Why is M&A a good strategy for business growth?
Mergers and acquisitions can be a game-changer for businesses looking to scale quickly and efficiently, but they’re not without their challenges.
When done right, M&A can open doors to new markets, streamline operations, and inject fresh talent and technology into your organisation.
However, it’s crucial to weigh up the pros and cons carefully to ensure you’re making the right move for your business. Let’s dive into the benefits and pitfalls of M&A and explore how to identify the perfect acquisition target and structure a deal that works.
The benefits of mergers and acquisitions
M&A creates several advantages for businesses looking to scale quickly, for example:
Reach new markets
One of the most obvious advantages of acquiring another business is an increase in market share.
If you acquire a business in a different region or country, you gain access to a whole new customer base and possibly new revenue streams too. This can also reduce the risk usually associated with expansion, particularly overseas, as you can leverage the existing expertise and experience within the target business.
If you acquire a business with a complementary offering to your own, this might unlock opportunities to cross-sell to existing customers, taking advantage of existing loyalty and potentially offering the customer a more holistic solution.
If you acquire a competitor, you can consolidate market share while also benefiting from the exerience and knowledge of their teams and the areas of business where they had more success.
Increase synergy and efficiency
When executed correctly, a good post-acquisition strategy can improve efficiency across both businesses, reduce overheads and take advantage of obvious synergies.
This might mean merging departments that can serve both businesses such as finance, HR and marketing. It might mean identifying synergies (such as complementary product offerings) that underpin future sales and marketing strategies. It might mean a reduction in per unit production or development costs, if these can now be done at a larger scale.
The reality is that there are likely to be learnings that each business can take from the other, even where one is significantly more commercially successful. By identifying these early on and making them a part of the post-acquisition strategy, organisations can benefit from enhanced performance, as well as the positive growth usually associated with M&A.
Access to talent and technology
Particularly in sectors where the employees possess skills that are in high demand, acquiring a business means injecting fresh knowledge and perspective into your organisation, promoting innovation, growth and potentially the use of new, more advanced technologies.
This influx of expertise can elevate your competitive edge in the market, upskill your existing employees, improve efficiency and long term, may reduce the cost of out-sourcing talent.
Disadvantages of mergers and acquisitions
Just as there are several advantages to growing via M&A, there are disadvantages too. Businesses should weigh up both sides before considering whether an M&A strategy is the right growth route for them. Disadvantages include:
Culture clashes
When two businesses merge, they often bring different corporate cultures, values, and strategic objectives. These differences can create tension and conflict, particularly if there is a misalignment in goals.
For example, one company may prioritise innovation and risk-taking, while the other might focus on stability and cost control. Without careful management, these cultural clashes can undermine the effectiveness of the merger, leading to decreased morale, lower productivity, and even failure to achieve the desired synergies.
Cultural integration also means blending teams from different backgrounds and working environments. This can be particularly challenging if the businesses have different approaches to communication, decision-making, and leadership, sometimes creating uncertainty and anxiety among employees, especially those from the acquired company.This uncertainty can lead to the departure of key personnel who are critical to the success of the merged entity. Losing such employees can be particularly damaging if they possess specialised knowledge or have strong relationships with key clients.
Operational integration
As well as the challenges involved with merging two distinct groups of people, merging two businesses involves integrating various operational systems, processes and technologies. This integration process can disrupt normal business operations, leading to inefficiencies and delays. For example, integrating IT systems can be complex and time-consuming, often resulting in temporary downtime or reduced service levels.
Even when both companies are in the same industry, their internal processes may differ significantly. These differences can lead to challenges in standardising operations, which may result in increased costs and delays in realising the expected benefits of the merger.
High costs
The costs associated with M&A transactions can be substantial. Beyond the obvious expenses such as legal fees, advisory fees and the purchase price, there are often hidden costs related to due diligence, regulatory compliance, and integration efforts. These costs can quickly add up, making the transaction more expensive than initially anticipated.
Post-acquisition, companies may face additional costs related to restructuring, redundancies and the alignment of business operations mentioned above. These ongoing financial burdens can strain the company’s resources, particularly if the anticipated synergies are slow to materialise.
This is why it is so important to work with an experienced team if you are intent on an M&A growth strategy; prior knowledge of the realities of M&A will not only make the process smoother, but also enable you to more accurately calculate whether the acquisition will be worth it.
How to identify and assess an acquisition target
Identifying and assessing the right acquisition target is crucial for a successful M&A transaction. A poorly chosen target can lead to some of the challenges mentioned above, while the right target can drive growth and create value. Here’s how to approach this process:
1. Define your strategic objectives
What do you hope to achieve through the acquisition? Are you looking to enter new markets, acquire new technologies, increase market share, or achieve cost synergies? The answer to these questions will inform your search for suitable targets.
2. Conduct a thorough market analysis
Leverage your industry network to identify potential acquisition candidates. These contacts can provide valuable insights into which companies may be open to acquisition and which are best aligned with your strategic goals.
Consider engaging external advisers, such as M&A consultants or financial advisors, who can provide access to a broader range of potential targets and assist with initial assessments.
3. Evaluate financial and operational fit
Assess the target company’s financial statements, including revenue, profitability, cash flow, and debt levels. Ensure that the target’s financial health aligns with your company’s risk tolerance and strategic goals.
Evaluate how well the target’s operations align with your own. Consider factors such as supply chain integration, technology platforms, and process alignment. A good operational fit can make the integration process smoother and more successful.
Structuring the deal: Key considerations
Once you’ve identified a suitable acquisition target, structuring the deal correctly is critical to ensure that the transaction is beneficial for both parties.
1. Assess the financial health of your target
Conduct thorough due diligence to uncover any potential financial risks or liabilities. This process should include an analysis of the target’s financial statements, contracts, litigation history, and tax obligations. The goal is to ensure that you are fully aware of what you’re acquiring and that there are no unpleasant surprises post-acquisition.
Accurately valuing the target company is also essential to structuring a fair deal. Consider various valuation methods, such as discounted cash flow analysis or comparable company analysis, to determine a realistic purchase price.
2. Negotiate acquisition terms
Negotiating the purchase price is a delicate process that requires balancing your strategic goals with the target’s expectations. Consider various payment structures, such as cash, stock or earn-outs, to align interests and manage risk.
Ensure that the acquisition agreement includes appropriate warranties and indemnities to protect against potential risks. These provisions can provide recourse if post-acquisition issues arise, such as undisclosed liabilities or operational problems.
3. Finance the deal
Consider the various options for financing the acquisition, including debt, equity, or a combination of both. Each option has its pros and cons, and the choice will depend on factors such as your company’s financial health, risk tolerance, and the strategic importance of the acquisition. You can read more about raising acquisition finance here.
Engage financial advisers to help structure the financing in a way that optimises your capital structure while minimising risk. They can assist in negotiating terms with lenders, investors, or other financing sources to secure the best possible deal.
If you are interested in growing your business via M&A and would like to find out more about your funding options, get in touch with a member of our expert lending team who will be more than happy to answer any questions you have.
