By HPA COO & Partner Justin Moser
Perhaps you’ve heard the saying, “There is only one way to eat an elephant: a bite at a time.” This saying is intended to inspire the tackling of sizable problems or systemic change in modular pieces, and it’s also relevant for businesses that want to consolidate, grow, and/or diversify their strategic positions through M&A: You can either attempt to tackle the beast in one enormous fell swoop (mega-deal), or carve it into manageable, digestible chunks (series of smaller acquisitions) – the latter often has its advantages.
Large acquisition stories, with bolded names and big digits, are attention-grabbing. This is especially true with transformational mergers, which can bring the intent of differentiation. These kinds of combinations, if done well, can lead to a transformational sum that’s greater than its parts, and result in all-new capabilities giving merged companies a strong strategic advantage (think: Disney’s acquisition of Pixar and CVS Health’s acquisition of Aetna). But the simple and often forgotten (or overlooked) truth is, acquisitions don’t need to be massive, high-cost, or complex to drive value. And that’s important to keep in mind since many of them fail (depending on how a business defines failure).
In his seminal Insights article, Why Intentions Matter in Making Mergers Work, HPA Senior Advisor, Alex Nesbitt shares,
“While there is tremendous opportunity, a great deal of expected value from M&A never materializes. Various studies estimate between 40% and 80% of all M&A ventures fall short of achieving their stated objectives.”
Nesbitt attributes these failures to a number of issues, but a lack of clarity around strategic intent is a major pitfall, followed by a lack of speed in post-merger integration and poor communication.
On the other hand, the cumulative impact of “string-of-pearls” acquisitions – or regularly paced small to moderately sized acquisitions – has statistically created more value than the occasional large M&A effort. Aside from lower deal complexity and cost, there are other compelling reasons why this programmatic approach to M&A has proven its worth:
1. Practice makes perfect
No matter the size of the deal, M&A takes a lot of work, from identifying targets and performing due diligence to negotiating and executing the deal. Doing all of these things well requires regular experience – and a regular, metronome-like cadence of smaller acquisitions provides this experience alongside programmatic discipline.
In Harvard Business Review’s article, Research Shows That Smaller M&A Deals Work Out Better, the authors assert, “M&A requires mastery of capabilities through repeated deals over time. Companies that execute programmatic M&A over years, often decades, become true masters of the art of identifying, negotiating, and integrating acquisitions.” The result is better returns and more momentum for the next deal, which in turn gives more experience, better returns, and more momentum, etc. Mega one-and-done deals don’t provide regular exposure to the acquisition process, and often miss the skills and mindset necessary for M&A success.
2. Lower complexity and big gains with tuck-ins
When there are inherent synergies (as there are in most any size deal), smaller, tuck-in acquisitions are relatively low-risk with the added benefit of more turnkey integration. The result is often a more rapid impact. In fact, combining several of these kinds of acquisitions can have the same – or even better – batting average than large deals.
Tech companies are known to pursue this kind of M&A for a variety of compelling reasons: smaller can often unearth better value buys; there are many more small companies from which to cherry-pick; and small often means a faster track to close the deal and integrate the target into the parent company. The net result is to acquire more quickly new or better capabilities, IP, and expertise, or expansion into a new market, customer base, or geographic area that could otherwise take years to develop internally.
3. Access to top talent and the acquihire movement
While some acquisitions have the strategic intent of giving a company new products, capabilities, or customers they don’t currently have or offer in-house, others focus on acquiring talent. What’s the rationale of acquihires? It could take years of recruiting to find a “unicorn” capable of helping a firm achieve its innovation goals. And some top unicorns or innovation visionaries will be difficult to recruit without acquiring their venture. Acquiring a smaller company with arrangements to retain key talent is a workaround that has become more and more popular with large tech companies.
Another added benefit is onboarding entire teams that already have the industry experience, skills, and ability to collaborate, making post-integration far faster and easier: They can hit the ground running, accustomed to working together. And while acquihires can be disruptive to the culture of the parent organization, if managed correctly the payoff can be rapid.
String-of-pearls acquisition strategy is both an art and a science. And while the benefits of these smaller type of M&A are clear, they demand the acquiring company achieve clarity on its desired strategic outcomes, gain alignment on areas of growth, and develop the skills necessary to successfully identify, diligence, negotiate, and execute the deal.
Does your company need the discipline of identifying, structuring and integrating firms?
The highly accomplished consulting team at HighPoint Associates has both the operational chops and industry expertise to successfully and rapidly execute each aspect of M&A 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.