Deciding to “expand via M&A” is not a strategy. M&A is instead a tool to use in pursuit of a goal, associated with a strategy, that can be leveraged to meet an objective (see below). Flying under the misconception that M&A is a strategy could result in poor decision-making, a lack of clarity and value-destroying transactions.
According to the Harvard Business Review, between 70-90% of acquisitions fall short of expectations because “executives incorrectly match targets to the strategic purpose of the deal, failing to distinguish between deals that might improve current operations and those that could dramatically transform the company’s growth prospects.” The result is that many organizations approach M&A in the wrong way – from identifying and acquiring unsuitable targets, taking the incorrect approach to post-merger integration and sometimes, by incorrectly viewing M&A as a strategy.
So, what is meant by strategy and how does it relate to M&A? At a high-level, strategy can be said to entail an approach designed to achieve a long-term goal – a goal for instance, could be “to exceed $100m revenue in the next five years”, “to expand sales to existing customers by 50%” or “to expand into new international markets.” Taking Amazon as an example, the recent announcement in June 2017 to purchase health food grocer Whole Foods is suggestive of a goal to, in time, become a major US grocery supplier. Amazon has been trying to enter the food retail market since 2007, when Amazon Fresh was launched. More recently, it has pushed its Amazon Go concept (a grocery store based on machine learning). However, Amazon has enjoyed limited success to date and despite its forays into selling groceries has never really managed to convince consumers to buy store cupboard staples in the same way as they do books or other, non-perishable items.
With a goal to become a major US grocer seemingly in place, CEO Jeff Bezos and the Board of Amazon would have needed to consider how to achieve this via implementing a strategy and deciding on the best tactic to utilize. M&A is just one potential tool that can be utilized to achieve such a goal (other examples, in context to Amazon, could include pursuing organic growth and opening up further Amazon Go stores). Sometimes, it might be the case that M&A is the only way an organization can achieve a goal – however, it is important to note that M&A is a tool used to help achieve a goal and not a strategy. This distinction is important because when M&A is considered to be only a strategy, a directionless process may ensue, where the organization lacks a clearly defined goal (i.e. the M&A lacks a specific purpose) and ultimately fails to unlock the potential value of the transaction.
Having decided that M&A is the tactic by which a goal will be achieved, an organization must give consideration to the specifics of the tactic and therefore, the nature of M&A to be undertaken. For instance, a joint venture, a merger of equals, an outright acquisition, a partial investment, following a buy-and-build/tuck-in strategy as part of market consolidation, or a transformative acquisition so as to move the organization in a different direction. Referring back to the example of Amazon, a transformative acquisition of Whole Foods has seemingly been chosen as the specific tactic to break into the US grocery market. Time will tell whether this helps Amazon achieve its goals.
At a fundamental level, and before proceeding with an acquisition, it is important to consider the tactic at a more granular level – i.e. what exactly is being purchased, how much of a performance increase can be expected from the Target/synergies, how much should the acquisition cost and to what extent should the Target be integrated? In terms of understanding what is being purchased, it is important to consider the value proposition of the Target – i.e. what does the product(s)/service(s) provide to customer? Secondly, what is the revenue and cost model – how does the Target generate revenue, what costs does it incur and how does it make a profit? Thirdly, what resources does the Target own – people, assets, technology, products, facilities and cash, etc. – to deliver the value proposition? Fourthly, what processes does the Target have to follow to deliver the product(s)/service(s) to customers? Ultimately, addressing the above points should help in answering whether the acquisition will help achieve the goal. If any of the above points are questionable then M&A should be reconsidered – it might be that the Target represents the wrong fit for the organization or perhaps, that pursuing an M&A process will not help achieve a specific goal.