Mergers and acquisitions have become a popular business strategy for companies But cost synergies can also result in an increase in buying and negotiating Let's explore how an M&A growth strategy can go wrong.
Table of contents
- Mergers and Acquisitions as Part of Your Growth Strategy
- Mergers and Acquisitions as Part of Your Growth Strategy | Hinge Marketing
- Six archetypes
Empirical analysis of specific acquisition strategies offers limited insight, largely because of the wide variety of types and sizes of acquisitions and the lack of an objective way to classify them by strategy. In the absence of empirical research, our suggestions for strategies that create value reflect our acquisitions work with companies.
In our experience, the strategic rationale for an acquisition that creates value typically conforms to at least one of the following six archetypes: Improving the performance of the target company is one of the most common value-creating acquisition strategies. Put simply, you buy a company and radically reduce costs to improve margins and cash flows. In some cases, the acquirer may also take steps to accelerate revenue growth.
Pursuing this strategy is what the best private-equity firms do. Among successful private-equity acquisitions in which a target company was bought, improved, and sold, with no additional acquisitions along the way, operating-profit margins increased by an average of about 2. This means that many of the transactions increased operating-profit margins even more.
Keep in mind that it is easier to improve the performance of a company with low margins and low returns on invested capital ROIC than that of a high-margin, high-ROIC company. Consider a target company with a 6 percent operating-profit margin. In contrast, if the operating-profit margin of a company is 30 percent, increasing its value by 50 percent requires increasing the margin to 45 percent.
Mergers and Acquisitions as Part of Your Growth Strategy
Costs would need to decline from 70 percent of revenues to 55 percent, a 21 percent reduction in the cost base. That might not be reasonable to expect. As industries mature, they typically develop excess capacity. In chemicals, for example, companies are constantly looking for ways to get more production out of their plants, even as new competitors, such as Saudi Arabia in petrochemicals, continue to enter the industry.
The combination of higher production from existing capacity and new capacity from recent entrants often generates more supply than demand. Companies often find it easier to shut plants across the larger combined entity resulting from an acquisition than to shut their least productive plants without one and end up with a smaller company. Reducing excess in an industry can also extend to less tangible forms of capacity. Consolidation in the pharmaceutical industry, for example, has significantly reduced the capacity of the sales force as the product portfolios of merged companies change and they rethink how to interact with doctors.
In addition, all the other competitors in the industry may benefit from the capacity reduction without having to take any action of their own the free-rider problem. Often, relatively small companies with innovative products have difficulty reaching the entire potential market for their products. Small pharmaceutical companies, for example, typically lack the large sales forces required to cultivate relationships with the many doctors they need to promote their products. IBM, for instance, has pursued this strategy in its software business. IBM investor briefing , ibm.
Working together, they introduced their products into new markets much more quickly.
Many technology-based companies buy other companies that have the technologies they need to enhance their own products. They do this because they can acquire the technology more quickly than developing it themselves, avoid royalty payments on patented technologies, and keep the technology away from competitors. For example, Apple bought Siri the automated personal assistant in to enhance its iPhones.
In , Apple also purchased Beats Electronics, which had recently launched a music-streaming service. While they can be, you have to be very careful in justifying an acquisition by economies of scale, especially for large acquisitions. If two large companies are already operating that way, combining them will not likely lead to lower unit costs. They already have some of the largest airline fleets in the world and operate them very efficiently.
Economies of scale can be important sources of value in acquisitions when the unit of incremental capacity is large or when a larger company buys a subscale company. For example, the cost to develop a new car platform is enormous, so auto companies try to minimize the number of platforms they need. The combination of Volkswagen, Audi, and Porsche allows all three companies to share some platforms. Some economies of scale are found in purchasing, especially when there are a small number of buyers in a market with differentiated products. An example is the market for television programming in the United States.
Only a handful of cable companies, satellite-television companies, and telephone companies purchase all the television programming. As a result, the largest purchasers have substantial bargaining power and can achieve the lowest prices. While economies of scale can be a significant source of acquisition value creation, rarely are generic economies of scale, like back-office savings, significant enough to justify an acquisition.
Economies of scale must be unique to be large enough to justify an acquisition. The final winning strategy involves making acquisitions early in the life cycle of a new industry or product line, long before most others recognize that it will grow significantly.
This acquisition strategy requires a disciplined approach by management in three dimensions. Second, you need to make multiple bets and to expect that some will fail. Third, you need the skills and patience to nurture the acquired businesses. Roll-up strategies consolidate highly fragmented markets where the current competitors are too small to achieve scale economies.
Beginning in the s, Service Corporation International, for instance, grew from a single funeral home in Houston to more than 1, funeral homes and cemeteries in Similarly, Clear Channel Communications rolled up the US market for radio stations, eventually owning more than It should NOT be an ego-driven trophy deal. Mergers and post-merger integrations are resource-intensive activities that usually involve some of the most senior people in the firm.
If they are not prepared for it, they can easily be distracted by other critical, but less urgent activities. The potential for distraction is greatest—and most profound—after the deal is done and the focus moves to integration. If senior management gets too distracted, and you risk having the merger flounder as well as damaging the underlying business.
- The six types of successful acquisitions.
- .
- De Jure and De Facto Salvation?
- Harder strategies;
- Going Wild- Book 9 in the Action! Series (MM) (BDSM).
The acquisition seems very strategic. The result is a confused marketplace. The whole confusing mess could be avoided with a solid, research-based plan to position the merged brand and help current and potential customers understand the rationale and benefits of the merger. If the marketplace is confused, the strength of your brand will suffer. After all, brand strength is the product of a simple equation:. Understanding this equation can help you avoid the perils of diminished brand strength. An ill-timed merger can quickly diminish the strength of both the acquiring and acquired brands.
Brand M, which has considerable visibility in the Midwest, wants to expand into the Southeast. To accomplish this, Brand M acquires Brand S, a southeastern-based firm. But there is a problem. The Midwestern brand is unknown in the southeast, so its overall brand strength is actually diminished by the acquisition. And, when the southeastern firm adopts the brand identity of Brand M, its brand strength is also diminished.
So how do you overcome this problem?
Mergers and Acquisitions as Part of Your Growth Strategy | Hinge Marketing
Sometimes a gradual transition to a new brand is the right answer. Watch out for situations where you must change both the focus of the reputation and increase visibility. These are the most challenging mergers. Do your research and understand fully what each firm—the acquired as well as the acquiring—bring to the equation. It is forward-looking —A good strategy is not just a response to what has been. Where do you really want your firm to go?
How will you get there? What needs to happen to do it? It does require buy-in —Senior management must be onboard and embrace what needs to be done. Without management buy-in, any strategy is doomed to failure. It focuses on implementation —High growth requires careful implementation of every aspect of a business strategy and plan.
Six archetypes
Follow through with implementation. And consider carefully how the merged firm will generate organic growth. This customized program will identify the most practical offline and online marketing tools your firm will need to gain new clients and reach new heights.
Who wears the boots in our office? That would be Lee, our managing partner, who suits up in a pair of cowboy boots every day and drives strategy and research for our clients. Email will not be published.
- The six types of successful acquisitions | McKinsey;
- Parallel Mind, The Art of Creativity: The missing manual for your right brain.
- !
- New Coastal Times?
- .
Professional Services Marketing Today. Send me all articles: January 8, Share. Seeking a solution to a business problem There are essentially two kinds of mergers and acquisitions: Download the The Visible Firm Guide Strategic mergers and acquisitions offer a solution to a different business problem. Here are five situations in which mergers and acquisitions have proven useful as a growth strategy: Companies can take advantage of revenue synergies and make more money in many ways, including the following: Reduce competition Open new territories Access new markets through newly acquired expertise, products, services, or capacity Expand the customer base for cross-selling opportunities Develop sales opportunities by marketing complementary products or services.
When do mergers and acquisitions go wrong? Are they no longer an accounting firm? After all, brand strength is the product of a simple equation: In the end, a successful high-growth strategy will include the following elements: How Hinge Can Help: Elements of a Successful Brand 4: Brand Promise Lee Frederiksen, Ph.