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10 Major Pros and Cons of M&A

Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of DealRoom

Any business owner considering an M&A transaction would do well to weigh up the pros and cons beforehand.

DealRoom has helped hundreds of companies through their M&A process, and the feedback from them on M&A transactions is usually some combination of pros and cons. Rarely does the feedback from companies fall exclusively in either camp.

The following are the most common pros and cons of deal-making that we’ve learned from those conducting transactions:

Advantages (Pros) of M&A

  • Fastest way to achieve growth
  • Enables companies to enter new markets
  • Enables companies to change their business model
  • Can be used to acquire new talent
  • Can be used to generate synergies

The Pros of M&A (Benefits)

1. M&A is the fastest way to achieve growth:

There is no other form of corporate activity that can grow your company’s top line as fast as a merger or acquisition.

This is why the world’s biggest companies unashamedly use M&A as a means for growth, particularly when it looks as though growth in their existing business is shuddering to a halt. Growth is therefore the most common reason for undertaking M&A and underpins most of the other motives.

2. M&A enables companies to enter new markets:

In a similar vein to growth, there may be no better way to enter a new market than to acquire a company already successful in that market.

This goes for almost every industry. Merging with or acquiring a company in an attractive market avoids most of the cultural, regulatory, and commercial issues that can beset companies entering new markets without greenfield ventures.

3. M&A enables companies to change their business model:

M&A can also be used to transform a company. The example of Nokia is a case in point. Though starting out as a paper mill, it acquired cableworks in the 1920s.

A merger between this cableworks company and a television manufacturer in the 1970s was the genesis of Nokia’s cell phone division. When the cell phone devices division was sold to Microsoft in 2013, Nokia acquired Alcatel-Lucent to transform itself (yet again) into a network provider.

4. M&A can be used to acquire new talent:

Acquiring for talent (referred to in some quarters as ‘acqui hiring’ is most common in high value-added industries, such as technology, engineering, or advertising.

Companies like Google, Apple, and Facebook are all considered pioneers in acqui hiring and have made acquisitions in the past decade of small startups principally to get the companies’ founders onto their roster.

An example of this came in 2017 when Google acquired Halli labs, whose founding teams were considered the world’s best AI and ML engineers. 

5. M&A can be used to generate synergies:

Synergies are what happens when two companies come together and amount to more than the sum of their parts.

This usually occurs through operational synergies (i.e. dropping some duplicated operational costs that arise as a result of the deal) or growth synergies (i.e. where two companies with complementary products join forces to create an enhanced range of products and services).

Although easy to overestimate, this is unquestionably one of the biggest pros of conducting M&A.

Disadvantages (Cons) of M&A

  • M&A can very easily be conducted for the wrong reasons
  • M&A can distract from the daily management of a business
  • M&A can destroy value as well as create it
  • M&A valuations are an inexact science
  • M&A due diligence is a complex and time-consuming task

The Cons of M&A (Negative Effects)

1. M&A can very easily be conducted for the wrong reasons:

Because of all the pros that have just been outlined, it can be simple to think of M&A as a quick win. That’s one thing that it almost certainly never is.

As we have said before on these pages, a merger or acquisition is the largest project that any company will take on, so it’s not to be taken lightly.

DealRoom’s project management tools and the companies that use them are evidence enough of this. Nobody should undertake M&A thinking it will be easy. Anything that can add so much value is rarely easy.

2. M&A can distract from the daily management of a business:

As much as M&A can add value for a business, the main value creation that goes on in any business should be its day-to-day operations.

Thus, pulling managers away from the operations of the company can be a major distraction from their performing their day-to-day tasks.

This defeats the purpose of what M&A is for, so a good plan has to be put in place before any deal to ensure that the correct time is allocated for each manager’s participation in the process.

3. M&A can destroy value as well as create it:

More than one company has had value destroyed because of mismanagement at some part of the M&A process.

Unfortunately, if managers don’t keep their eye on the ball, this can even happen when two companies appear to be a near-perfect match.

Without the proper care at every stage of the deal - be that origination, negotiations, due diligence, deal closing, or integration - value can be destroyed without good planning and implementation.

4. M&A valuations are not an exact science:

More than one book on M&A has called it ‘part science, part art’. Another way of saying this is, even the most analytical of us can get M&A horribly wrong.

Amazon’s acquisition of Whole Foods, to take one example, was seen in many quarters as a deal that would generate significant value for both companies, giving Amazon a high-end distribution chain for its grocery fulfillment efforts, and giving Whole Foods access to the world’s most potent e-commerce engine.

But the deal hasn’t been a roaring success, proving that even if everything is in place for a deal to be a success, it doesn’t mean for sure that it will be.

5. M&A due diligence is a complex and time-consuming task:

As a provider of virtual data rooms primarily used for M&A due diligence, DealRoom has been party to hundreds of deals over the past decade.

A notable takeaway from this decade has been the correlation between thorough due diligence and deal success. The most successful deals were almost always those in which the M&A lifecycle management platform was used more, by more participants, for a longer period of time.

DealRoom’s experience in M&A makes it an ideal platform for any participants in the process to maximize the pros and minimize the cons.

Talk to us today about how our software can provide your company with a valuable tool to empower your M&A process.

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