Mergers and acquisitions are extremely common types of transactions in the business world, and knowing the ins and outs of them is one of the keys for success. Over the past several years, M&As in America have increased in number, and that trend doesn’t look to change anytime soon. Odds are that your company (or a company you’re involved with) will go through the process eventually, so knowing what they are and some of the strategies involved is important.
Mergers and acquisitions (M&As) are a type of business transaction in which two companies — a buyer (the acquiring company) and a seller (the target company) — combine assets. Naturally, there are multiple types of M&As, such as horizontal mergers and acquisitions (one company buys out a competitor), vertical mergers and acquisitions (two companies in a similar industry but occupying different spots in the supply chain combined) and conglomerate mergers and acquisitions (where two companies in different industries combine), among others.
What Are M&A Strategies?
To put it simply, M&A strategies are the driving force behind a business deal. In virtually every instance, M&As are for either financial purposes and/or to reduce the risk for the acquiring company. In most instances, buyers fall under one of two categories, such as the following.
- Financial buyers: These are the ones who buy for the goal of financial gain. There may be several end games here — to increase cash flow, to grow market share or to reduce debt, but the transaction is always financially motivated.
- Strategic buyers: A strategic buyer has other goals than a financial buyer (though some of them will overlap). These include acquiring companies to gain new products or expertise, expand offerings or gain inroads into new territories.
In many instances, these investors are private equity (PE) or venture capital (VC) firms. Although they are similar in many ways, VC firms tend to nurture newer and smaller companies than PE firms do, while PE firms go with a longer-term strategy, buying (and holding) the target companies before cashing out.
7 Common M&A Strategies
As mentioned earlier, there are multiple reasons why one company would acquire another. While every situation is different, the goal is to increase value or reduce risk. In nearly every instance below, there is overlap with the different strategies. Most mergers and acquisitions fall under one of the following categories.
1. Improve Performance
This is to increase value and/or reduce expenses, both of which promote growth and boost earnings per share (EPS), thus increasing overall value.
2. Acquire Technology, Products and Resources
In this instance, a company is acquired because it’s less expensive and/or time-consuming to develop this technology, product or resource on its own. This includes intellectual property (IP), trade secrets, technology or customer base.
3. Take Advantage of Economies of Scale
A company can dramatically lower costs by acquiring another one with similar products. For example, rather than expanding production capabilities from scratch, buying an existing one with that infrastructure in place can produce profits faster and incur less of an investment.
4. Invest in Promising Startups
Although this is more of a VC strategy (investing in a startup with future potential), this overlaps with acquiring technology, products and resources. Gaining the products, services and/or technologies from a startup can be a fast track to future financial gains.
This is a way to gain traction with your core competencies in new markets, which is often a far speedier process than organic growth. In addition, in some instances, acquiring a company with related products but with a similar customer base can accelerate expansion and growth.
Acquiring a competitor also plays into expansion, but it has ties with financial performance as well. Consolidation can be used to reduce price competition (by eliminating competitors) or to reduce capacity (by scaling down its industry’s excess supply or production capacity).
7. Grab a Bargain
Everybody loves a great deal, and when one presents itself, it may be too good of an opportunity to pass up. In this instance, it’s more of a financially driven deal, not a strategic one.
In addition, there are other types of strategies under the M&A umbrella, all of which fit under one (or more) of the aforementioned categories. These include taking steps to reduce tax liability, deploy excess cash, achieve vertical integration and even transform a business.
The Role of a Virtual Data Room in Any M&A
A virtual data room (VDR) has always been an indispensable tool for M&As in multiple industries. A VDR is an extremely secure online location, where all parties to the transaction can safely and securely store, share and edit all documentation related to the process. The features of a quality VDR include secure access (which includes enterprise-level encryption), multiple layers of security and user-friendly admin controls. There are also customizable rights management features that will grant only approved users access to certain documents, which increases the security of the deal and maintains the integrity of the data.
CapLinked is an industry leader in the VDR space, offering online workspaces that are highly secure yet extremely user-friendly. CapLinked VDRs features an interface that is compatible with every type of OS, giving users the ability to upload and download documents from any type of computer, tablet or smartphone from anywhere in the world. Sign up for a free trial to see for yourself how a CapLinked VDR can shorten the timeline of the transaction and lower costs, as all parties involved never have to travel to an old-school “deal room.” Plus, check out its management features, document collaboration controls, customizable permissions and more.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Harvard Business Review – Your Best M&A Strategy
Deloitte – M&A Strategy | Deloitte US
McKinsey – A blueprint for M&A success | McKinsey