How to Deal With an Attractive M&A Target that Does Not Fit Your Strategy?
This is one of the most common M&A mistakes we see from clients. An attractive M&A transaction comes along – it might be undervalued, it might be high growth, it might be in an exciting sector sort of adjacent to our existing footprint – but we know it doesn’t really fit the strategy. Absent a clear strategic blueprint for executing M&A it is too easy to post-rationalise a deal thesis, and somehow sell the deal to the board. This approach to M&A usually leads to a waste of available capital and management time on deals that create a disconnected portfolio of businesses with limited strategic synergy.
Why do companies make the mistake of buying M&A targets that don’t fit strategy?
They don’t really have a strategy
One of the first questions I ask students attending our Core M&A Skills training course is “Why are you taking this course?”. The most common answer is “Because our strategy is to grow by M&A”. A few additional questions establish this ambition is often not much more than “We are financially strong, and would like to get bigger by buying companies that somewhat fit our existing areas of activity”.
This approach rarely works. Good M&A flows from a clearly developed strategy. From developing a strategic vision that sets out a view of the future for the company and its industry, understands where the company has – or needs to have – competitive advantage, and chooses the markets in which the company will choose to compete. The strategic vision should then guide a strategy planning process in which each strategic business unit, operating unit, and core function develops interlinked actions to deliver the vision. At each of these levels executives should examine opportunities for both organic and M&A routes to achieve the strategic objectives.
Where M&A is the chosen route managers must be made to articulate why they need M&A to deliver against the corporate strategy. In particular what assets and capabilities they want to add through M&A. From this they can develop a Strategic Acquisition Theme that defines the criteria an M&A target must meet. Potential targets should be categorized by geography, sales channel and product types, as well as standard screening metrics such as revenues, number of employees, growth, product portfolio, technologies and ownership. Within the chosen strategic theme, the M&A teams can then start to build relationship with potential targets, and assess the opportunistic transactions that present themselves.
They get distracted by opportunistic approaches
I’ve heard this described as “shiny-object syndrome”. The M&A team, and sometimes executives and the board, are swayed by deals brought to them by intermediaries. They manage to cobble together a somewhat convincing deal thesis around a transaction. It seems exciting and no one really questions how the M&A transaction will generate value, never mind how it fits strategy.
The reality is that many boards, and even more so investors, are ill-equipped to judge the strategic and operational merits of the M&A transactions they are asked to approve. They rely on the expertise of the managers and board members they have appointed to deliver the company’s mission. Managers and boards they prefer to back, rather than deny or obstruct.
We’ve built it, now we need to be seen using it
Paradoxically this problem stems from an initially sound approach. A decision has been made to use M&A as one of the tools to execute strategy. A high-quality M&A team is pulled together and tasked with developing and delivering M&A targets. The CEO has announced your company’s intention to acquire, and the M&A team incentivised to complete transactions. The hammer has been built, now we need to drive in some nails!
The M&A team are diligent and before long there is a list of targets, a stream of teasers from intermediaries, some ongoing target discussions, and perhaps a due diligence exercise or two. Now we need to drive in that first nail. Completing an M&A transaction becomes the focus of attention, strategic fit an afterthought.
How do good companies make sure M&A aligns with strategy?
No matter how authority for delivering M&A within the organisation is devolved, it is ultimately the board’s responsibility to ensure that the transactions they approve align with strategy. In ideal circumstances the Board will be sufficiently involved in the detail of the strategy development process to make that assessment. That said, in a giant corporation the board are unlikely to have the depth of knowledge or time to grasp all the technical and commercial ramifications of a particular transaction.
To meet this knowledge-gap many successful acquirers have built structures that resemble those of private equity firms when they assess potential targets. A formal investment board will review proposed transactions, and target lists, and make assessments of strategic fit, as well as the more traditional financial and commercial metrics. The investment board will be supplemented with additional internal or external expertise as necessary to meet the challenges of assessing specific transactions.
So how should we deal with an M&A target that does not fit our strategy?
When a transaction does not fit strategy the investment board is faced with three distinct possibilities:
The proposed M&A transaction, although not consistent with the strategy in place, is consistent with one of the strategic options explored and rejected during the strategy development process. In these circumstances the board should circle back and review the original decision to reject this direction. Have things changed, other than the availability of the target, in the interim? If no, stick with the original plans and reject the proposal.
It is a good opportunity, but it changes the strategy. In short, this finding means the original strategy was wrong. Is this really the case or are we getting seduced by the lure of the available rather than the suitable? If the original strategy was wrong, again we need to circle back and work the implications through the strategic planning cycle. If we don’t different parts of the organisation might well be working in contradictory strategic directions.
The deal doesn’t fit strategy, but the strategy is correct, and the transaction should be rejected. I’d hazard this is the most common situation. Too often the M&A team, and the board, find these deals irresistible. The unsuitable transaction becomes a capital and time-wasting distraction. Worse, competitors capitalise on the strategic direction they had intended to follow.
About The Merger Training Institute
We provide practical, in-career mergers and acquisitions training for boards, executives and professionals in global corporations.
Our short, intense M&A courses are designed for executives needing to understand best M&A practice or adding new M&A responsibilities to their existing roles.
The courses are taught by tutors with hands-on M&A experience gained as part of corporate management teams. As well as being academically rigorous they are rich with case studies and real-world examples based on our tutor’s practical mergers and acquisitions experience.
Our course participants come from a wide range of industries and roles including general management, business development, strategy, marketing, finance, human resources, operations and legal.
Our Mergers and Acquisitions Training Courses
Core Mergers and Acquisitions Skills Training Course
The Core Mergers and Acquisitions Skills programme (M&A training course) is a three- day programme that teaches all the commercial and technical skills you will need to confidently lead or support a successful M&A transaction.
Our expert tutors guide you through the M&A process from strategy and deal origination to valuation, due diligence, deal structuring, contract negotiation and post-merger integration.
M&A Due Diligence Training Course
The M&A Due Diligence Training Course is a two-day programme that offering a solid grounding in the techniques used by some of the world’s most successful companies to assess risks, evaluate synergies and confirm the strategic fit of an M&A target. The course is designed specifically for executives involved in corporate M&A.
Successful Post-Merger Integration Training Course
The Successful Post-Merger Integration Training Course is a two-day programme that provides a solid grounding in the post-merger integration techniques used by some of the world’s most successful companies to deliver value from their M&A transactions.
Across the two days of the course you move from the key decisions made in the pre-deal phase, through the critical first 100 days and on to full synergy delivery. The course covers the post-merger integration issues most likely to arise in each business function and the most important business processes.
Advanced Business Valuation Training Course
The Advanced Business Valuation training course is a two-day expert level business valuation training course that teaches participants how to prepare robust business valuations in the context of a corporate M&A transaction.
Our expert tutors move you past the stage of plugging numbers into a standard spreadsheet and help you explore how risk, synergies and the quality of the target company might impact its value.