In the next three posts, I will look at the steps to merger & acquisition success. In post one, I have focussed on strategy development, in post two I will look at the search and screen and in the third and final post I will cover the execution and integration phases.
STEP ONE: STRATEGY IS THE KEY
To be successful in executing mergers, acquisitions and takeovers – or M&A they’re referred – you need to follow a structured process. The purpose of strategy development is to make a company clearly articulate what they want to achieve through the M&A process. All too often, companies acquire others for a host of mismatched reasons: gaining market share, economies of scale, entering new markets, accumulating critical assets, fortifying weak product lines, acquiring technology, etc. However, each one of these motives implies a different target profiling criteria, transaction structure, and integration process.
History tells us that getting the motive wrong can be disastrous and lead to the acquisition of entities that ultimately destroy value for the acquirer. A number of companies have come undone by undertaking a transaction that made a lot of sense when it was sold to them by the investment bankers, but ultimately failed to deliver when reality set in.
If you want to be successful in M&A activities (and be able to replicate that success), you need to start with specific, well-articulated motives and then use them to guide your company through the rest of the process. Your M&A motives will be defined in the form of a succinct statement called a “Strategic Rationale”. Then, you will use a process called “Target Profiling” to develop the basic criteria a potential acquisition must fulfil.
According to McKinsey and Company[1], the strategic rationale for an acquisition that creates value is typically at least one of the following five archetypes:
1. Improve the target company’s performance
Put simply, buying an underperforming company, reducing costs to improve margins and cash flow and also taking steps to accelerate revenue growth – usually with a view to resell in the future.
2. Consolidate to remove excess capacity from industry
As industries mature, they typically develop excess capacity which often generates more supply than demand. M&A activities can be used to remove excess capacity from the market by removing a competitor, their production facilities or their products.
3. Accelerate market access for products
Often, small companies with innovative products have difficulty reaching the entire potential market for their products. A company with larger distribution capacity can seek to acquire such smaller entities and thus accelerate sales of the smaller companies’ products.
Similarly, if a company lacks a distribution channel in a particular country or market segment, it may choose to acquire another entity that can provide that distribution channel immediately.
4. Get skills or technologies faster or at lower cost than they can be built
Companies can use acquisitions to close gaps in their technologies or skills, allowing the entity to quickly expand from offering a single product/service into offering a broad range of complementary (or not) products and services. This strategy can also be used to deprive a competitor of access to technology that might otherwise become generally available in the market.
5. Pick winners early and help them develop their businesses
The final winning strategy according to McKinsey and Company involves making acquisitions early in the life cycle of a new industry or product line, long before most others recognise that it will grow significantly.
6. Roll-up strategy
Roll-up strategies consolidate highly fragmented markets where the current competitors are too small to achieve scale economies. This strategy works when businesses as a group can realise substantial cost savings or achieve higher revenues than individual businesses can.
7. Consolidate to improve competitive behavior
Companies in highly competitive industries sometimes use consolidation to reduce price competition. The evidence shows, however, that unless an industry consolidates to just three or four companies and can keep out new entrants, pricing behavior doesn’t change: smaller businesses or new entrants often have an incentive to gain share through lower prices. So in an industry with, say, ten companies, lots of deals must be done before the basis of competition changes.
8. Enter into a transformational merger
A commonly mentioned reason for transaction is the desire to transform one or both companies. Successful transformational mergers are rare, however, because they involve much more than a simple combination of businesses. Transformational mergers are successful where two companies are transformed into an entirely new company with a redefined management team, mission, strategy, portfolio, processes and organisational structure.
Theoretically, your strategy for engaging in any M&A activity should fall somewhere within these eight categories.
Jason Maywald is a highly experienced legal and transactional advisor in the insurance and medical assistance sectors. He holds a Bachelor of Laws from the Queensland University of Technology, and has significant experience in competitive corporate acquisitions, IPOs, commercial property acquisitions and disposals, corporate restructures, and hostile and friendly takeovers.