The second half of 2022 saw a significant change in mergers and acquisitions. Deals fell from an all-time high to a 10-year low. According to Bain & Company, declines in multiples and a mid-year pause in mega deals cut deal values by more than one-third compared to 2021. This drop left many business leaders feeling apprehensive about making deals in 2023.
This sentiment is echoed throughout the business world as growth seems to be stagnating. JP Morgan’s economic outlook for 2023 indicates a continued downward trend, likely leading to a mild recession. High interest rates, reserved consumer behavior, and a period of transition as the supply chain normalizes are taking a toll on growth.
What does this mean for your growth strategy?
It’s in tough economic times that growth strategies get a lot more scrutiny. This includes intentional decisions to pursue growth through mergers and acquisitions, diversification, innovation, or financial performance.
Often, mergers and acquisitions (M&A) can be a key part of a strong growth strategy.
M&A Expands Market Presence
The most visible example of growth is market presence. It’s a measure of how well-known and trusted a brand is within its industry or region. Market presence can be determined by market share, customer loyalty, and brand recognition metrics.
Companies seeking to grow their market presence might use an M&A strategy to acquire new customers, new products/services, or access to new markets. For example, in 2017, e-Commerce giant Amazon acquired Whole Foods and effectively entered the grocery market.
This acquisition added 460+ physical stores to the e-Commerce brands’ market presence, along with access to an entirely new subset of grocery customers. Additionally, the added convenience deepened loyalty with many existing customers.
M&A Facilitates Achievement of Economies of Scale
Another way that M&A factors into the growth strategy is through economies of scale. This is when a company acquires a supplier, a logistics company, or a manufacturing facility in order to streamline operations and support sustainable growth.
For example, when DuPont and Dow Chemical Company merged to create DowDuPont, the two companies were able to combine R&D, share resources–including distribution and supplier networks, and negotiate better prices on contracts.
Through reduced cost and increased efficiency, the DowDuPont merger positioned the company to be more competitive in three core services areas, eventually splitting into three new–stronger companies.
M&A Facilitates the Acquisition of Technology & Intellectual Property
In the digital age, there’s a premium on technology and intellectual property. These are the key drivers of unique value that sets one business apart from another. This innovation is present in every industry.
In the pharmaceutical industry, drug companies tout proprietary formulas that are more effective at treating symptoms of ‘incurable’ diseases like HIV or Parkinson’s Disease. In the technology industry, manufacturers use proprietary technology to make their devices more desirable. For example, Apple currently holds a patent on 3D touch technology that limits the ability of Android-based manufacturers to replicate the feature on their smartphones.
So, in a world where competitive advantage is determined by proprietary technology and intellectual property, mergers and acquisitions become a strategic move to gain access. When IBM acquired Red Hat in 2019, they did so to gain access to leading-edge open hybrid cloud technologies.
M&A for Diversification
In a similar manner to accessing new technology, businesses also use M&A strategy for diversification. By reducing dependence on a product or market, these companies can improve long-term growth prospects and increase brand recognition, accessing new markets filled with untapped potential for growth in the process.
Amazon–the multinational eCommerce retailer, was originally founded as a used textbook retailer. Over the years, Amazon has diversified into dozens of markets–often through acquisitions. In 2014, Amazon entered the online streaming market for video gamers with the acquisition of Twitch. And in 2018, they entered the online pharmacy market with the acquisition of PillPack, just to name a couple.
What to Consider Before Pursuing an M&A Strategy
Mergers and acquisitions can be a quick path to sustainable growth. But there are risks involved. In 2000, leading internet service provider AOL and media conglomerate Time Warner announced a $165B merger.
For almost a decade, the company struggled with integration, and in 2009 Time Warner finally released AOL as a separate company. This M&A failure was likely the result of a poor strategic fit that failed to live up to expectations.
As you build an M&A strategy, consider these risks:
- Strategic Fit
- Hidden Risks or Liabilities
- Financial Performance
- Market Position
- Growth Potential
- Cultural Fit
- Integration Plan
How Embarc Advisors Can Help You Build a Strong M&A Growth Strategy
M&A is a key prong for the growth strategy of any company. Whether large or small, all companies typically have an aspiration to pursue growth strategies. However, many smaller companies typically don’t have access to the same resources as larger corporations. This creates a corporate development gap that puts small and medium-sized companies at risk.
At Embarc Advisors, we provide startups and founder-owned businesses with the capabilities to build and execute a strong M&A strategy. Some of our recent projects include:
- A founder-owned IT managed services provider executing a series of bolt-on acquisitions to take advantage of the PE roll-up playbook before selling to a Private Equity firm. It used all debt to avoid equity dilution.
- An auto service shop operator acquiring multiple additional sites to implement its best practices and gain economies of scale.
- A VC-backed autonomous technology company acquiring a real-world services business to gain valuable data and accelerate the training of its machine learning models.
Contact our team today and start the conversation about building a growth strategy for your future.
Learn more about financing your next acquisition with our post: How to Finance Your Acquisition Without the Backing of Private Equity