M&A strategy is about having a solid understanding of what makes your company successful today and the steps that can be taken to improve into the future.
Successful acquisitions must start with a solid rationale which ensures (i) the deal is tied to the company’s overall strategy and (ii) that it will help advance the company along its defined strategic path.
Research conducted by McKinsey suggests that successful acquisitions align closely with an organisation’s long-term growth strategy. Organisations that can demonstrate an ability to accelerate revenue growth via acquisitions typically, do not treat deals as opportunistic “events” or as something that “happens” to a company. Rather, they regard M&A as a core competency that is essential for creating value – while linking this to overall strategy.
The development of an M&A strategy should begin with asking several key questions:
1. Why, where and how should we use M&A to help achieve the corporate strategy.
2. What is our value creation thesis?
3. What are our desired strategic outcomes of M&A – see Consider Strategic Objectives, below.
4. How does the target make us better?
5. How can we make the target better?
Answering these questions will likely prompt additional questions around specific company strengths and capabilities, competitive advantage, resource availability and other inputs to effective deal making, etc. (see Strategic Review, below).
Strategic Review
A strategic review can help identify gaps in your company’s ambitions and opportunities for M&A to fill these gaps. It can also ensure your company’s M&A strategy focuses on market trends, factors in various types of perceived market uncertainty and – to the extent possible – account for the likely actions/reactions of competitors. The rigorous analysis conducted as part of a strategic review will enable you to understand your company’s internal strengths and external market opportunities over the next several years. This analysis will help to develop a set of prioritised options, such as an acquisition or divestment, to achieve the strategic objectives.
A strategic review can be carried out via SWOT analysis
As part of a strategic review, the leadership team should also consider any M&A constraints imposed (by, for instance, the CFO or Steering Committee) such as the size of deals that can be transacted, which will have an impact on the pool of potential M&A targets.
Consider Strategic Objectives
As challenges and opportunities for growth are defined, options to defend, grow, fix or exit a company can be assessed and prioritised based on your company’s goals, capabilities and financial position, etc.
Generally, companies can choose from a number of key strategic objectives such as:
📈 Organic growth: Increase company breadth or depth via long-term revenue growth, market share capture, margin enhancement or improved asset utilisation.
🏅 Talent: Acquire necessary talent to remain competitive.
🔬 R&D: Capture intellectual property, know-how/skills.
💼 Portfolio Management: Manage a portfolio of businesses to maximise existing and evolving capabilities, reduce risk, or reposition a business.
🤺 Defensive action: Ward off potential take-over attempts or fix existing business/operational problems.
🧪 Opportunistic posture: Capitalise on a unique market/competitive opportunity or a developing business formula.
🌎 Market: Expand market share and revenue across international markets + capitalise on another county’s comparative advantage in supply a product/service.
🎯 Leverage: Capture unique synergies between acquirer and target capabilities.
📑 Transformation: Create an entirely new value proposition or business model.
📊 Efficiency: Get leaner, improve margins.
🤼 Scale & Scope: Get bigger, eliminate a competitor.
Tips
- Revisit the M&A strategy conversation on an on-going basis and continually update your M&A themes/areas of focus.
- Consider how you might need to modify corporate and M&A strategies and initiatives because of economic shocks – e.g., pandemic, inflation, supply chain, etc.
- Ensure company-wide buy-in – top level management should define the strategy but people on departments impacted by M&A should have input.
- Keep teams updated and seek to gain engagement and support.
Watch outs
- Do not make M&A decisions based on gut-instinct or the actions of one person acting alone. M&A should be a team activity.
- A corporate strategy review is critical for success; however, it is often neglected by executives under pressure to achieve short-term results. Two common causes for acquisition failures is a lack of insight regarding a company's core competencies and limitations as well as changing market conditions – and therefore, doing the wrong deals.
About the Author
Tom is the CEO of Navima. Prior to Navima, Tom worked at 2 M&A boutiques (leading acquisitions, divestments, strategy and venture projects) and was Head of M&A & Corporate Development for a fast-growth, VC backed SaaS company. Tom has supported companies around the world including Shell, Unilever, Philips and the Big Four with improving their M&A process and leading the development of playbooks.