How to maximise the potential of your M&A deal

Larry Ellison, co-founder of Oracle, once famously remarked that, “Everyone thought the acquisition strategy was extremely risky because no one had ever done it successfully. In other words, it was innovative”.

But all the different types of M&A transactions come with various risks and opportunities that must be carefully managed to capture value. Getting this right is critical because, research suggests, between 70% and 90% of M&As fail.

Having advised on numerous transactions, I’ve found that M&A strategies vary based on the relative size of the entity being acquired and the degree of difference between the two companies. It’s vital to understand what type of M&A deal might make sense in your particular context, and will allow for successful integration or separation. As I outline in my latest book, Outside In, Inside Out, tight integration between deal strategy and overall corporate strategy is non-negotiable.

There are four types of M&A deals: consolidation, transformation, tuck-in, and strategic growth. It’s crucial to understand the particularities of each if you are to maximise the benefits.

1. Consolidation: Pooling strengths, creating a unified identity, and setting out to conquer the market together

A consolidation M&A deal occurs when one company acquires another, typically a competitor, to broaden its product or service offerings or enter new markets. The goal is to diversify and expand revenue streams. The key to a successful consolidation is the swift and thorough integration of business models. Quickly establishing a unified organisational structure and standardising systems early on is crucial for streamlining and capturing efficiencies.

One of history’s most iconic consolidation deals was the merger of Exxon and Mobil, creating a global energy superpower. At the time, oil prices were low, and the industry struggled with profitability. The merger, widely regarded as a game-changer, helped Exxon and Mobil bolster their competitive positions by streamlining operations, reducing costs, and expanding their global reach. 

In contrast, the 2015 merger between Heinz and Kraft Foods, initially heralded as the most significant consumer goods deal ever, didn’t meet expectations. Combining two giants in the food industry sent shockwaves through competitors, but the aftermath was less than stellar. Shares in Kraft Heinz have lost about two-thirds of their value since the merger, and the company has been beset by sluggish sales. Despite the deal’s scale and potential, it failed to deliver the anticipated synergies. This deal underscores the importance of thorough due diligence and realistic integration plans.

2. Transformation: This isn’t just about merging assets; it’s about reinvention, creativity, and taking a leap into an expanded future

Transformational deals are pursued when a company seeks to disrupt an entire industry. These game-changing acquisitions provide the purchaser with an edge by securing them new technology, intellectual property, or top talent.

A great example is Costco’s $1bn acquisition of Innovel Solutions in 2020. Innovel, a logistics and supply chain management company, helped retailers streamline deliveries. Costco supercharged its delivery capabilities by bringing Innovel into the fold, making it a serious contender against Amazon’s dominance in the space.

For these types of deals phased integration is vital to maintaining stable performance. Initially, the acquired company should continue operating independently, particularly in product development and customer service.

This gradual approach enables the businesses to integrate their operations while capturing early cross-selling opportunities. Retaining the acquired company’s leadership is also essential, as their expertise fuels knowledge transfer and a smooth transition.

3. Tuck-in: Adding that special touch, enhancing capabilities, and completing the picture without disrupting the overall design

Tuck-in deals happen when big companies snap up smaller ones within the same industry to bolster their market position. They’re often about transferring core strengths to the acquirer and eliminating competition. An established industry leader usually absorbs smaller players to solidify its dominance. 

Take Microsoft’s acquisition of Mover in 2019, for instance. Mover, a cloud migration start-up, helped businesses shift their workloads to the cloud, aligning perfectly with Microsoft’s goal to expand its Azure cloud platform. Following the acquisition, Mover was seamlessly integrated into the Azure migration centre, thereby enhancing Microsoft’s offerings.

A crucial aspect of tuck-ins is retaining key talent – identifying star performers and ensuring their buy-in. Collaborating with HR to craft tailored bonuses for achieving integration milestones can help retain talent. 

4. Strategic growth: Joining forces to unlock new markets, accelerate innovation, and create a strong future together

Strategic growth deals involve acquiring new skills and expertise to expand into fresh or non-core business areas. A perfect example is Google’s 2014 acquisition of Nest Labs, a leader in smart home devices like thermostats, smoke detectors, and security cameras. This equipped Google with new capabilities in the booming smart home market. However, making this kind of deal a success isn’t just about the technology; it’s also about building solid relationships with the acquired company’s key employees, customers, and suppliers. 

I’ve learned that to truly maximise the potential of such deals, you must think long-term. It’s not just about immediate wins, but expanding offerings and geographical reach is where the real value lies. Another critical factor is designing interim financial and operational structures while planning for a longer-term setup. Aligning the cultures of the two organisations is essential, too. You need to identify synergy opportunities that incorporate meaningful input from both sides. 

In the world of M&A, deal strategy is the be-all and end-all. Strategies must be carefully tailored from the inside out to bridge the specifics of each transaction, whether it’s a consolidation, transformational, tuck-in, or strategic growth deal. The underlying goal remains to further a company’s strategic objectives, capitalise on synergies, and unlock long-term value. In M&A, strategy is more than just numbers. 

Dr Lance Mortlock is the author of Outside In, Inside Out – Unleashing the Power of Business Strategy in Times of Market Uncertainty and EY Canada managing partner, industrials and energy.

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