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Corporate M&A Strategy

The Relevance and Components of a functioning Corporate M&A Strategy

Corporate M&A Blueprint

Key Takeaways:

  • A corporate M&A strategy is a must-have for companies that plan to grow via acquisitions
  • It increases the likelihood of generating excess value for shareholders
  • Being a serial acquirer might be advantageous in generating value

A company’s growth story can be categorized into two main components: organic and inorganic growth.

Organic growth is the growth that a company generates by way of using its own resources and growing from within. This can be done, amongst other things, through increasing sales via new marketing methods, developing new products, or targeting a new customer group. On the other hand, inorganic, or sometimes also referred to as acquired growth, is growth through the use of mergers and acquisitions. Hereby, the increase in sales is realized not by any new marketing method but rather through the purchase of or a merge with a company, including its customers.

Using mergers and acquisitions is a great way to reach certain strategic targets quickly. While it might take several years to develop new products, create commercializing marketing strategies and eventually target a new customer group, an acquisition can accomplish the strategic target in a much shorter period.

What’s more, in today’s challenging environment, especially in times of Covid-19, management boards might think about opportunities to rebound from their lost revenues quickly. This is where M&A comes into play. However, for any acquisition to be successful, companies must have a precise and agreed upon corporate M&A strategy. Moreover, for the corporate M&A strategy to deliver superior returns, it must be systematically aligned with the overall strategic goals of the company.

The most successful deals in terms of value creation are those where acquirers have well-articulated value creation ideas

Why is Corporate M&A Strategy of relevance?

If set-up correctly, having a corporate M&A strategy will pay off in the long run. Following the decision to use acquisitions as part of the overall growth story, companies must spend a considerable amount of time upfront on developing a thorough corporate M&A strategy. This acquisition blueprint should align with the overarching strategic target of the business.

The most successful deals in terms of value creation are those where acquirers have well-articulated value creation ideas. One of the crucial components of the corporate M&A strategy blueprint is to define how the acquisition target is contributing to the overall success of the acquirer. By way of explicitly bringing attention to the parts of the deal that are value accretive, time and effort are used in the most effective way. This holds true for management attention, as well as for the due diligence process. A well-articulated value creation idea can accelerate the due diligence process by enabling to focus only on the most crucial sources of value.

Additionally, having a corporate M&A strategy allows for the integration process to be planned and started early in the transaction. Research by the Institute for Mergers, Acquisitions and Alliances as well as Deloitte has shown that M&A teams are more common in corporates than post-merger integration teams. While M&A teams are calculating their business cases inclusive of synergies, the absence of essential integration teams shows that the objective of following through on these critical synergies is not yet the priority. As the value creation rational often means the difference between what strategic and financial investors can offer, focussing on realizing the strategic intent of the transaction is of utmost importance.

Furthermore, a thorough corporate M&A strategy sets boundaries to focus only on relevant targets. While at times, there are a variety of transaction objects on the market, it becomes even more important to focus on those that promise to be the most successful. Therefore, corporate M&A strategy helps by narrowing down the transaction pipeline by setting forth certain investment criteria.

As we have worked out the importance of having a corporate M&A strategy, let’s now look at what the main components are.

The Main Components of a Corporate M&A Strategy

A complete and functioning corporate M&A strategy should give answers to the following questions:

  1. Why should a company invest?
  2. Where should a company invest?
  3. How should M&A be used to achieve the corporate strategy?

These questions should be assessed in detail and must focus on the aspects that contribute the most to the overall value creation.

1) Why should a company invest?

The management must set forth the reasons as to why it would be more beneficial to acquire a competitor as opposed to growing organically.

In that regard, management should conduct an in-depth self-assessment of its products and services as well as the market surrounding them. While the answer might sometimes be as easy as “there are no targets to acquire, so we have to grow organically”, it is often more complex than that.

Let’s look at an example. The fictional company CompareCo is an online business that is comparing consumer loans of different banks and quoting offers according to the interest charged. The company has longstanding relationships with the banks and has trained its call-center staff to be well informed to react to the many loan queries of their customers. Moreover, the company has spent significant brand investment to position itself as the number one in comparing bank loans.

CompareCo would now like to expand its offering to further compare insurances. However, there is already InsureCompare on the market, the market leader in comparing insurances. For CompareCo to compete against InsureCompare successfully, it would need to start building relationships with insurance companies from scratch. Furthermore, the call-center staff would need to be trained in insurance products, and significant investments in the brand must be made to get the customer’s awareness. The time that it would take for CompareCo to build up all these necessary things themselves and become profitable in the insurance vertical would be significant. As a consequence, it wouldn’t be in line with CompareCo’s overall strategy to become a market leader in online comparison within the next three years.

In the given scenario, CompareCo might be better off acquiring InsureCompare. By doing so, it would get the existing relationships with insurers immediately, add insurance-trained staff to the workforce and avoid expensive brand investments to position itself.

The aforementioned is only one example of numerous possible scenarios. The following questions will provide an idea on aspects that could as well be of relevance to answering the questions as to why a company should acquire rather than build themselves.

  • Are market entry barriers too high?
  • Is the market already saturated and organic growth nearly impossible?
  • Is the aim to consolidate the market to gain market share quickly?
  • Are economies of scale relevant to rapidly exceed the critical mass?
  • Is there a war for talent between competitors, which results in slow organic growth?
  • Is there a considerable synergy upside of a transaction that would immediately generate value?

2) Where should a company invest?

Equally important for a corporate M&A strategy is to set forth specific investment criteria. The blueprint should define any boundaries or limitations to the use of acquisitions as a vehicle for growth. In particular, this could mean restrictions in terms of:

  • Market
    • Significant market size – e.g. market size >€10bn
    • Strong growth perspective – e.g. market estimated to grow by 5% p.a.
    • High profitability
    • Low cyclicality
    • Political stability
    • Only in existing core markets
  • Financial metrics
    • Double-digit revenue growth over the past three years
    • EBIT margin above 20% over the past three years
    • Low Capex requirements – e.g. 5% of revenues
  • Deal metrics
    • Size of the transaction – e.g. deal value must be below €100m
    • Dynamic payback period below five years
    • Five-year IRR of 5% or above
  • Competitive position
    • Leading market position
    • Entry barriers / competitive advantages
    • Scalable business model
    • Low risk of disruption
    • Cultural fit
  • Value creation rational
    • Scope: close to own competencies
    • Scale: synergies with existing business
    • Growth: Opportunities for buy & build / consolidation
    • Operational excellence: better management

The corporate M&A strategy blueprint must be as precise as possible on the investment criteria. Otherwise, the investment criteria are rather seen as a guideline than something to be adhered to. However, the more precise the requirements, the more difficult it gets to find potential targets. As a solution, the blueprint could categorize the criteria into must-haves and nice-to-haves.

3) How should M&A be used to achieve the overarching strategy?

The blueprint for corporate M&A strategy should also contain the ways of how to use the acquisitions to enhance the overall strategy. In particular:

  • How does the company plan to add value to the target? Or, vice versa,
  • How does the target contribute to the strategic goal of the acquiring company?

Let’s have a look at an example. NewsCo, a company that is active in the newspaper business, is looking into buying a printing facility. So far, NewsCo has purchased the printing services via an external party. This made NewsCo very dependent on the printing facility, as the newspaper must be at the doorstep of subscribers as well as in kiosks every morning. On a few occurrences, the facility had IT issues that led to the paper not being distributed in the morning and subscribers canceling their subscription.

NewsCo now how has the opportunity to buy the printing facility. This opportunity enables NewsCo to generate value by (i) acquiring a business along the value chain that reduces the cost of printing, (ii) making NewsCo less exposed to IT issues, as this would now be in their own hands, and lastly (iii) lowering overhead costs as most of the functions (finance, HR, accounting) are already present at NewsCO.

What is more, the acquisition is in line with NewsCo’s overarching strategy to get less dependent on suppliers and integrate as many functions along the value chain as possible.

If most of the crucial points regarding value creation have been worked out, the management can focus its attention during the due diligence on the points that really matter. At the same time, the post-merger integration can be planned accordingly and already start early in the transaction process.

The advantages of being a serial acquirer

When it comes to the corporate M&A strategy, being a serial acquirer might be advantageous in generating value.

A study by the Boston Consulting Group (“BCG”) has found out that serial acquirers outperform single acquirers by a substantial margin when it comes to certain deal types (small, distressed, private or inter-continental). Amongst other things, BCG listed that companies which are selective and adhere to their investment criteria when it comes to sourcing deals are particularly successful. Further, getting used to the complexity of small and private companies gives acquirers an edge over single acquirers. BCG concluded that serial acquirers have an increased chance of success through their regular practices in acquiring companies.

A study by McKinsey came to a similar conclusion. Companies that regularly acquire smaller targets are twice as likely to estimate synergies more precisely. Furthermore, these serial acquirers have built best practices in their organization across all the M&A stages, to be as efficient as possible and generate excess value for their shareholders.

Conclusion and Key-Takeaways

Acquisitions are a vital part of the growth story of many companies. Whether these players use M&A to increase their revenue or to rebound from a recession, a corporate M&A strategy is a must-have.

The strategy blueprint must provide answers to the questions on how, why and where to invest. It should act as a framework that governs the entire investment process. When set-up correctly, the corporate M&A strategy will help to shift the focus of all participants on what really matters: creating value. 

Finally, if the transactions repeatedly follow the principles set out by the corporate M&A strategy, they have an increased chance of generating excess value for the shareholders.

You should now be able to answer to following questions:

  • Why is corporate M&A strategy so important?
  • What are the main components of a corporate M&A strategy?
  • Why are serial acquirers more likely to generate excess shareholder value?

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