic deal.
Successful integrations typically last between three and six months, although, as in all things, the particulars will determine the exact length of time for your company. As the integration process comes to a close, convene a meeting with key stakeholders to conduct a post-integration analysis. Identify what went well and what went wrong. Not only will uncovering hiccups help with your next M&A, but spotting weak areas can help you iron out inefficient processes and increase synergy in the newly acquired business.
M&A Best Practices
While no two M&A deals are exactly alike, experience has revealed a variety of best practices to follow during the M&A process. Utilize these tips to safeguard against unprofitable deals.
It’s About What You Can Give
A 2016 Harvard Business Review article raised a provocative challenge to the prevailing notion that M&A deals are all about what the acquired company can do for the buyer. These types of deals — while common — result in inferior results because the purchasing company fails to make strategic investments in the newly acquired business.
Remember, an M&A deal is a strategic partnership between two companies. Too many M&A deals suffer because the benefits are viewed unilaterally. In other words, leaders concern themselves with what the acquired company can do for them and not what they can do for the acquired company. This mindset is both pervasive and dangerous.
Buyers often have access to liquidity, while sellers generally offer new technology, processes, markets, customers, and/or synergy potentials. Help yourself by helping your newly acquired business.
The Importance of Pricing
Some experts have identified pricing as the number one reason why M&A deals fail. Many otherwise profitable deals fall prey to the bidder’s curse. Irrational exuberance causes buy-side teams to inflate valuations to extreme levels. Competition exacerbates this condition. Auctions have a tendency to push up prices past the point of profitability.
Mirage and Ego
Facebook’s 2014 acquisition of WhatsApp for $21.8 billion almost certainly represented a poor valuation of the company. But, with 465 million users at the time of purchase, the company appeared ripe for monetization. The 2010s saw a spate of unprofitable tech companies achieve high market caps based on a belief that after reaching a critical mass, these businesses would find a way to leverage their user base to achieve healthy profit margins.
The sheer scale involved also invited some ego-stroking that did not prove to be business-savvy. More than a few M&A researchers have identified ego as one of the primary drivers behind unsuccessful deals. When a CEO chooses to make a name for themselves by acquiring a company that sounds impressive but whose financials don’t quite match up, investors pay.
Managing Your Company’s Strategy in M&A
Traditionally, managing a company’s M&A strategy involved copious hours spent in meetings and on the phone. High-level workers become consumed with analysis, due diligence, and integration management.
Consider using a tool made specifically for M&A such as Devensoft. Devensoft allows your entire M&A team to easily share, edit, and revise important files and documents all in one convenient location, enabling cross-team communication and collaboration. Let Devensoft help you manage your M&A process from beginning to end.