Strategy vs. Fruition
M&A allows a company to achieve competitive positioning and accelerate growth in a way that is not achievable by organic means alone. Nonetheless, many M&A deals fail to live up to their expectations. There are various scenarios and reasons for this, but simply said, the rationale for each deal should exceed the risk involved. Each deal should be structured to create some kind of added value to the company – synergies, reduced costs, market entry, etc. This value should be recognized early on and there should be a strategy in place to achieve it. However, a vague acquisition strategy is less likely to achieve value creation.
What’s a vague acquisition strategy?
A vague strategy is one that seeks to achieve broad goals, and often ones that are difficult to measure. For example, Company A seeks to acquire Company B in order to “expand” its product line. This is like throwing something in a shopping cart so that you can have more stuff at home. In this example, you should recognize which products are key, which are complementary, which are cannibalistic, and which acquired products will improve a metric essential to the performance of the overall company (revenue, costs, market share, etc.) – the metric may be quantitative or qualitative, but it should be measurable. If the strategy is vague, then it will be difficult to measure the value created and to execute the integration of acquired assets.
How can you develop a specific strategy?
It’s not a bad idea for the seller to highlight potential synergies in the CIM which will attract a desired class of strategic buyers. Try to quantify the financial and strategic benefits for potential buyers. Don’t leave money on the table by not identifying and communicating available synergies. Also, communicate growth opportunities, attractive skills and technology, and valuable company relations. Anything that could create value for the potential buyer should be communicated. The buyer, in turn, will send an Indication of Intent and further due diligence will guide the valuation process. Always negotiate the value. Even though synergies are difficult to realize, they seem even less realistic if they aren’t defended as credible value drivers. What makes these synergies even more realistic is an integration plan.
What else does a successful strategy depend on?
An important part of the strategy itself is its execution. Identified synergies are useless if you don’t know how to integrate the acquired business. Here lies the failure of many deals, and with good reason. Challenges to realizing the full potential value of a deal include: combining product and services lines, employees, functions, locations, and much more. For instance, if human capital isn’t integrated well, then a bigger, broken department will be less effective than the sum of two smaller ones. In fact, the antonyms of synergy are discord, separation, and divorce – all of which can be very costly and unproductive. In sum, there’s no use in acquiring a company you don’t know how to use.
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