What is the right M&A Strategy

Why M&A strategy is important

Many companies do not have a M&A strategy. Hence they face a dubious track record in acquisitions. Many companies do acquisition for the sake of doing it and do not have a clear strategic rationale for doing the same.
Some companies measure acquisitions in terms of how much it can contribute to the their revenues. There is no consideration given as how much value they are looking to add to the target company.
As a result many companies often waste their shareholders money on bad acquisitions.These acquisitions have bleak prospects.Many companies acquire businesses that are on a decline because they often mistakenly believe that they can turnaround these declining businesses with their skills and capital.The probability and odds of this happening is less than 1 to 100.
Many cases the sellers provide their business and financial projections that are more of an entertainment value than a realistic estimate.Buyers should not value the target with the seller projections and must do an independent assessment.

Selecting the right target for acquisitions in M&A strategy

  • The best target for acquisitions would be those businesses that have excellent economic characteristics and are run by outstanding managers.
  • Acquirers should negotiate for a transaction that allows them to buy 100% of such a business at a fair price.

Best M&A strategy

M&A strategy 1 – First Category

  • The first M&A strategy would involve companies which have acquired businesses that perform exceedingly well during the expansionary periods.
  • These businesses are in a position to increase prices even when the demand for the products in the market is flat. This is because these businesses do not fear losing their market share even after increasing their unit prices.
  • In addition these businesses have an ability to accommodate large volume increases in their business with a minor additional investments in capital.
  • Businesses from the services sector which can hire large volumes of personnel when there is a higher demand for their services from customers fall in the first category.
  • These businesses have strong fundamentals and do not require exceptional management skills in order to operate profitably. At the same time identifying businesses that have these characteristics are equally tough.

M&A strategy 2 – Second category

  • The second category involves acquiring businesses that have exceptional management talent. These companies have strong leadership pool who have made the right business decisions, right investments and created a strong robust operating model.
  • The acquirers in the second category wait patiently for the right opportunity.They would only pay for those investments which are really worthy and is aligned to their corporate strategy.They would not engage in any deals just for the sake of doing it.

Buying the right target companies is most important in M&A strategy

Good companies have two characteristics :

  1. Ability to command high pricing for their products/services.
  2. Companies with strong management skills who can even turnaround a business successfully when things are not favorable.

Identifying companies with above characteristics at an attractive price is challenging but if done, then it is almost half the battle won.
The moment the deal time identify businesses with above characteristics, then they should act quickly and with conviction to take advantage of such opportunity.

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