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Adopting M&A as a Strategy

There is a case to be made that mergers and acquisitions (M&As) are not strategies – they’re tactics. However, mid-sized businesses can use acquisition in innovative ways as a tactic to implement strategy.

In many instances, M&As are a means for mid-size companies to grow by winning in their sector without having to go head-to-head with the big boys. It represents a business accelerator in terms of growth and market share that competitors will find hard to beat. The critical point is to leverage M&As as tools to accelerate strategic shifts, not as answers on their own.

However, in the event of a misstep, the business can experience a serious operational distraction and a waste of financial manpower resources, so professional hand-holding is a prerequisite.

Advantages include building scale to reach more customers, entering new markets, cutting excess, or fulfilling unserved demand.

This, in turn, can result in more profitable growth, as well as improved performance, agility, and flexibility. To achieve these benefits, acquirers need to have a clear and tested strategic business objective. When considering an M&A transaction, a business needs to pair its strategy with not only the business process but also with the market demand. Sound project management is critical, particularly in creating clarity around business goals and metrics, roles and responsibilities, and the correct assigning of tasks, timelines, and communication. This all needs to be in place from the outset of the M&A process through to the close of a deal.

More and more mid-sized firms are considering an M&A as a means of breaking free of a slow growth trajectory in an anaemic South African economy. To do so, they typically rely on high-level, top-down assumptions, such as cost synergies, forward-looking valuations, and expected post-deal operational improvements.

Performing this due diligence requires assessing simulations to model the assumptions embedded in the end result for the two respective companies. Important to both companies is having the capability to gain this insight in as close to real-time as possible with advanced analytics to provide accurate information instantly – even in the middle of the month – to predict month-end performance and take immediate action.

Such skills are often beyond the capability of a mid-sized company, and an M&A partner can bring a number of disciplines that keep the corporate strategy of growth top of mind throughout the process:

- Align M&A benefits with organisation and client strategies and goals.

The entire team, including all professional advisers such as lawyers and bankers, needs to maintain a clear idea of the client business’s goals which will streamline the negotiation process. This involves respect for clients, partners, and staff; and building long-term valued relationships at every opportunity.

When an M&A fails, it is typically for reasons related to conflicting business cultures.

- Monitor market trends and opportunities

Remaining aware of market fluctuations is paramount to capturing M&A opportunities.

In difficult times, many business leaders have had to move out of their comfort zones into different geographic markets in order to grow their companies.

- Don’t centre deals solely around the cost

The growth value of targets increases during market downturns, recessions and periods of economic uncertainty, so the present time might be a perfect time to consider M&A targets.

As we’ve seen in recent deals announced in the public space in South Africa, the quantum of the offer doesn’t deter deals. There’s high demand. Rising rates won’t impact what we’ll see in the next 24 to 48 months on the M&A demand side but keeping an eye on the movement of financial markets is critical.

- Don’t have a fear of walking away

If all the stars don’t completely align on a deal, don’t be hesitant to walk away. Some bets are risky, so for them to pay off, companies can’t rely on optimistic assumptions.

It requires strategic conviction to say no because sometimes that’s the best business decision. With current corporate supply being relatively low and demand continuing to rise due to high liquidity, staying nimble and strategic with M&A transactions makes good business sense. By having regard for solid strategic decision-making based on keen opportunities expertly executed, the sky’s the limit.

Unless the acquiring company is careful, no matter how mutually beneficial an M&A appears, every deal brings complexity and uncertainty that can detract from the perceived opportunity to create business value.

Published in Business Brief February/March 2023


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