The M&A industry will peak again in 2023 as companies adapt to today’s challenges. But according to Harvard Business Review, up to 90% of all transactions fail. That said, a wise M&A business strategy can help merged businesses survive through integration challenges.
This post will shed light on the most common M&A strategies with some real-life examples, considerations for strategic development, and best M&A practices.
Definition of M&A strategy
An M&A strategy is how the acquiring company aims to add good value with the acquisition based on its current position and growth intentions.
Implementing a merger and acquisition strategy and in-depth research allows an acquiring company to:
- Identify acquisition expectations. An M&A strategy helps to align transactions with a corporate strategy and develop a clear M&A thesis.
- Pick more suitable target companies. Realistic M&A expectations and requirements allow for selecting the most suitable selling company.
- Mitigate acquisition risks. Knowledgeable M&A choices help companies prepare for acquisition risks in advance.
- Prepare for post-deal integration. Wise M&A planning simplifies post-integration activities.
Types of M&A strategies
Business leaders differentiate four types of M&A strategies:
A horizontal M&A strategy involves a merger or acquisition of companies in the same industry. Such M&A deals involve companies offering the same services and sharing the same audiences. The primary purpose of this merger is to devour direct competitors to eliminate rivalry.
Horizontal integrations typically occur in competitive industries and pursue the following benefits:
- Reduced competition. Horizontal M&A results in consolidation, lessening competitive pressure for a buying company.
- Better market share. The horizontal merger boots the buyer’s market value and sales as it obtains the acquired company’s customer base and sales channels.
- Lower growth costs. Horizontal M&A yields faster results than product development from scratch.
At the same time, horizontal mergers involve the following drawbacks:
- Regulatory challenges. Due to anti-monopoly laws, these transactions may put involved companies at regulatory and financial risks.
- Leadership discrepancies. Merged entities may become too complex and inflexible to manage, risking revenue losses.
- Integration challenges. Post-merger integration may face cultural, managerial, and production challenges that delay success and decrease market value.
A vertical M&A strategy involves a merger between companies producing different products and services but sharing the same industry. It often occurs between manufacturers and suppliers or services and technologies. The primary goal of this M&A is to improve efficiency and independence.
Companies pursue the following benefits with vertical M&A deals:
- Combined power. Vertical strategy strengthens a merged company with operational, technological, and cost synergies.
- Efficient cost management. Acquired suppliers allow financial buyers to reduce service costs due to better control over manufacturing and distribution processes.
- Increased revenue. Synergies and resource control increase market value and sales.
However, a vertical M&A strategy may lead to several challenges:
- Substantial capital investment. Vertical integration requires significant budgets for combining technologies, production, and staff.
- Talent loss. Layoffs and discrepancies between combined systems may discourage crucial talents.
- Flexibility loss. Vertically integrated entities may become more vulnerable to market changes and competitors along the supply chain.
A concentric M&A strategy implies that a company joins forces with another company in the same industry to provide more products and services.
Buyers pursue these mergers to improve and extend products and services by accumulating talent, additional resources, and technology. It often happens between companies offering different services to the same audience.
A combined company becomes more resilient than two separate entities. Concentric mergers involve the following benefits:
- Extended products. A new entity provides more products and services and broadens product categories.
- Reduced costs. Combined production facilities, new technology stack, and added products reduce marketing, distribution, and production costs.
- Better growth opportunities. Improved and extended products target new audiences and markets, increasing sales and growth opportunities.
That said, a concentric merger may involve a particular drawback:
- Limited diversification. Since a concentric merger occurs in the same industry, the combined company cannot add as many products as compared to conglomerate mergers.
Conglomerate M&A deals mean acquiring smaller companies in non-competitive industries. They may occupy completely different markets or even geographical locations.
Companies pursue conglomerate M&A to diversify products, achieve synergies, or improve resilience and profits. Conglomerate mergers involve several benefits:
- Better diversification opportunities. Conglomerates avoid substantial losses due to diversified assets and income streams.
- Expanding customer base. Combined entities access previously unavailable audiences and add new customers quickly.
- Increased revenue. Diversified assets and new customers create more revenue streams and increase sales for the new entity.
Still, conglomerate mergers may involve several issues:
- Cultural differences. Companies from different industries may have opposing cultures and experience related integration challenges.
- Managerial issues. Unprofessional decisions hinder business growth when company A applies a new business model incompatible with the acquired business B.
M&A strategy examples
Good examples of horizontal M&A
Bad examples of horizontal M&A
Disney’s acquisition of Pixar
HP and EDS merger
Disney’s acquisition of Pixar for $7.4 billion in 2006 is one of the best horizontal M&A deals. Bob Iger, Disney’s CEO, says this deal is one of his proudest decisions. It revitalized Disney and generated $11.5 billion in profits post-acquisition due to innovative Fox movies.
Hewlett Packard acquired Electronic Data Systems for $14 billion in 2008.The deal failed due to poorly addressed integration challenges and layoffs accompanied by the global economic recession. HP’s misdirected focus and discrepancies in growth vision also resulted in profit losses.
Disney accessed Fox’s CGI technology and talent.Disney reduced competition and access to new audiences.Disney accessed new characters and franchises.
EDS lost $8 billion four years after the acquisition.HP lost over 20% of its market capitalization by 2012.HP fired 27,000 people to compensate for the profit loss.
Good examples of vertical M&A
Bad examples of vertical M&A
eBay acquisition of PayPal
AOL-Time Warner hostile takeover
eBay, an online marketplace, acquired PayPal, a payment platform, for $1.5 billion in 2002. This deal benefited both companies significantly. eBay acquired a promising payment solution, while PayPal accessed an enormous customer base. It was good timing for both companies to join forces.
America Online, an internet service provider, merged with Time Warner, a media entertainment company, in 2000. The $350-billion deal was the worst in American history. Two companies failed synergies and misled customers. Cultural discrepancies and a lack of post-merger execution ruined the merger.
eBay revenues were growing for 12 consecutive years.PayPal revenue has been growing for 12 years.Paypal generated over 40% of eBay’s revenue in 2012.
AOL subscribers have been declining for 12 years.AOL Time Warner reported a $98.7 billion loss in 2002Ted Turner, vice president of the combined company, lost $8 billion or 80% of his wealth.
Good examples of concentric M&A
Bad examples of concentric M&A
Coca-Cola and Energy Brands
Heinz and Kraft
Coca-Cola acquired Energy Brands in 2007 for $4.1 billion, the owner of Vitaminwater. This merger allowed Coca-Cola to diversify its product lines with vitamin-rich beverages. Although Coca-Cola settled charges for misleading health claims, the overall profit boost of this merger was spectacular.
Heinz, a processed foods and beverages manufacturer, merged with Kraft, a confectionery, food, and beverage conglomerate, in 2015.The $45-billion mega-merger failed due to employee misconduct, proceedings, and unprofessional integration decisions.
Coca-Cola added many beverages to its products. Coca-Cola has added over $650 million in sales post-acquisition.The company invested in several other beverage businesses after Vitaminwater’s success.
Kraft Heinz announced a $15.4-billion write-down after the SEC investigation.The company’s shares plunged 60% in four years after a merger.The company stock price is over 50% down eight years after the merger.
Good examples of conglomerate M&A
Bad examples of conglomerate M&A
Berkshire Hathaway is one of the biggest and most successful conglomerates. Its brands include Duracell, GEICO, Dairy Queen, Benjamin Moore, etc. Berkshire Hathaway’s success comes from clever acquisitions under Warren Buffet’s supervision.
General Electric is a giant conglomerate under decline.It owns healthcare, aviation, renewable energy, power, finance, and other businesses. It peaked in the 1999s-2000s but experienced a steep decline after 2008. New York Times suggests GE fell apart due to unreasonable acquisitions and the inability to respond to market conditions.
The stock price grew 246 times from 1984 to 2023.Over $660 billion market cap.Fifty-three acquisitions and 20 investments.
Thirty-four acquisitions and 44 investments.The stock price fell over 65% from 2000 to 2023.Market cap decreased by 79% from 2001 to 2023.
Key considerations for developing an M&A strategy
Deloitte identifies poor strategic fit, overpaying, lack of clever integration, and cultural differences as primary reasons why M&A deals fail. This is what happened to companies in the bad M&A examples.
In contrast, Deloitte suggests that comprehensive market assessment, M&A planning, and professional post-merger development enhance the deal process and lead to success. Successful dealmakers take four steps to develop a working M&A strategy:
- M&A goal definition
- Target company analysis
- Risk assessment
- Robust post-merger plan
Define the company’s goals regarding M&A
William Bell, Chief Sales Officer at Chief Outsiders and a CEO with over 20 years of experience emphasizes that companies should set clear strategic goals.
The buyer should always consider strategic implications and choose a target company based on its goals, whether they are:
- Entering new markets
- Growing within market segments, or
- Purchasing customers and expanding geography
McKinsey’s M&A success blueprint strongly suggests conducting a thorough self-assessment to identify your acquisition goals:
- Does M&A preserve your competitive advantage?
- What budget capabilities do you have for M&A?
- What type of M&A strategy suits your financial goals?
- Does your M&A strategy align with industry trends?
Analyze the target company
Analyzing a target company (due diligence) should be a central part of an M&A deal. It allows a buyer to identify key opportunities and risks of the acquisition deal.
Ultimately, buyers can understand whether target businesses fit their strategic goals. According to Deloitte, the due diligence process should center around IT, human resources, financial health, commercial aspects, company’s performance, and taxation.
George Deeb, a growth expert at Rocker Ventures, provides several considerations to understand whether a target company fits your acquisition goals:
- What do you want this transaction to bring you? Customers, products, technology, something you can’t acquire easily on your own.
- Is this transaction good for the company’s shareholders? The combined business worth should be higher than the two firms alone.
- Does this transaction promise high revenue? George suggests finding selling companies that ensure better revenue growth with cross-selling opportunities.
- Does this transaction improve your market position? Ensure this transaction makes you outperform competitors and reduces your dependence on a particular customer.
- Is the target company compatible with your business? Ensure the target company shares your strategic vision and corporate culture.
Assess the risks related to M&A
Risk assessment should comprise a significant part of due diligence. Gibson, Dunn & Crutcher LLP, an international law firm, provides several risk assessment questions to consider when conducting due diligence:
- What risk management policies and procedures does a target company have?
- Can a target company’s business model resist economic hardships?
- What risks and pressure points do potential synergies involve?
- What risk prevention terms does a transaction have?
- Does this transaction involve independent third-party risk assessment?
- How thoroughly does your team evaluate the target’s risks?
- What risks does the transaction process involve?
The transaction process itself may involve several risks. According to PWC, warranty breaches, working capital, purchase price issues, earnout implementation troubles, and board duty lawsuits are common M&A-associated risks.
Develop a plan for post-merger activities
Ernst & Young has found that 58% of executives whose deals met or exceeded expectations started post-merger integration as early as possible.
The global leader in M&A transactions advises companies to develop a post-merger integration plan based on the transaction’s value drivers. EY also suggests establishing an Executive Steering Committee, consisting of an investment banker, M&A analysts, and other experts. It will facilitate the integration program.
Also, one should establish an integration management office (IMO) to supervise key integration steps and milestones. It clarifies the integration strategy, ensures timely execution, and reports the progress to leaders, shareholders, and investors.
Best practices for developing an M&A strategy
The following practices enhance the acquisition process and ensure smooth corporate development post-deal.
Targeting smaller acquisitions
Business leaders, consulting, investment banking, and private equity firms recommend pursuing smaller acquisitions within horizontal, vertical, conglomerate, or concentric strategies. It is called the programmatic approach, and it is more efficient than big episodic acquisitions or organic growth M&A.
McKinsey’s research on 1,000 M&A deals has found that small deals are more manageable and deliver higher value to frequent buyers than large transactions.
Among the top 100 performing companies in Global 1,000, nearly 70% are programmatic acquirers. In contrast, only 8% of companies targeting large episodic deals become the top 100.
Incorporating digital technology
Digital transformation becomes increasingly important in the 2023 mergers and acquisitions landscape. According to a Deloitte M&A trends survey, more companies will be using virtual environments in their M&A deals. Only 17% and 22% of businesses conduct due diligence and integration in person.
Notably, 57% of organizations conduct due diligence in the virtual environment, while 52% of companies use virtual M&A tools for post-merger integration.
Companies manage M&A in virtual data rooms (VDRs), secure collaboration platforms with dedicated M&A workflows. Virtual data rooms facilitate strategic deal planning and execution from start to finish:
- Strategic planning. A centralized collaborative environment allows one to inspect company resources, assess market conditions, and identify potential targets. Communication, data analytics, and file-sharing tools enable executives to pick an M&A growth strategy more accurately.
- Due diligence. M&A workflows, including Q&A, deal dashboards, tasks, and messaging tools, enable seamless collaboration between buyers and sellers. It drastically simplifies due diligence and allows for more accurate investigation.
- Post-deal activities. Powerful communication and data-sharing capabilities allow companies to develop post-integration plans more efficiently. Collaboration tools enable frictionless interaction between departments and ensure effective integration execution.
- Security compliance. Data rooms address M&A cybersecurity risks, preventing data leaks and agreement breaches. Extensive user permission systems and document security tools force deal parties to comply with transaction policies
Prioritizing acquisition targets
A study on 33,952 companies and 22 years of M&A found that acquiring companies look for specific private and public companies when pursuing M&A activities:
- Large, fast-growing private companies with high profitability, high leverage, and low liquidity.
- Small, fast-growing public companies with low profitability, low leverage, and low valuations.
Picking a suitable M&A strategy ensures the transaction’s success and business survivability in the long term. Horizontal, vertical, concentric, and conglomerate are the common deal-making strategies.
M&A strategic planning needs a company to define clear M&A goals, inspect acquisition targets, analyze risks, and develop robust post-deal plans. Experienced and successful dealmakers target smaller acquisitions, use virtual data room technology, and select private and public companies with specific parameters. These practices maximize transaction success and survivability for acquirers and sellers.