How to improve the success rate of M&A strategy?

M&A strategy is difficult

Historically M&A strategy was used to supplement and accelerate organic growth.Today organic growth is hard to achieve and largest companies are encountering the stiffest headwinds.Many companies do not have a good success rate in their M&A deals as most of the deals failed to achieve the anticipated synergies announced at the time of the deal.
The reasons for the slow organic growth is because customer preferences have shifted and big companies are slower to respond to customer preferences when compared to their agile digital natives.The entry barriers have come down which makes it easier for new age companies to gain access to the customers.
M&A as a strategy was primarily used to accelerate growth, but in the current markets even M&A has become harder. There is a high competition for deals especially from Private Equity buyers.PE firms have highest amount of capital from fundraising as Dry powder in buyout firms have reached a record high of $1.2 trillion.This has led to increase in deal multiples.
Inspite of the huge volume of capital available, the deal volume have come down because many targets are not attractive to be acquired.In addition, many of the large deals announced have disappointed. Beyond cost synergies these deals ceased to contribute to long term growth.This has compelled the acquirers to shift their M&A strategy as many acquirers started buying smaller companies in an unsystematic way and without enough scale to generate any momentum in their portfolio.
With organic and inorganic growth failing to achieve investor expectations, companies are looking at a new business model where M&A will be a vital part for resurgence of growth.

How to have a winning M&A strategy?

  • Companies who have a high success rate in M&A follow a programmatic M&A approach where as companies that have a dismal success rate acquire sporadically.The reason why a Programmatic M&A approach is successful is because buyers have a dedicated team who follow a sequence of carefully chosen practices and behaviors including disciplined approach to Target selection, valuation and Negotiations.
  • When choosing the right target company to acquire, buyer need to look at targets and sectors that they understand well, acquire companies that are growing fast and look at adjacent sectors which are beyond their core competency, but only if nnecessary.
  • Acquirers need to look at targets in adjacent sector only when adding a new portfolio. Target companies also like acquirers that can offer distinct synergies, resources or capabilities.

M&A Strategy one – Acquire fast growing companies

  • VC backed companies that have been growing at a tremendous rate are the best target companies to acquire.These companies will be the challengers to the incumbents in the future.
  • At the same time, these companies come with high valuations.Many target companies are valued at more than 20X EBITDA which would mean that the acquired company needs to generate a sustainable growth rate of more than two times the current growth rate.If the acquirer is able to achieve this growth by pulling multiple levers, then these deals are worthwhile to invest in.
  • Portfolio expansion deals can offer both scale and value to the acquirer.These deals can drive scale by providing operational and overhead synergies. Many target companies have already trimmed their costs and are lean.Hence acquirer will find it challenging to extract more value from such deals.Hence for portfolio expansion deals to be successful, acquirers must identify greater potential for synergies beyond scale like access to new customer base or stronger brands.

M&A strategy 2 –  It is what you give and not what you get

  • Acquirers looking for growth need to focus on acquiring fast growth companies.Successful acquirers focus on fast growth companies for which they can be the best natural owners.These acquirers invest on the target capabilities and assets to further increase their growth rate and broaden their market access.
  • Leading acquirers often have mature capabilities across the value chain, have deeper innovation budgets and sophisticated trade and pricing management.The target organization can leverage the acquirer assets to justify higher valuations that goes far beyond capturing only cost synergies. Hence the combination of acquirer’s capabilities and target’s faster growing products can support an investment thesis and justify the acquisition.

M&A strategy 3 – programmatic M&A

According to McKinsey research, programmatic M&A approach is one of the handful strategic moves that can lift a company from an industry player to a leader.Programmatic M&A differentiates successful acquirers from the rest because of the following skills.

  • Programmatic M&A supports the company’s objectives of growth by complementing and reshaping their portfolio.M&A is a part of an agile approach to dynamic resource allocation.
  • By being proactive in identifying and selecting the disruptive companies before others do, acquirers have a higher chance of selecting the right targets.Acquirers increase their deal pipeline and identify targets by attending trade shows and doing social media research.
  • Successful acquirers follow a disciplined deal approach and walk away when valuations cannot be supported or sufficient value cannot be created.
  • Acquirers adapt their integration strategy based on the target company.They have a strong focus on value creation and rigorous execution.
  • Acquirers using a programmatic M&A approach adapt their portfolio quickly by entering or building scale in the fastest growing categories while divesting or discontinuing lower cost and underperforming brands.

M&A Strategy is integral

  • M&A strategy is integral to the growth of companies.With higher valuations and increased competition for the right deals, companies need to raise their acquisition game.
  • To improve their M&A success rates, a)Acquirers should understand the target organization’s business very well in order to arrive at the right valuation. b)Further they should acquire fast growth companies as this can increase acquirer’s growth rate. c)Finally acquirer should look beyond their core competencies to acquire targets in adjacent sectors only if necessary.


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