m&a community logo
Exploring winning strategies for mergers and acquisitions
Back to Insights

Exploring winning strategies for mergers and acquisitions

na Investment
m&a strategies
m&a strategies

In the post-pandemic M&A landscape of economic uncertainty and geopolitical tension, strategic M&A planning is fundamental for organizations to adapt to the new normal and shift their focus from mere financial gains to tactical objectives, like market expansion and access to new technology.

The article explores the basics of mergers and acquisitions strategy, provides merger and acquisition strategy examples, and explains how to mitigate M&A risks, including ESG and cultural alignment.

What is an M&A strategy?

Mergers and acquisitions strategy or M&A strategy is a company’s approach and method for combining or acquiring other businesses to achieve certain goals, such as expanding market share, accessing new technologies, or diversifying product offerings.

To understand M&A strategies, it’s important to distinguish between two buyer types: financial and strategic buyers.

Financial buyers

Financial buyers engage in M&A transactions with the goal of financial return. These are professional investors, often from private equity firms, who stick to the following process:

  1. Acquisition. They choose target companies, identifying and purchasing the best financial option.
  2. Performance enhancement. They work to enhance the target company’s performance by implementing measures to reduce costs, improve cash flow, and boost profit margins. The primary objective is to enhance returns on invested capital.
  3. Exit strategy. They sell the acquired company or list it on the stock market with an initial public offering. For insights on how to pitch a stock during the exit phase, refer to our article.

Strategic buyers

Strategic buyers are companies that regard M&A as a logical extension of their broader growth strategy. In strategic mergers and acquisitions, one company buys another to pursue specific strategic aims, such as:

  1. Synergy realization. When starting the M&A processes, companies often focus on cost synergies. However, studies demonstrate that a failure to consider revenue synergies from the start of M&A may slow the realization of value by a year or more. To prevent it, companies involved should develop cross-functional teams to create realistic plans for achieving goals.
  2. Market expansion. The most visible sign of a company’s growth is market presence, often quantified through metrics like market share, customer loyalty, and brand recognition. When Microsoft purchased LinkedIn for $26.2 billion, it entered the professional networking and social media space, broadening its market access beyond traditional software and technology.
  3. Access to new technologies and intellectual property. Without innovation, businesses are left behind. That’s what happened to hundreds of large companies, including Kodak, which was so focused on the success of photography film that it missed the digital revolution. That’s why pursuing technology-driven M&A opportunities is a must, especially for tech companies and the pharmaceutical industry. It allows you to get the technology quickly without the need to develop it and helps avoid royalty payments on patented technologies.

Strategic planning in M&A

When the objective of an M&A lacks clarity and a well-defined strategic rationale, the deal falls apart. Take, for instance, the merger between America Online and Time Warner, which was valued at a stunning $350 billion in 2000. Despite initial expectations for success, the new entity failed. The inability to see the future of the internet, understand the landscape of the media industry, and identify cultural misalignments led to the collapse of a merged company. 

That’s why, before starting the M&A process, careful strategic planning is essential. It involves outlining the objectives and actions necessary for a successful transaction. Consider the following:

  1. Clear objectives. Define the strategic objectives driving the M&A, whether it’s entering a new market, acquiring technologies, or realizing cost savings through economies of scale. For example, when acquiring LinkedIn, Microsoft formulated its goal as “to grow the professional networking site and integrate it with Microsoft’s enterprise software,” indicating market expansion as their key strategic objective.
  2. Thorough due diligence. Prepare to conduct comprehensive due diligence on the target company, evaluating its financials, operations, IP, and legal aspects. Seek advice from professional services firms that can help identify potential risks or opportunities associated with the target firm. Also, leverage tools such as virtual data rooms to ensure secure and efficient information exchange.
  3. Employee retention. According to EY research, 47% of employees leave after a transaction. The number grows to 75% within three years. To minimize the human capital loss, both the target and acquiring firm are recommended to nominate the 2% of critical talent in each business area and prepare retention packages for them. It’s also essential to develop a comprehensive M&A communication plan to provide employees with a clear vision for the company’s future.
  4. M&A regulatory compliance. During M&A, both target and acquiring companies become subject to regulatory scrutiny and legal considerations from bodies like antitrust authorities or competition commissions. The aim is to assess the transaction’s potential impact on market and price competition to prevent monopoly and ensure compliance with relevant regulations. To mitigate legal complexities, seek advice from legal experts specializing in M&A.

Types of M&A strategies

Companies may employ various M&A strategies, depending on the objectives they want to achieve.

CategoryMost suitable forKey objectivesM&A strategy cases
1 Horizontal mergersTwo businesses that operate in the same industry and share the same product lines and markets (direct competitors)To eliminate competition, reduce costs, and achieve economies
of scale by combining similar operations
Disney’s acquisition
of Pixar
united two entertainment industry giants, aiming to consolidate resources and eliminate competition
2 Vertical mergersCompanies at different stages of the supply chainTo improve supply chain efficiency, reduce operating costs, and enhance control over
the production process
Vertical integration
of Tesla with SolarCity united electric vehicles and solar energy, enhancing efficiency and creating comprehensive sustainable energy solution
3 Market extension M&ACompanies selling the same products in different marketsTo expand market reach and increase customer baseProcter & Gamble’s acquisition of Gillette brought together two consumer goods giants. This market-extension merger allowed P&G to expand its market presence globally
4 Product extension M&ACompanies offering complementary products or services in the same marketTo diversify product or service offerings and cross-sell to existing customersGoogle expanded its services and entered the online video-sharing space through the product-extension merger with YouTube
5 Conglomerate mergersTwo companies with unrelated business activitiesTo increase market share and diversify businessesAmazon’s acquisition of Whole Foods is an example of a conglomerate merger. It united an e-commerce business with a grocery chain, diversifying its business portfolio and expanding its presence in the retail industry
6 Cross-border acquisitionCompanies aiming for global expansion and international market accessTo expand into new markets internationallyVisa’s acquisition of UK-based fintech Currencycloud allowed Visa to strengthen its position in the global payments industry and improve its services for international transactions

It may happen that after carefully analyzing a deal, the buy-side or sell-side decides that merger and acquisition strategies don’t present the best choice for the company’s organic growth. In this case, it may consider other options, such as an alliance, joint venture, or franchise. 

An alliance is a collaborative partnership between two or more companies that involves the sharing of resources and expertise. In joint ventures, two or more businesses come together to undertake a specific project. Franchises grant the right to operate using an established business model.

Some companies might also opt for a divestiture strategy that involves divesting some acquired assets or business units to grow and increase market value.

The human factor: Cultural mergers in strategy

A strategic merger between the German-based Daimler-Benz and American-based Chrysler serves as an excellent example of how a significant cultural gap can lead to the failure of corporate consolidation. The clash in management styles, communication practices, and decision-making processes resulted in operational challenges and hindered the expected synergies and revenue growth.

That’s why cultural alignment in mergers should never be underestimated. When companies combine, it’s not only about the financial and operational aspects. The human factor plays a crucial role and should be considered during post-merger integration and included in the M&A integration plan. 

Here are the best practices for successful post-merger change management and cultural integration:

  1. Early cultural due diligence. Conduct thorough cultural due diligence early in the M&A process. Understand the values, beliefs, and practices of both organizations to identify potential areas of misalignment.
  2. A cultural integration plan. Develop a plan with initiatives that can help culturally integrate the companies. For example, create cross-cultural training sessions and invite experts to discuss cultural nuances, potential challenges, and strategies to navigate them.
  3. Leadership alignment. Schedule regular senior management meetings where leaders from a target and an acquiring company can express their expectations and concerns for the integrated organization.
  4. Feedback sessions. Organize regular feedback sessions where employees can express their thoughts, concerns, and suggestions regarding the integration.

Risk mitigation in M&A strategy

Effective risk assessment is key to successful deals. Let’s explore how identifying and managing risks paves the way for smooth and prosperous transactions.

Key risks to knowDescriptionRisk mitigation tactics
1 Challenging economic timesIt’s believed that M&A activity decreases in an economic downturn. However,
a PwC analysis found that companies pursuing deals during economic uncertainty saw higher shareholder returns than industry peers
1. Stay adaptive and confident even
in uncertain economic times. This helps identify and capitalize on emerging business models, as in past recessions

2. Diversify funding sources, focusing
on maintaining access to capital and considering both public and private funding options
2 Risk of target overvaluationAccording to McKinsey, 25% of deals
are overestimated by at least 25%
in planned cost synergies, potentially leading to a 5% to 10% valuation error
1. Conduct a thorough and objective evaluation, assessing the target’s past performance and future potential. Use methods like discounted cash flow or precedent transaction analysis

2. Hire external financial advisors
to offer an unbiased perspective
3 Poor due diligenceInadequate due diligence can lead to poor valuation, unexpected litigation, or tax issues, while thorough due diligence allows the buyer to adjust expectations, devise effective negotiation tactics, and reduce the risk of legal or financial challenges1. Start due diligence early, ideally after the signing of a Letter of Intent (LOI)

2. Assign specialists with business, legal, and financial expertise and industry knowledge to conduct due diligence

ESG considerations 

Due to a rising awareness of the significance of sustainability and ethical practices in business, the ESG impact on M&A shouldn’t be overlooked. In fact, almost 70% of respondents surveyed by Deloitte consider ESG strategically important in M&A.

However, they also admitted that it’s not always clear how to incorporate ESG factors into M&A strategies. For example, 43% said they include ESG in M&A discussions just occasionally, and 39% lack clearly defined metrics for evaluating ESG.

To respond effectively to the growing importance of ESG in M&A strategies, let’s explore the three key ways ESG is reshaping M&A:

  1. ESG presents new value-creation opportunities. In 2021, private investors saw remarkable returns, with $86 billion generated from 80 exits in climate tech, clean tech, and impact investing. Studies also indicate that better ESG performance aligns with higher annual returns, leading to a compounded effect of 20% to 45% over 5 to 10 years. 
  2. ESG reveals new risks. These risks include climate-related threats to assets and challenges from the global move away from fossil fuels. These risks raise questions that companies and investors can address in advance, like the vulnerability of assets to rising sea levels and extreme weather events, the cost of compliance with future regulations, and the impact of new climate tech innovations on markets and supply chains.
  3. ESG impacts can be quantified. Many organizations struggle to translate ESG issues into financial terms, but this can be addressed with the help of advisory services. For example, in one case described by Deloitte, a potential deal to acquire an energy provider was abandoned due to greenwashing in revenue reporting. That was because achieving the target’s stated 80% revenue from renewable fuels would have required a $300 million investment. 

Key takeaways

  • M&A strategy involves a company’s methods for combining with or acquiring other businesses to achieve specific goals like cost and revenue synergies, market expansion, or access to new technologies.
  • Mergers and acquisitions business strategy types include horizontal, vertical, market-extension, product-extension, conglomerate, and cross-border acquisition strategies.
  • Strategic planning is vital for successful M&A, emphasizing clear objectives, thorough due diligence, employee retention strategies, and compliance with regulatory requirements.
  • To achieve cultural alignment, which is so important in M&A, consider early cultural due diligence, a comprehensive cultural integration plan, leadership alignment strategies, and regular feedback sessions.
  • The most common risks companies should address in M&A are uncertainties in economic times, target overvaluation, and poor due diligence.