When former Disney CEO, Bob Iger was asked for the remarkable revitalization of the Walt Disney company over the past two decades, his answer was unequivocal:
Disney used mergers and acquisitions as a business growth strategy.
Over that time, it acquired leading production companies like Pixar, Marvel, Lucasfilm, and 20th Century Fox. Each brought something different to the table. With Pixar, it acquired the world’s most advanced animation practices.
With Marvel and Lucasfilm, in addition to large movie franchises, it acquired the merchandise rights to films that it could market through its retail branches. And with 20th Century Fox, it acquired a hugely valuable back catalogue.
In short, Disney’s strategy is a prime example of a successful M&A strategy.
M&A usually falls into two categories: strategic and financial.
This is not to say that strategic M&A does not generate revenue: A large part of the success of Disney’s strategic M&A play has been the financial growth that it generated. The two work hand in hand.
Primary goal of acquisition
Growth is the primary goal of an acquisition, so any company which is serious about growth should make mergers and acquisitions a central part of their strategy.
Good M&A is usually what enables one company without any inherent competitive advantage to overtake competitors in its space. This is true in almost every industry, from SMEs all the way to multinationals.
Whether it’s acquiring a company for its intellectual property, to enter a new geography, obtain valuable physical assets, or to gain access to new products and service lines, the primary goal of an acquisition can be summed up in one word: Growth.
At a time when growth in the global economy has been sluggish for the best part of a decade, there is little coincidence that M&A has hit record levels as companies look to any means possible to ensure they keep growing.
We at DealRoom help dozens of companies to grow via M&A and in this article, we take a closer look at the issue of growth through mergers and acquisitions.
How can merger or acquisition help a company expand?
Every company is limited to a large extent by external factors: the market, the industry, and the country or countries in which it operates.
Remarkably few companies can remove themselves from these constraints for sustained periods.
Of those that can, many do so through mergers and acquisitions. In an industry where average annual growth is 5%, most companies will be expected to achieve growth in sales close to this.
By contrast, all things being equal, a merger of two equals will double the revenue of both.
Additional benefits of using mergers and acquisitions as a growth strategy include:
- Quickly enter new markets. Historically gaining entry into a market has been known to take years (consider the networking, sales pitching….). However, acquiring a company can accomplish this goal relatively easily and quickly.
- Enter a marketplace with credibility. Piggybacking on the previous benefit, gaining access to a marketplace alone does not equal success, rather gaining credibility in a marketplace yields true results, especially when markets can be oversaturated; true financial gain comes from being a recognizable and trusted service or product.
- Diversify products/services. Expanding the services and products your company offers can lead to sustainability and revenue. In fact, larger companies will diversify as a way to prepare for and protect themselves in the future. This trend is seen very often in the food industry. Take for example Mars acquiring Chappell Brothers years ago or Coca-Cola acquiring Odwalla as Americans became more health conscious.
- Acquire intellectual property. Intellectual property refers to nonphysical assets such as copyrights, patents, and trademarks. Ideas can be turned into money making services, products, and technology.
- Acquire top talent. Mergers and acquisitions are a prime way of obtaining strong talent. It is essential that change management practices take place from the top down in order to retain these strong employees, which will, in turn, protect the value of the deal. That being said, when a strategic move is made, many employees understand the benefit of the decision as M&A is part of today’s business landscape.
- Reduce competition. The assets that come with mergers and acquisitions can help your company operate at lower costs. A direct consequence of operating at lower costs is the ability to lower prices and, therefore, reduce competition.
- Surprise competitors. Some practitioners believe M&A moves can help companies surprise competitors, thus giving them an advantage.
- More value for shareholders. M&A activity can generate more value for company stakeholders, and diversification through mergers or acquisitions can also put stakeholders’ worries at ease.
- Innovation through Acquisition. Large tech companies like Google and Microsoft are justifiably acclaimed for being leaders of innovation, but what is less discussed is how they acquire many of their most valuable innovations, bringing them into their portfolio to improve their existing offerings. They have shown that M&A is a valuable strategy for developing a company’s innovation capabilities.
How do companies drive growth by acquisitions?
The consolidation of two or more companies and their operations is a faster way of achieving growth than almost any other means.
The world’s largest companies - all of which, without exception have used acquisitions as a growth strategy - are testament to this.
Too learn more about these, see our overview of 11 Powerful Acquisition Examples and what we learned from them.
Of course, this growth doesn’t happen by itself. Good acquisition policy looks at the issue of fit between the two companies.
Even when the companies appear a good fit, a thorough due diligence process is paramount to ensure the growth of the merged entity is sustainable.
When does M&A work for Business Growth?
As the example of Disney shows, a well-planned M&A strategy can be a highly effective way of generating business growth.
Most companies cannot be expected to stay ahead of the pack in every department (who would have thought that the Walt Disney Company would need to acquire another company for its animation capabilities?), so it makes sense to acquire key capabilities through acquisitions, particularly at a time when technology is changing so quickly.
Furthermore, when acquiring a company, the buyer usually gains access to pre-existing (and often successful) clients and contracts, human capital, workflows, products, physical assets, and even intellectual property.
Finally, M&A works for business growth when companies are in tune with synergies. Synergies are of the utmost importance when utilizing M&A, specifically acquisitions, to generate growth.
Growth through acquisition vs. Organic growth
Disney provides us with a case study of the power of M&A over organic growth.
In January 2006, it announced the acquisition of Pixar, and this was followed in December 2009 with the acquisition of Marvel.
In anecdotal terms, we could assume that the addition of two such complementary businesses would contribute significantly to Disney’s growth.
The stock market returns over the period which followed both deals confirms it. The graph below shows Disney’s performance between 2006 and 2016 (dark blue link) vs. the S&P 500 index (light blue line).
Fig 1. Performance of Disney Stock vs. S&P 500, 2006-2016
As the chart shows, Disney stock enjoyed 350+% growth over the period, compared to just 61% for the overall market during the same period.
Or to put it in another way, Disney’s compounded annual growth exceeded 14%, while the overall market growth rate compounded was a little under 5%.
It’s also worth bearing in mind that this takes in a period during which the stock market was considered to be bullish. Another statistic bears out the power of acquisitions: In 2005, Disney’s revenue was $31 billion. By the end of 2016, it had jumped to $55 billion.
How to develop a growth through acquisition strategy
When looking to generate a business growth strategy, the following roadmap can get you started.
Again, just as with M&A playbooks, each company and each deal are different - you’ll need to tailor the guidelines and advice to your company’s individual situation.
In general, however, the process of growing your business through acquisition should look similar to this:
Having a roadmap can certainly help in getting you started.
But it's not enough.
So..what do you do next?
You can use our 7-step checklist to developing a powerful growth through acquisition strategy for your business:
- Fully analyze and evaluate your needs and goals.
- On a related note, you will need to perform a comprehensive evaluation of the current market and business world. It means to consider the economy, customers, competitors, as well as your current business and its operations. Be sure to question each aspect of your evaluation to make sure your information is accurate and not idealized.
- Consider why a combined company would breed more success from M&A (and be specific here as you answer this question).
- Clearly identify the synergies you’re looking to capture. Is this (M&A) the only way to capture them?
- Do you have a diligence team and diligence tools ready to go?
- How do you plan to successfully integrate the new company? How will you retain key employees (remember employees are the ones currently making the company successful)? How will you focus on culture, and what change management practices will you put into place?
- Examine how you will align your M&A practices with your growth strategy.
Critical and strategic factors in a growth by acquisition strategy
Until now, the focus of this article has been on how acquisition strategies drive growth.
But this in itself makes an assumption that the acquisitions are conducted properly. Experience shows that acquisitions can destroy value as much as create it, with the difference usually being in the execution of the transaction.
The critical and strategic factors that underpin successful acquisitions are as follows:
- Addressing strategic fit: Acquiring for the sake of acquiring is little more than management hubris. The target companies should fit the requirements of the buyer’s corporate strategy in some way (i.e. product or service line, geographic reach, etc.).
- Addressing cultural fit: Some of the biggest transactions of all time have failed because of cultural differences between the two merging companies. Culture - or how a company gets stuff done - is fundamental to the company’s value creation, so needs to be considered.
- Conducting due diligence: Thorough due diligence ensures that the buyer ‘looks under the hood’ of the business they’re acquiring, and that the price they’re looking to pay for the business reflects its intrinsic value.
- Integration: The deal isn’t done when the ink dries on the share purchase agreement. At this stage, the two companies must begin an integration process that seeks to ensure that the two companies become more than the sum of the parts.
Benefits of growth by acquisition
In addition to the benefits such as gaining access to new customers and geographic markets, growing by acquisition has several additional benefits when compared to organic growth:
● Speed: A well-executedM&A strategy can deliver growth much faster than through organic means, as shown by many of the historic growth trajectory of some of each industry’s largest companies.
● Benefits of experience: As more and more acquisitions are made by a company, each additional acquisition should become less risky and, all things being equal, more straightforward to execute.
● Benefits of scale: Whilst strongly disencouraging ‘empire building’, there are almost no drawbacks to being a larger firm. Financiers, suppliers, customers, employees, and shareholders all stand to benefit from the increased scale brought by M&A.
What to look out for in acquisition from start to finish
The purpose of the due diligence process is to investigate issues within the target company that aren’t immediately obvious.
This includes everything from soon-to-expire contracts with large customers to potential litigations owing to the company’s actions in the past.
However, on a more strategic level, there are several issues that the buyer should keep an eye out for.
These include the following:
- Culture: This word comes up again and again, but it’s importance to M&A success cannot be overemphasized. Buyers should keep their eyes and ears open and glean all the information they can about the target company culture and get a feel for what they’re buying into.
- Competitive Advantage: Is there anything that the target company does that gives it competitive advantage (which we’ll define as the ability to generate above-market value for a sustained period of time), or is it a ‘plain vanilla’ company?
- Leadership: Could the leadership of the target company make a valuable addition to your own company’s leadership team? Spend time with them during the due diligence process to establish if this might be the case.
- Opportunities: Are there any opportunities on the horizon for the target company that it can exploit, but your company can’t, in the near future? Say, because of a service or product line they have which is set to undergo significant growth.
- Synergies: Where are the synergies between your two firms? Are they truly complementary to each other or does buying the target company actually risk leading to cannibalism of some of your company’s revenue streams?
When does M&A not work for business growth?
- The deal does not follow sold strategic or financial logic
- Company is too small to take on the complexities of the M&A process / has insufficient M&A experience
- Company is not financially stable / faces lack of funding
- The potential deal has too many red flags and M&A risk factors
- Members of the M&A team are only searching for deals due to reward programs
When executed correctly, there is nothing that can beat mergers and acquisitions for long-term value creation.
The fact that the world’s most successful companies have in-house teams dedicated to acquiring other companies underlines this. However, M&A is a complex task to execute.
To deliver the growth that they’re aiming for, companies need to undertake good company search, due diligence, and integration. Having done so, they stand to reap the rewards of an acquisition for growth strategy.