Vast opportunities exist when experts can effectively implement an acquisition strategy as a means for reducing costs, gaining access to new business and increasing enterprise value. Doing a deal is easy, implementing one is far more difficult. Risks and pitfalls are inherent in the integration process.
That does not mean that many a botched deal—particularly high-profile transactions—have failed to completely taint the perception that M&A is a catchall solution for growing a company. It certainly is not. The statistics remains solidly clear: 80% to 90% of mergers and acquisitions fail. Most transactions fail to realize their assumed synergies, thus decreasing overall shareholder value. If I were to put it another way: M&A has a similar success rate to startups.
While we have outlined some of the motivating factors in pursuing an M&A transaction below, it is important to note that investors who seek growth are often willing to follow this risky path as they perceive the potential positive outcome outweighing the inherent risks. As always, the complement vs. supplement comparison of performing acquisitions is applied. The Seven C’s for doing a deal follows.
Consideration is often given to various new channels a company can access when done so using acquisition as a tool. For instance, a company may add a quality sales force, expand its web presence or gain access to retail and wholesale distribution channels.
When parent and target can recognize efficiencies of both scale and scope across their businesses, reduction in cost by eliminating redundancies is often the means to achieve this.
It is unfortunate that l “cost synergies” are couched in redundancies between the two companies. This typically means headcount reduction, which a compassionate owner never really likes to see, but is often a necessary evil included in eventually realizing the synergies between the two combining entities.
When two combining can greatly scale-up the volume of overall operations by better asset allocation, huge opportunities exist. For instance, a parent may have excess capacity that could easily be filled by the target’s capabilities and assets. The inverse is also true.
The tacit knowledge various pieces inside each of the two combining organizations could lend itself to increased capabilities across the whole. For instance, research & development, marketing, technology and operational expertise of an acquirer—if implemented to a target’s existing business—could aid in creating excess value, making the transaction a foregone conclusion.
Depending on the difference between customer segments between the acquirer and the target, there may be an opportunity to effectively use acquisitions to acquire customers in a heretofore untapped market segment. For instance, the target business may hold contracts and relationships with customers on the lower or upper end of the market where the acquirer currently does not play.
This strategy can also help to create diversification among the existing customer base of a firm’s business, making it more valuable as an eventual target itself.
Expansion to new geographic regions, including countries remains a key ingredient for businesses seeking acquisitions as a strategy for expansion and enterprise value growth. Geographic expansion opportunities do not always involve multiple countries, but could involve expanded domestic geographic growth as well.
In some cases, access to cash, various debt lenders and the capital markets can be facilitated through a strategic acquisition. Relationships with capital providers are sometimes easier bought than built, unless there is a public liquidity component to this type of a deal. An alternative public offering would be a prime example. There are other, potentially more efficient ways for gaining access to alternative sources of capital than making acquisitions, but it can be at least one piece of the overall rationale for doing a deal.
It is always much easier to do a deal than to effectively and efficiently implement one. Unfortunately, the rose-colored glasses stay on until well after buyers recognize the difficulty in deal integration. However, that does not take into account the fact that many buy-side acquirers see the aforementioned list as obvious reasons to pursue a transaction. As always, buyer beware. Seeing potential synergies and actually recognizing them are two very different things.