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.
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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.
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