How has Mergers and Acquisitions (M&A) strategy changed in 2019?

Change in mergers and acquisitions (M&A) strategy

In this blog, we shall discuss on how the mergers and acquisitions (M&A) strategy has changed in 2019 as companies are focusing on vertical integrations to further expand their growth and revenues.
This change in strategy explains why Pharmacy companies are acquiring Insurance firms and Cable companies are acquiring content providers.

Mergers and Acquisitions (M&A) strategy in 2019

  1. The old adage that “You make maximum money in the period of chaos” is proving right in 2019.In the name of Digital, more acquisitions are happening.In fact M&A activity has increased this year compared to last year.
  2. This increase in M&A activity has led to rise in EBITDA multiples of target companies that are looking to exit.Further increased competition from Private equity firms are increasing the purchase price of these target companies.
  3. The demand in digital has given a notion to all firms that Digital would be the panacea for all the struggles that companies are facing today.Digital has also broken the industry barrier.Today companies no longer needs to compete within their own industry but also against companies from other industries. Amazon has proved this when it is entering into every industry with its scalable data driven platform model.

How the mergers and acquisitions (M&A) strategy has changed in 2019

  1. The M&A strategy has changed with companies no longer looking to acquire their competitors to further scale and expand their market share.This is because companies in matured industries have already consolidated most of the attractive target companies.The remaining companies available are no longer attractive.
  2. Hence more companies are looking at adjacent industries to further expand their access to new markets, customers and products/services.
  3. In the past, vertical integrations happened when companies acquire their suppliers to improve their margins, improve access to raw materials and control prices.
  4. In 2019, most of vertical acquisitions happen to gain access to customers data and integrate it with their business to provide a personalized service offerings.
  5. Amazon acquisition of Whole Foods is an instance where a leader in online retail space acquired a brick and mortar stores to gain access to customers data that frequent retail stores and leverage them to sell Amazon services.This shows Amazon intent to control the entire online to offline retail markets.

Advantages of Vertical Integration
Some of the ways that companies benefit from acquiring firms from adjacent industries are:
Leverage Growth synergies

  • Companies doing scale acquisitions rely on Cost synergies to add value to deals.
  • The synergies that are identified during due diligence are rarely implemented in Integration phase.For instance, when a position which is deemed as redundant in the due diligence phase and contribute to Cost synergies might actually be found as an important position which is no longer redundant. This results in companies missing their synergies targets post acquisition.
  • In the vertical integration, companies can sell the acquired company products and services through its Salesforce which can add revenues.
  • Apple acquisition of Siri helped it to leverage the AI capability of Siri in its iphones and extended this capability to all its iphones.

Integrate the Target products

  • In vertical integration, acquired companies products are no longer point solutions, but they can be integrated with buyer ecosystem to build an end to end service offerings.
  • For example, certain software products that are point solutions cannot compete with a platform solution like Microsoft Teams which provides an end to end service offering.
  • Customer always looks for different choices but they also want an one stop solution that provides all these choices.Hence it is necessary to integrate the acquired company products and services to buyer platform.

Be Ruthless in selecting the right target

  • Buyers needs to be ruthless about their choices of acquisitions.
  • An acquirer cannot overpay for an acquisition.Inspite of the target company adding rationale to the acquirer, overpaying would result in erosion of deal value.
  • An acquisition should also be ready to be integrated quickly to add value.An acquisition that takes a long time to add value or which is in a very poor financial shape that requires buyer intervention to turn it around are not good acquisitions.
  • Hence the acquisition should select all the necessary checkboxes before it proceeds to the next stage.

Sources of Financing

  • High purchase price would compel companies to rely on external funding to finance the deal.
  • It is necessary that acquirers choose the best credit option available in order to reduce the cost of capital.
  • Some banks are ready to lend at an attractive and become minority stakeholders.Buyers should explore such financing options.

Have a Customer specific strategy

  • In case of vertical integration, the target company may provide services to both vendors and competitors to the parent company.
  • In this situation, acquirers need to ensure that the existing business relationships of the target company continues.
  • In order to avoid conflict of interest, acquirers can demarcate teams that serve customers and competitors.This messaging needs to be communicated clearly so that there is no customer attrition.

Prepare a 90 Day Transition Plan

  • No acquisition is successful if there is no integration strategy to integrate the target company with acquirer.
  • It is necessary that the founders of both companies decide on an high level strategy on how the two companies will be integrated.
  • If the decision is made to integrate the businesses completely, then decisions regarding the headcount, processes and systems rationalization has to be finalized in the 1st 90 days.

Conclusion

  • As companies become matured, their mergers and acquisitions (M&A) strategy is extended to adjacent industries to increase their revenues.Already transactions involving convergence of pharma and Insurance industry or Cable firms and Content providers are consummated in 2018.
  • Though there are many reasons for looking at vertical acquisitions, none is more important than integrating customer data.Amazon acquisition of Whole Foods validates this rationale.


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