#StratChat 12 January 2023: Mergers and Acquisitions
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#StratChat is conducted under Chatham House Rules. Consequently, the summary below is presented without any attribution of who said what. As such, it is an agglomeration of views - not necessarily just those of the writer or indeed of any one individual.
This week we talked about Mergers and Acquisitions as a tool of business strategy.
Mergers and acquisitions (M&A) (and disposals and carveouts) have long been a part of the strategists arsenal.
We have horizontal integration, vertical integration and diversification. We have acquisitions for assets, stock, technology, capabilities and talent. We have leverage buyouts, management buyouts and reverse mergers. I am sure there are many more varieties besides...
And we have plenty of high-profile stories about how it can all go horribly wrong!
What is the role of M&A in business strategy? When is it a good idea and when is it not? And how do you ensure it strengthens rather than weakens your strategy?
Mergers and acquisitions (M&A) can be a tricky business, and it's important to consider the different strategies and potential pitfalls before diving in. We talked about some of the pros and cons of M&A, as well as the different types of M&A and the strategies that companies use to make them successful.
One of the key advantages of M&A is that it can be very successful for smaller and medium-sized businesses. This is often achieved through "rollups" and "bolt-ons" - acquiring other businesses for their talent, customers, technology, or intellectual property. These types of M&A can have more immediate effects and be more tactical in nature.
On the other hand, larger M&A deals can be more of a gamble. They may be pursued simply to build market cap growth artificially, and may involve "merger arbitrage" or "special situations investing." Cross-selling can also be notoriously difficult in these types of deals, as issues can arise between sales teams and there may be restrictions on data sharing and compensation.
Another important consideration in M&A is whether to "acquire and hold" (i.e., build a conglomerate or investment trust) or to "acquire and integrate." The latter strategy can be more difficult and risky, as it often involves trying to combine two separate businesses and cultures.
However, when a company is struggling to achieve organic growth, M&A may be the only way to grow. This can create a catch-22, as the reason the company is struggling to grow may be because it may have become too big to effectively manage, and the original problems that led to the M&A may be compounded. Additionally, M&A can be a distraction from properly running the organization, and management may be pressured into deals by outside players with vested interests.
Another type of M&A is the "rollup" strategy, which involves adding together and scaling up multiple small businesses. This can be done to achieve purchasing economies or other benefits. Private equity firms are known to look for opportunities to do this in various industries.
However, it's important to remember that M&A can also be very risky and can even "kill" a business by interfering with its operations or discouraging competitors from becoming customers. This is why it's essential to be aware of the potential downsides of M&A and to have a clear strategy in place before embarking on any deals.
In conclusion, M&A can be a powerful tool for growth, but it's important to carefully consider the different strategies and potential risks before making any moves. Whether you're looking to "acquire and hold" or to "acquire and integrate," it's essential to remember that the customer should always be at the forefront of your mind. M&A is a delicate balance of strategy and culture, and it's important to keep the two in harmony to achieve success.