Why You Should Consider M&A as Part of Your Business Growth Strategy
A major priority for every board is to deliver growth and build shareholder value. Most successful companies start with organic growth. With sound marketing and operations, and a slice of good fortune, they can reach a significant and profitable market share. This is the point at which many boards begin to set their sights on expanding into new markets and territories, gaining a competitive edge, or acquiring new customers and products.
It is possible to deliver all these growth vectors organically but it takes time and often several years of heavy investment. This can create a drag on cash flow and earnings. Each of these new organic ventures will also need its own slice of good fortune to achieve sustainable profitability – and not all will get there. This in a nutshell is why M&A is one of the most important tools companies use to enter new business areas.
In this article Robert Kemp, Training Programme Director of The Merger Training Institute, and tutor on our Core Mergers and Acquisitions Skills training course, explores why companies use M&A as a route to growth and the skills required to make it work.
When is M&A Effective as a Growth Strategy?
M&A can be used to address a wide range of strategic opportunities and threats, or simply to deliver growth more quickly than can could ever be achieved organically.
Here are some of the situations in which mergers and acquisitions can be effective.
Saving time and shortening the learning curve
Perhaps your company wants to enter a new market or territory or develop new products and services. You may well have the capabilities and resources to do this, but it will take time and financial investment. How many new market entries or product launches have you been involved with that were profitable within 2 years, 5 years, 10 years? Ouch!
It is almost always easier and more cost-effective to simply acquire the capability. The right target will deliver not only a proven product and business model, but a built-in customer base and established profitability.
Filling gaps in product lines, customer bases and business models
Few marketplaces are static, and most are subject to periodic disruption by new technologies and business models. When a market changes in response to an external shock, new laws or new regulations it can create a gap in your offering. This is a prime opportunity to plug the gap with an acquisition.
The growing burden of employment legislation and regulation was a profitable opportunity for many traditional law firms, but the growth opportunity drew in non-traditional competitors with a different business model. The new entrants offered HR consulting and legal support on a subscription model. SME clients liked the predictable expense and broader service offering. Many established law firms reacted by acquiring subscription-based competitors, sometimes even leaving the branding in place. The acquisition of Swansea based Holistic Services by Capital Law in 2008 was a typical example.
Acquiring talent and intellectual property – The “Acqui-Hire”.
Many fast-growing technology and professional services companies experience acute shortages of suitably experienced and talented staff. These industries are driven by the intellectual property bound up in the skills and experience of their employees. Staff shortages quickly put a brake on growth. An acquisition and its associated employee IP are often the quickest way to unblock capacity and move things forward.
Opportunities to leverage synergies
With a sensible approach to finding targets, and valuation discipline, it should be possible to buy targets that immediately cover your cost of capital. The icing on the cake is the opportunity to harvest cost and revenue synergies and deliver a much higher return. This is often expressed as unlocking strategic value.
Cost synergies are about removing overlapping resources and increasing volume through consolidated operations. Increased buying and negotiating power can also create purchasing synergies. With effective project planning and sufficient board commitment cost synergies can reliably be delivered in full.
Revenue synergies are about cross selling to the customers of the combining companies or taking the opportunity to raise prices by removing a competitor. Revenue synergies are harder to achieve, because they require the cooperation of customers and competitors, and often take far longer than expected.
Delivering a Successful M&A programme
M&A is a complex commercial and technical process with its own specialist terminology and business practices. Members of your team may have touched on parts of the M&A process in past roles – usually as part of a due diligence team, or a post-merger integration. This is a far cry from responsibility for the M&A process from start to finish.
Managers thrown into M&A without past-experience can find themselves in a confusing world of unfamiliar new challenges:
- How do we generate deals with the kind of companies we want to buy, rather than relying on targets brought to us by investments banks and brokers?
- What is the strategic value? Can it be calculated or is it a commercial judgment?
- How do deal makers decide on the multiples appropriate to a transaction? Multiples of what?
- What is the difference between an asset sale and a share sale? What differences does it make?
- How do we make sure pre-deal synergy targets are realistic AND delivered post-acquisition?
It is possible to learn M&A best practice and terminology on the job, but it is a steep learning curve, and mistakes are costly. Most companies embarking on their first M&A campaign either hire a senior commercial manager with M&A experience or procure suitable training for the executive or divisional board tasked with delivering the strategy.
ROBERT KEMP is Training Programme Director of The Merger Training Institute and a veteran of many successful corporate M&A deals.
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.