With many large corporations taking on M&A as a potential growth strategy, business leaders are tempted to adopt the acquisition path to build a business empire. However, according to Mark Sirower, renowned M&A consultant in BCG, most acquisitions end up in spectacular failures. Many firms fail to see how new acquisitions fit into their overall strategy and have yet to find a way to build M&A capabilities that consistently harness value for shareholders. As such, it is imperative for top management to deliberate the M&A process to ensure long term success. In this article, we will explore the common motives of M&A and how it fits into the strategy of the firm.
Horizontal Integration
A horizontal M&A involves acquiring a target firm with a similar business, operating in the same market. The target is likely to be a direct competitor of the acquiring firm with comparable products and services. The main reason for doing so is to enhance revenue by increasing market share and, at the same time, reducing competition.
Market Extension
This M&A strategy finds target firms with a similar product line but operate in a different territorial market as compared to the acquiring firm. The benefit of such acquisitions is the opportunity to enter a new market while staying in the core competency of the acquiring firm.
Vertical Backward Integration
A vertical backward acquisition seeks to combine the acquiring firm to its suppliers. The advantage is through cost savings arising from the purchase of supplies needed to run the business. A prime example is a clothing manufacturer taking over a yarn producer.
Vertical Forward Integration
Contrastingly, a vertical forward integration seeks to buy over the acquiring firm’s customer. The combined firm can value-add to their existing product portfolio and charge a higher margin to extract value. An example is a clothing manufacturer acquiring a fashion retailer.
Product Extension
Acquiring firms seeking product extension will look for potential targets in the same geographical areas but with different product lines. The main purpose is to add additional ranges of products and cross-sell them in the same geographical market. This strategy is best executed with complementary goods that increases the likelihood of cross-sell.
Free-form Diversification
Under this form of strategy, acquiring firms take on all other opportunities to undergo M&A. The target firm typically offers different product lines while servicing an entirely separate geographical market. The main purpose is to diversify income into alternative sources which might smoothen the impact of economic cycles. However, this represents the highest risk of M&A failure as the management team would have to operate the two businesses quite independently which potentially limit the synergies of the combined firm.
Although M&A is a complex process and is not the answer for every strategic goal, executives can still realize the full potential for synergy of an acquisition. It is highly beneficial to enter the deal fully knowing the rewards and risks involved and, more importantly, knowing when to walk away when things no longer make economic sense.
