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The 10 Biggest Motives for an M&A Deal

Show Notes Of Podcast

10 Reasons for Companies to Acquire or Be Acquired

  • Motive 1: Economies of Scale
  • Motive 2: Market Share
  • Motive 3: Acquire New Technology/Expertise
  • Motive 4: Synergies (“Value Creation”)
  • Motive 5: Geographical Diversification
  • Motive 6: Vertical Integration
  • Motive 7: Cross-selling
  • Motive 8: Taxation
  • Motive 9: The Financial Motive
  • Motive 10: Opportunism

Whenever a large transaction is announced, the managers involved are usually quite willing to disclose their motives for the transaction.

This can be as much about justifying the spend to their shareholders and the general public as anything else. It also serves to give some insight into the thought process behind the many deals that are closed every week.

The 10 biggest motives are discussed below. Some examples have been provided to give context to each specific motive.

Note, that as a virtual deal room provider, DealRoom has been able to discuss the motives for deals with several intermediaries and indeed, the companies partaking in the transactions.

Where possible, we’ve included some examples of those deals which have called on DealRoom to aid their M&A process.

Whenever a large transaction is announced, the managers involved are usually quite willing to disclose their motives for the transaction.

This can be as much about justifying the spend to their shareholders and the general public as anything else. It also serves to give some insight into the thought process behind the many deals that are closed every week.

The 10 biggest motives are discussed below. Some examples have been provided to give context to each specific motive.

Note, that as a virtual deal room provider, DealRoom has been able to discuss the motives for deals with several intermediaries and indeed, the companies partaking in the transactions.

Where possible, we’ve included some examples of those deals which have called on DealRoom to aid their M&A process.

10 Reasons for Companies to Acquire or Be Acquired

  • Motive 1: Economies of Scale
  • Motive 2: Market Share
  • Motive 3: Acquire New Technology/Expertise
  • Motive 4: Synergies (“Value Creation”)
  • Motive 5: Geographical Diversification
  • Motive 6: Vertical Integration
  • Motive 7: Cross-selling
  • Motive 8: Taxation
  • Motive 9: The Financial Motive
  • Motive 10: Opportunism

Motive 1: Economies of Scale

Bigger is often better.

That’s the thinking behind acquiring for the economies of scale motive. Larger companies enjoy cost savings and competitive advantages that smaller companies usually don’t.

This is very common in the airline industry where British Airways has merged with a few different firms over the years to create IAG (International Airlines Group), essentially a conglomerate of airlines which has more control over the skies than almost anybody else.

Motive 2: Market Share

Market share may be the most common motive of all for M&A transactions; companies are constantly looking at where they stand in their industries relative to their peers so market share acquisitions are never far from the thoughts of CEOs.

Of course, one issue here is that too much market share attracts the ire of antitrust organizations.

Virtually every big retail bank you know has become big through the acquisition of smaller regional retail banks, giving them a power which famously makes them ‘too big to fail’.

Motive 3: Acquire New Technology/Expertise

Industries change and if companies don’t, they don’t survive. That’s why companies are often on the lookout to acquire other companies which give them new technologies and expertise.

In the next decade, as the energy transition continues, we can expect many of the oil and gas majors to begin investing in renewable energy firms, for example.

Over the course of the last decade, Google has acquired over 30 artificial intelligence (AI) startups, acquiring a range of capabilities in a technology which is set to be hugely influential in the years ahead.

Motive 4: Synergies (“Value Creation”)

As DealRoom blog articles have stated in the past, the scale of synergies are too often exaggerated.

But sometimes, the logic, if not the numbers, makes absolute sense. In 2017, when Amazon acquired Whole Foods, it was a clear attempt for Amazon to bring the power of its ecommerce machine to traditional food retail.

Clearly, the markets thought it was going to be a success: within hours of the deal, most other food retailers in the US were down by a few percentage points on the news.

m&a science

Motive 5: Geographical Diversification

Geographical diversification has been a huge value-driver in M&A over the years and this stands to reason:

Why build a company from scratch in a foreign country when you can acquire a cash generating entity that already exists and use it as a platform for your own company’s growth in that country?

Arguably the most successful example of this has been Spanish bank Santander, which has acquired banking chains in 9 countries outside of Spain to become one of the world’s largest retail banking institutions.

Motive 6: Vertical Integration

Vertical integration involves a company acquiring different parts of the value chain; typically, this begins with a company which has grown to a certain size buying its own distribution so that it doesn’t need to hire third party distribution.

We’ve touched on vertical integrations in a previous article (see here), As mentioned in that article, LiveNation’s acquisition of Ticketmaster in 2010, where it acquired Ticketmaster’s retail distribution, was a good example of vertical integration.

Motive 7: Cross-selling

Cross selling can be a powerful way to deliver revenue synergies: The idea that two companies have more to offer their customers by being together.

One recent example of a cross-selling deal is provided by Starbucks’ acquisition of Teavana for $750 million in 2017.

What could be more synergistic for revenues than selling tea and coffee together? Now, you can get tea at Starbucks and coffee at Teavana. Everyone’s a winner.

Motive 8: Taxation

Perhaps unsurprisingly, tax is one area where companies are loath to admit that they’ve undertaken M&A to avoid taxes (note: avoid, not evade).

It doesn’t play well with consumers knowing that a company is openly avoiding taxes but be assured: this is one of the most common motives for M&A.

But also one of the least mentioned as the explicit motive. The idea is that a cash flow positive company acquires a firm with carry forward tax losses to reduce its own tax burden.

Motive 9: The Financial Motive

Until now, the motives have been largely strategic in nature.

But what about when a company is being bought essentially for its stream of cash flows?

This is usually the case when a private equity firm is involved in an acquisition. US investment bank William Blair used DealRoom when it was advising the management of TaskUs Inc. on a sale to private equity giant, Blackstone. Blackstone acquired TaskUs Inc. for a fee in excess of $500 million.

Motive 10: Opportunism

Companies aren’t always looking for an acquisition when one lands on their doorstep.

“Opportunistic” is a word that CEOs are keen to play up as it suggests that the transaction as a sort of ‘once in a lifetime deal.

Really what’s at play in an opportunistic deal is buying a company below its intrinsic value. JP Morgan’s 2008 ‘fire sale’ deal for BearStearns, which it acquired at a supposedly knockdown price, is an example of a deal that found a company rather than the other way around.

Conclusion

More often than not, when a transaction goes through, those publicizing it will mention at least one of the motives we’ve included here, if not two or three.

Remember the Law of Parsimony when it comes to motives for M&A deals, however:

If there’s definitely one strong motive for a deal, it’s got an excellent chance of being a success; if there’s more than one motive, it could just be that the manager wants to convince you that a deal is worth the money.

Whenever a large transaction is announced, the managers involved are usually quite willing to disclose their motives for the transaction.

This can be as much about justifying the spend to their shareholders and the general public as anything else. It also serves to give some insight into the thought process behind the many deals that are closed every week.

The 10 biggest motives are discussed below. Some examples have been provided to give context to each specific motive.

Note, that as a virtual deal room provider, DealRoom has been able to discuss the motives for deals with several intermediaries and indeed, the companies partaking in the transactions.

Where possible, we’ve included some examples of those deals which have called on DealRoom to aid their M&A process.

10 Reasons for Companies to Acquire or Be Acquired

  • Motive 1: Economies of Scale
  • Motive 2: Market Share
  • Motive 3: Acquire New Technology/Expertise
  • Motive 4: Synergies (“Value Creation”)
  • Motive 5: Geographical Diversification
  • Motive 6: Vertical Integration
  • Motive 7: Cross-selling
  • Motive 8: Taxation
  • Motive 9: The Financial Motive
  • Motive 10: Opportunism

Motive 1: Economies of Scale

Bigger is often better.

That’s the thinking behind acquiring for the economies of scale motive. Larger companies enjoy cost savings and competitive advantages that smaller companies usually don’t.

This is very common in the airline industry where British Airways has merged with a few different firms over the years to create IAG (International Airlines Group), essentially a conglomerate of airlines which has more control over the skies than almost anybody else.

Motive 2: Market Share

Market share may be the most common motive of all for M&A transactions; companies are constantly looking at where they stand in their industries relative to their peers so market share acquisitions are never far from the thoughts of CEOs.

Of course, one issue here is that too much market share attracts the ire of antitrust organizations.

Virtually every big retail bank you know has become big through the acquisition of smaller regional retail banks, giving them a power which famously makes them ‘too big to fail’.

Motive 3: Acquire New Technology/Expertise

Industries change and if companies don’t, they don’t survive. That’s why companies are often on the lookout to acquire other companies which give them new technologies and expertise.

In the next decade, as the energy transition continues, we can expect many of the oil and gas majors to begin investing in renewable energy firms, for example.

Over the course of the last decade, Google has acquired over 30 artificial intelligence (AI) startups, acquiring a range of capabilities in a technology which is set to be hugely influential in the years ahead.

Motive 4: Synergies (“Value Creation”)

As DealRoom blog articles have stated in the past, the scale of synergies are too often exaggerated.

But sometimes, the logic, if not the numbers, makes absolute sense. In 2017, when Amazon acquired Whole Foods, it was a clear attempt for Amazon to bring the power of its ecommerce machine to traditional food retail.

Clearly, the markets thought it was going to be a success: within hours of the deal, most other food retailers in the US were down by a few percentage points on the news.

m&a science

Motive 5: Geographical Diversification

Geographical diversification has been a huge value-driver in M&A over the years and this stands to reason:

Why build a company from scratch in a foreign country when you can acquire a cash generating entity that already exists and use it as a platform for your own company’s growth in that country?

Arguably the most successful example of this has been Spanish bank Santander, which has acquired banking chains in 9 countries outside of Spain to become one of the world’s largest retail banking institutions.

Motive 6: Vertical Integration

Vertical integration involves a company acquiring different parts of the value chain; typically, this begins with a company which has grown to a certain size buying its own distribution so that it doesn’t need to hire third party distribution.

We’ve touched on vertical integrations in a previous article (see here), As mentioned in that article, LiveNation’s acquisition of Ticketmaster in 2010, where it acquired Ticketmaster’s retail distribution, was a good example of vertical integration.

Motive 7: Cross-selling

Cross selling can be a powerful way to deliver revenue synergies: The idea that two companies have more to offer their customers by being together.

One recent example of a cross-selling deal is provided by Starbucks’ acquisition of Teavana for $750 million in 2017.

What could be more synergistic for revenues than selling tea and coffee together? Now, you can get tea at Starbucks and coffee at Teavana. Everyone’s a winner.

Motive 8: Taxation

Perhaps unsurprisingly, tax is one area where companies are loath to admit that they’ve undertaken M&A to avoid taxes (note: avoid, not evade).

It doesn’t play well with consumers knowing that a company is openly avoiding taxes but be assured: this is one of the most common motives for M&A.

But also one of the least mentioned as the explicit motive. The idea is that a cash flow positive company acquires a firm with carry forward tax losses to reduce its own tax burden.

Motive 9: The Financial Motive

Until now, the motives have been largely strategic in nature.

But what about when a company is being bought essentially for its stream of cash flows?

This is usually the case when a private equity firm is involved in an acquisition. US investment bank William Blair used DealRoom when it was advising the management of TaskUs Inc. on a sale to private equity giant, Blackstone. Blackstone acquired TaskUs Inc. for a fee in excess of $500 million.

Motive 10: Opportunism

Companies aren’t always looking for an acquisition when one lands on their doorstep.

“Opportunistic” is a word that CEOs are keen to play up as it suggests that the transaction as a sort of ‘once in a lifetime deal.

Really what’s at play in an opportunistic deal is buying a company below its intrinsic value. JP Morgan’s 2008 ‘fire sale’ deal for BearStearns, which it acquired at a supposedly knockdown price, is an example of a deal that found a company rather than the other way around.

Conclusion

More often than not, when a transaction goes through, those publicizing it will mention at least one of the motives we’ve included here, if not two or three.

Remember the Law of Parsimony when it comes to motives for M&A deals, however:

If there’s definitely one strong motive for a deal, it’s got an excellent chance of being a success; if there’s more than one motive, it could just be that the manager wants to convince you that a deal is worth the money.

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