Perhaps you’ve heard the expression, If at first you don’t succeed, merge.
And while they are not the cure-all the joke makes them out to be, mergers – and more broadly Mergers & Acquisitions (M&A) – can be a powerful inorganic growth strategy when intentions are clear and execution is well orchestrated against those intentions.
The bad news? Many M&A don’t work. Particularly large M&A.
The reality is many businesses are not sufficiently specific with their intentions for Mergers & Acquisitions before they embark on one. And if you’ve read enough HighPoint Associates content, you know we’re all about intentionality.
So when it comes to considering whether M&A is right for your business, the first effort comes down to identifying your rationale for undergoing what can be a lengthy and often intimidating process. In his InSights article on post-merger integration, Why Intentions Matter in Making Mergers Work, HPA Senior Advisor Alex Nesbitt writes,
“There are many reasons one company may wish to acquire another, leading to a variety of merger types… [These] categories serve as a starting point for considering the desired outcome of a merger….”
While HighPoint Associates sees all manner of rationales for businesses merging with or acquiring another, the below three types of M&A (aka combinations) rationale are by far the most common:
Much like a person consolidating their debt, efficiency combinations have the effect of reducing a business’ operating costs (among other things). These kinds of value creation M&A can also increase operational efficiencies. In either case, the anticipated end result is better scale with improved cash flow and profitability.
A good example is the $26.5 billion 2020 T-Mobile-Sprint merger deal, in which T-Mobile emerged as the surviving brand while the Sprint brand was discontinued within just a few months of deal finalization. According to T-Mobile, their combined assets and extensive capabilities and market overlap resulted in a “Supercharged Un‑carrier positioned to deliver unparalleled network reliability, value, innovation and commitment to customers now, when it’s more important than ever.”
The most popular reason for M&A transactions is to increase market power and/or share. In this case, extension combinations are frequently pursued to expand a company’s product lines or add product categories, or to widen their presence in a market they currently inhabit or enter an adjacent or new market. Additionally, they may be looking to increase customer penetration. This kind of M&A is all about revenue, with increased efficiencies and cost reduction secondary.
According to Google’s hardware chief, Rick Osterloh, the tech giant’s 2019 pre-pandemic purchase of Fitbit was about “devices, not data.” An attractive opportunity for Google, the acquisition will allow them to “invest even more in Wear OS as well as introduce Made by Google wearable devices into the market.” On the target company side, Fitbit CEO James Park has stated the acquisition would allow them to “innovate faster, provide more choices, and make even better products.” A seemingly win-win situation.
Transformational M&A come in several stripes, but they all have one thing in common: Each leads to new capabilities that the separate entities would never have on their own. In this case, the merged company is a sum greater than its pre-merged parts.
While efficiency combinations are focused on increasing scale-based cash flow and efficiency, and extension combinations are measured by an increase in market share and revenue, transformational combinations seek to achieve differentiation with new capabilities. The goal of this combination is to create a strategic advantage with new opportunities and connect with new kinds of customers.
Within transformational M&A, there are three “sub-rationales”:
1. To multiply products, services, and/or operational capacity.
2. To acquire needed resources like customers, talent, technology, or innovation capabilities. E.g. When a company wants to keep up with competitors that might be ahead of the game in terms of technology, acquiring a company that brings that technological edge can often be a faster way to get up to speed and become more competitive in the market.
3. To enter very different markets and diversify risk. This last category of M&A transaction is normally undertaken by large conglomerates.
CVS Health’s acquisition of Aetna in 2018 is one such transformational combination. In fact, the stated goal straight from the target Co’s mouth was to “Transform the consumer health experience and build healthier communities.” CVS’s retail locations across the country are expected to help achieve that goal, while allowing CVS entry into the health insurance space.
Aside from the heavy financial investment they require and their mixed batting average, Mergers & Acquisitions are simply too big an undertaking to begin without a clear understanding of your company’s rationale before deal sourcing. Again, per Alex, “While managers are typically eager to focus on the process of post-merger integration, they need to consider the desired outcomes of the merger first. Knowing what the combined entity must achieve serves as the foundation for establishing the intention of a company instigating a merger.”
Want to strengthen your strategic position in the marketplace?
The highly accomplished consulting team at HighPoint Associates has both the operational chops and industry expertise to successfully and rapidly execute each aspect of Mergers & Acquisitions planning and integration. We’ve led significant M&A activities internally, and understand firsthand each endeavor is a high-stakes event that integrates complex assets, cultures, processes, and IT systems. Contact us today to learn more about HighPoint’s mindful approach to mergers.