The M&A market is very active today. Yet, history suggests that very few mergers and acquisitions are successful. Ultimately, at least 60% are expected to fail. So, what are the different types of successful acquisitions?
The outcome of M&A deals is important for many different stakeholders. The founders who launched the companies being bought, the buyers, the teams involved, investors and of course the customers. Although buyers may often never intend to continue to invest in certain business units, no one likes failure.
There are many reasons given for acquisitions. Research shows just six types of acquisitions which are really likely to succeed. Consider whether these are your reasons for shopping for companies to buy or that potential buyers for your business are thinking along these lines.
1. Improved Performance Of The Target Company
A few adjustments could dramatically improve the performance and value of a company. Especially in the hands of well equipped and experienced operators.
Raising revenues and cutting costs to improve margins and profitability can turn an okay business into a cash machine, and add billions to its worth for other buyers and investors.
Shaving just a few percentage points in cost savings may add double digits to the company’s value.
This may be done to create more value and cash and profitability in the acquiring holding company. To accelerate growth and maintain strong reporting numbers, and to offset weaknesses in changing markets.
It’s like flipping houses in a way. You’re not going to buy the prettiest, newest, most overpriced house and expect to get much in value or cash flow or yield. Instead, those house flippers look for the ugly.
Units that are underperforming, and in which they can create a lot of value with some new paint, and new tenants. Then it can be on par with those higher-priced, pretty ones.
Out of the different types of successful acquisitions, this one may be the most obvious but at the same time one of the hardest to execute.
2. Removing Excess Capacity In An Industry
This is similar to a roll-up, but more focused on larger and more successful competitors.
A roll-up is typically focused on acquiring small companies that may align with your bigger vision, or offer some cross-selling opportunities, and create more value in your company. Often in expectation of then selling the package deal to an even larger corporate buyer.
Removing excess capacity is about removing competition and oversupply. When an industry gets hot, new entrants and a swelling in supply from incumbents who are expanding can create a lot of price pressure and may damage the market for everyone.
Remove the competition and oversupply and options, and you’ll have less downward pressure on prices, and may be able to put more peer pressure on competitors to behave better rather than to take short cuts and engage in unethical sales practices to survive.
Of course, this may only work to the point where there are several large incumbents who then mistreat customers and set a very low bar for customer satisfaction. Then the industry becomes ripe for disruption by a new startup again.
It’s also worth noting that these consolidations and roll-ups can be hard to disguise, and may trigger competitors to react and copy your moves. So out of all the types of successful acquisitions unless you plan way ahead this specific type could generate other risks mainly related to how the market reacts.
3. Creating Market Access For New Products & Services
Of the startups and founders, I’ve advised and interviewed on the DealMakers Podcast, some of the biggest dollar value types of successful acquisitions fall into this category. We’re talking about multi-billion dollar deals.
Think about it. If you’ve got a great product or service, one of the simplest ways to instantly scale that to 100 million or billions of users is simply to merge with or sell your company to an entity like IBM, Google or Facebook.
These companies have massive global sales forces, billions of existing customers, and can afford to do whatever it takes to gain adoption.
It’s also a super-easy way for larger companies to improve their own profitability, revenues, and other metrics.
Mastering the storytelling side and how you are positioning your business is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
4. Acquisition Of Technology Or Skills
While they may not be as evil as entrepreneurs think, big corporations definitely still suffer from the cliche sluggishness and slow decision making and ominous red tape they are so despised for.
When you are big it seems unavoidable that things move incredibly slowly, and they cost a lot more too.
This is why many successful entrepreneurs leave these companies and then start up their own ventures, which they then sell back to their ex-employers.
Build a fantastic team or technology, and make it cheaper for someone larger to buy you than to go through the risk and long process or replicating it themselves, and you can have the makings of a very nice exit.
Out of the different types of successful acquisitions, this one also involves the acquihires where a larger corporation buys a company mainly for the talent. They would buy the company and then use the employees for a new or ongoing initiative where the larger company requires hiring fast. This is a way to hire in bulk.
5. Leveraging A Company’s Industry Specific Potential For Scale
This is a great strategy for acquiring smaller companies which can help you grow in your space. They can help you instantly tap into new customer acquisition, and benefit from economies of scale and better margins in production, delivery, and so on.
One of my recent podcasts guests did something similar when they acquired a smaller company who had the opposite 70/30 split of customers on two continents. Together they instantly boosted their market share and reach.
Other applications may be seen in the auto industry, where dealerships can sell multiple models, and share manufacturing plants and basic parts. Think GM, or more recently Fiat, Alfa Romeo and Maserati.
6. Picking Winners Early & Developing The Business
If you can spot winners in your industry early, and develop them under your umbrella, you can enjoy massive value creation and growth. Definitely one of the types of successful acquisitions to consider.
This is particularly valuable in emerging sectors which haven’t caught on with the masses yet. For example; early cloud computing and shift to mobile technology, organic and green products, and new healthcare products. It takes some investment and willingness to be ahead of the times, but the payoff can be huge.
Talk to your M&A Advisor and ensure your exit and acquisition strategies fall into one of these categories for the best chances of success.