Few firms reach the very top without conducting at least a few M&A transactions.
And the fact that the most successful firms in the world employ teams of professionals whose only role is to seek out attractive potential acquisitions tells its own story.
Implemented well, an active mergers and acquisitions strategy can be a highly fruitful process for any company.
At DealRoom we work with dozens of companies helping organising their M&A process and below, we look at 10 of the biggest benefits of such a strategy.
1. Economies of Scale
Underpinning all of M&A activity is the promise of economies of scale. The benefits that will come from becoming bigger:
- Increased access to capital,
- lower costs as a result of higher volume,
- better bargaining power with distributors, and more.
While buyers should always avoid the temptation to indulge in ‘empire building,’ as a general rule, bigger companies usually enjoy advantages that small companies do not.
2. Economies of Scope
Mergers and acquisitions bring economies of scope that aren’t always possible through organic growth. One only has to look at Facebook to see that this is the case.
Despite providing users with the ability to share photos and contact friends within its platform, it still acquired Instagram and Whatsapp.
Economies of scope thus allow companies to tap into the demand of a much larger client base.
Synergies are typically described as ‘one plus one equalling three’: the value that comes from two companies working together in tandem to make something far more powerful.
An example is provided by Disney acquiring Lucasfilm. Lucasfilm was already a huge cash generator through the Star Wars franchise, but Disney can add theme park rides, toys and merchandise to the customer offering.
4. Opportunistic Value Generation
Some of the best deals happen when a company isn’t even actively pursuing an acquisition.
The hallmark of these acquisitions is that the purchase price is less than the fair market value of the target company’s net assets.
Often these companies will be in some financial distress, but a deal can be made to keep the company afloat while the buyer benefits from adding immediate value as a direct consequence of the transaction.
5. Increased Market Share
One of the more common motives for undertaking M&A is increased market share.
Historically, retail banks have looked at geographical footprint as being key to achieving market share and as a result, there has always been a high level of industry consolidation in retail banking (most countries have a group of “Big Four” retail banks.
A good example is provided by the Spanish retail bank Santander, which has made the acquisition of smaller banks an active policy, allowing it to become one of the largest retail banks in the world.
6. Higher Levels of Competition
The larger the company, in theory, the more competitive it becomes.
Again, this is essentially one of the benefits of economies of scale: being bigger allows you to compete for more.
To take an example: there are currently dozens of upstart companies entering the plant-based meat market, offering a range of vegetable-based ‘meats’.
But when P&G or Nestle begin to focus on this market, many of the upstarts will fall away, unable to compete with these behemoths.
7. Access to Talent
Ask anybody in the recruitment industry where the biggest talent shortages currently are, and the answer will invariably be a variant of ‘people that can code’.
Why is this?
Firstly, because of the huge demand for coders in the so-called fourth industrial revolution. But also because all of the best coders are working for large silicon valley technology companies.
The biggest always have access to the best talent. That’s as true for every other industry as it is for technology.
8. Diversification of Risk
This goes hand-in-hand with economies of scope: By having more revenue streams, it follows that a company can spread risk across those revenue streams, rather than having it focus on just one.
To return to the example of Facebook: Some analysts suggest that younger eyeballs are turning away from the social media giant towards other forms of social media… Instagram and Whatsapp among them.
When one revenue stream falls, an alternative stream of revenue may hold, or even pick up, diversifying the acquiring company’s risk in the process.
9. Faster Strategy Implementation
Mergers and Acquisitions may be the best way to make a long-term strategy to become a mid-term strategy. Suppose a company wants to enter the Canadian market; it could build from the ground up and hope that it reached the desirable scale in five to ten years.
Or it could a business, its client base, distribution, and brand value and benefit from them all upon closing of the acquisition.
This also goes for areas like new product development and R&D, where an organic strategy can rarely match the speed provided by M&A.
10. Tax Benefits
Acquisitions can sometimes bring tax benefits if the target company is in a strategic industry or a country with a favorable tax regime.
The example of US pharmaceutical companies looking at smaller Irish companies and moving their headquarters to Ireland to avail of its lower tax base is a case in point. This is referred to as a ‘tax inversion’ deal.
The most well-documented version was a proposed $160 billion merger between Pfizer and Allergan in 2016, subsequently scuppered by US government intervention.
As this list shows, there are numerous benefits to good acquisitions.
And what’s more, the better constructed the deal, the more these benefits are likely to arise.
Anybody looking to put an M&A strategy into practice should consider which of these benefits they’re most looking for from the acquisition when thinking about their motives for buying.