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Mergers and acquisitions may drive much of the corporate finance agenda, but at their core, they are strategic transactions. In this article, DealRoom seeks to unveil their huge strategic significance to the corporate agenda, and to understand how technology is driving a better understanding of M&A.
If mergers and acquisitions were truly only about finance, it is worth stopping to consider if there might be easier ways for a company to generate ROI.
Mergers and acquisitions are about bringing two or more companies together, through a myriad of ways of ensuring that shareholders in each of the entities involved stand to benefit.
On paper, this is easy. “Let’s join company A and company B, and create a new company, which is bigger than the sum of its parts.”
What could possibly go wrong?
As it happens, mergers and acquisitions are probably the most complex of any financial transaction exactly because they demand so much strategic understanding. Unlike the value of a bond, there is no succinct equation which will tell you whether an M&A transaction will succeed.
As regular readers of the DealRoom blog will be aware, M&A are a series of moving parts. To mention just a few of those parts, consider:
50 more bullet points could easily be added.
Again, to underline the point, if the real driver for M&A was financial (i.e. profit), there would be very little to consider other than this when considering transactions. The reality is starkly different.
Below constitutes what we believe to be a quite exhaustive list of the driving forces for mergers and acquisitions:
Acquiring a company in a different geographic market can open access to new customers, industries, markets, and suppliers. A company which has excelled at this strategy is Spanish (and now, global) bank, Santander, which has acquired domestic banks in over 20 countries to fuel its growth.
Acquiring a competitor generally tends to allow a company to gain a larger market share, thus strengthening their market position. This is common among banks, where consolidation has led to most countries having a ‘Big 4.’
This was also a facet of the U.S. food retail industry, where a wave of M&A in the 1990s led to the bigger players holding significantly increased market shares.
M&A enables companies to diversify their product or service offerings, reducing reliance on a single market or industry. This has traditionally been one of the drivers behind acquisitions among conglomerates, who have several business lines at once, enabling them to diversify their revenue flows, thereby reducing their risk. Nestlé is a textbook example of diversifying through M&A.
Merging operations can often result in cost savings through economies of scale, streamlined processes, and reduced duplication (for example, having one HR function instead of two). This is common to most M&A transactions, and is usually filed under ‘synergy creation’, which is the next bullet point.
Airline mergers are good places to look for cost savings, as there are huge costs generated at all parts of their value chains (e.g.., ground staff, baggage handlers, customer service, etc.). The merger of U.S. Airways and American Airlines saved an estimated $150M in costs per year.
Synergy creation can be revenue synergies (i.e., where more of each product or service sells by virtue of grouping it with another product or service), or cost synergies (like those mentioned in the ‘cost savings’ bullet above).
Sometimes, smaller companies are acquired because they’ve got a few highly skilled individuals on their roster, which have attracted the attention of a rival company. This isn’t a common driver for M&A but it does exist. Facebook has acquired a series of company with the principal aim of owning their talent.
In this context, enhancing competitive advantage means acquiring something so that others cannot gain access to it. This is usually something not repeatable (i.e., it is patented or one-off in some other way).
The issue here is that companies don’t admit to it. In fact, they active underplay it, in an attempt to avoid the gaze of the antitrust office. One to consider here is Amazon’s purchase of Kiva in 2012. This article outlines how, by not sharing Kiva with anybody else, Amazon enhanced its own competitive advantage significantly.
When growth is sclerotic in a certain segment of an industry, companies will often look to other higher growth segments to acquire companies that can speed up sales. A good example here is provided by the soft drinks industry, which went through a phase of buying energy drinks - which were growing much faster than traditional soft drinks around a decade ago.
The classic case is Coca-Cola acquiring the now ubiquitous Monster Energy in 2008.
DealRoom has an article that talks about vertical integration at some length. In short, vertical integration is driven by the motive to acquire upstream or downstream operations, ensuring better control over the supply chain.
A textbook example is furniture maker IKEA acquiring Romanian forests in 2015, providing it with the raw materials to churn out its flatback chairs, tables, and beds.
Mergers and acquisitions enable companies to gain access to innovative technologies or R&D capabilities that they don’t currently possess. Most technology acquisitions include some element of this.
A good example of this comes from a somewhat unlikely source, however: Disney’s acquisition of Pixar in 2006 was driven by many factors, one of which was the desire to gain control of Pixar’s then revolutionary animation technology.
Acquiring a well-known brand enhances brand value, reputation, and even customer loyalty for the acquiring party. The French conglomerate, LVMH, has acquired dozens of luxury brands with the intention of creating an unrivaled portfolio of luxury brands that takes in everything from shoes and accessories to perfumes and haut couture.
Each extra brand, in theory, gives the LVMH brand a more illustrious reputation.
There are a couple of ways of thinking about M&A for licensing or distribution. The first is acquiring a company and gaining control of its distribution channels (relationships with vendors, warehousing, and even retail). This is a subset of ‘market expansion’, the first bullet point on this list.
Another facet of this is licensing: Acquiring a foreign company to acquire its licences to provide a service or produce something within a country. Here, acquisitions of national telecoms firms are a good example. Consider Vodafone’s acquisition of Telcim, Turkey’s second largest mobile operator, in 2005.
If ‘diversification’ might also be called ‘economies of scope’, economies of scale are the benefits that result from building a company to a size, which has market power. That is to say, it creates value by virtue of being big.
An example is Walgreen’s acquisitions of several other pharmacy chains over the past decade, giving it enhanced bargaining power with large pharmaceutical suppliers looking for distribution for their drugs.
With so many different motives for mergers and acquisitions, by extension, there are multiple ways of them going wrong. And for practitioners of M&A, the bad news is that it can go wrong at any stage of the process, even when the deal is strategically sound.
The pitfalls are diverse and aren’t always well highlighted. In a previous article, FirmRoom looked into seven of M&A pitfalls and suggested some solutions to each.
There’s another issue here which needs to be highlighted; a merger or acquisition isn’t complete when the ink has dried on the share purchase agreement.
In many respects, this is actually when the hard work begins. Significant value can be created or destroyed at the post-merger integration (PMI) phase which follows the transaction closing.
Despite its importance, many management teams overlook the phase or give little more than lip service.
This is a huge mistake.
The potential consequences of poorly executed integrations can lead to deals being written off entirely. Case studies have been written on the theme. AOL Time Warner, the poster child for poorly executed M&A, is among several other things, an example of a failure to integrate two organizations.
Sidestepping PMI, because everything is ‘running okay as it is’ is like sidestepping due diligence because you like doing things in good faith.
DealRoom has been designed to synchronize due diligence with PMI, so that teams can begin working on the integration plan during the due diligence process.
This can expedited the overall M&A timeline by 40%. Value is also created for practitioner across other areas, such as through using DealRoom’s collaboration tools, which have been designed for M&A and tracking the tasks involved. This promotes transparency, contributing to more successful integrations.
Running due diligence and integration in parallel is a revolutionary step in better dealmaking.
It generates faster processes, better communication, and smoother transitions.
All academic texts, every blue chip consulting firm white paper, and every integration specialist will say, without exception, that starting integration as soon as possible is essential for value creating outcomes.
DealRoom is the first to integrate it with the due diligence phase.
The further benefit to using a tool like DealRoom for integration is that users don’t have to chase information down, as was traditionally the case (creating a lag in PMI).
Everything is tied to a task, which is clearly delineated by the platform. This enables everyone involved in the integration to track process, flag potential issues early, and ultimately make better-informed strategic designs throughout the process.
In a previous article, FirmRoom touched on the tools which are used in M&A.
With so much riding on each M&A transaction, and at every stage of the transaction, technology is required to ensure that it all fits together.
DealRoom provides this, and ensures that there is a single source of truth for data being exchanged by both teams.
Not dozens of email chains - one focus point, where the deal gets done, and generates value for all concerned.
In the world of mergers and acquisitions, each transaction is a web of intertwined tasks and responsibilities. Financial obligations, human resource considerations, strategic alignments, product line integrations, and IT system harmonization are just some of the crucial threads. Yet, weaving these threads into a successful M&A tapestry is no easy task. But what if we told you there is a tool that could simplify this complex process?
Enter DealRoom, an advanced platform that streamlines the complexities of M&A, bringing clarity to chaos and creating a more manageable, less daunting landscape for all parties involved.
Anyone involved in M&A knows the terrain is riddled with potential pitfalls. Even the most strategically sound deal can become a quagmire of unforeseen issues. The key to navigating this challenging landscape lies not only in identifying these pitfalls but in turning them into stepping stones towards a successful transaction. How? With DealRoom. Our platform's advanced analytics and collaboration features equip you with the foresight to anticipate potential pitfalls, allowing you to address them proactively and increase your chances of a successful outcome.
DealRoom doesn't just change the game; it changes the rules entirely.
In a traditional M&A process, due diligence and post-M&A integration are distinct phases with their own sets of challenges.
But what if they weren't?
With DealRoom, these phases become two sides of the same coin. Our platform synchronizes due diligence with post-M&A integration, expediting the overall M&A timeline by an impressive 40%.
The result? Faster processes, better communication, and smoother transitions. Sounds too good to be true? Read on.
In the tumultuous journey of M&A, a compass is essential. But not just any compass - a compass that points towards a single source of truth.
That's where DealRoom comes into play. Our platform is designed to provide real-time tracking of tasks and transparent communication, eliminating the need to chase information across multiple channels.
By keeping everyone on the same page, DealRoom enables users to make well-informed, strategic decisions based on a unified vision. But how exactly does this work in practice? Let's dive deeper.
As the tides of the business world shift, so too does the landscape of M&A. Changes are inevitable - be it the rise of artificial intelligence or the advent of new regulatory challenges. But amidst these changes, one thing remains constant - DealRoom's commitment to adapt and evolve. Built with flexibility at its core, our platform is poised to navigate the ever-changing waters of M&A, guiding users through their first, next, or hundredth transaction with confidence and ease.
Few billion dollar companies are made without some well executed mergers or acquisitions.
M&A continues to evolve. While artificial intelligence is predicted to change everything irrevocably this year, next year will bring new concerns, new challenges, and new obstacles to value generation.
DealRoom will continue to adapt, because it has flexibility built into its DNA. As your company looks towards its first transaction, or its next transaction, and wants to know where to turn, use DealRoom to guide you in this decision.
Both are a strategic imperative for companies that want to achieve meaningful growth. Achieving this requires the right tools and partners - themselves part of the strategic decision.
DealRoom was developed with the intention of being one such tool, whose focus is M&A transactions with positive outcomes.