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Some M&A strategies involve more risk than others. The biggest risk factor is the disruptive change required in your core business. For example, if you are trying to consolidate an industry through multiple acquisitions, then significant risk exists in the integration process. On the other hand, the classic private equity “financial engineering” is less risky. While you are slashing costs, there is no disruptive change happening to the core business. You’re still in the same business and don’t need to integrate different teams and products.
Riskier strategies are sometimes necessary and can achieve greater returns. You can’t avoid shifting market dynamics or other potential disruptions to your business. For example, if you are facing a rapidly declining market and technology disruption, a transformational M&A deal may be your best option.
The above chart categorizes the different M&A strategies from less risk to more risk based on the inherent risks in the M&A strategies. These strategies include:1
- Financial Engineering: reduce costs/optimize taxes to increase profitability
- Consolidate Capacity: remove excess capacity to fix oversupply problems
- Sales Leverage: buy product to sell through your existing sales channels
- Buy Tech/Skill: buy new technology or talent
- Emerging Market: make small bets with startups in high growth new markets
- Defensive Play: buy a disruptor company that threatens your core market
- New TAM: buy into a new market to increase your market size
- International Expansion: buy competitors in international markets to expand
- Consolidate Competition: buy competitors to consolidate the market
- Industry Rollup: consolidate a fragmented industry
- Transformation: move a company in a new direction via acquisition
- Buy Cheap: buy an asset because it is cheap
To ensure that your deal is successful, you should assess the risk factors to understand potential problem areas. If you are engaging in a riskier M&A strategy, you can significantly reduce the risks through an effective deal strategy, including utilizing a Deal Manager with experience in these deals and focusing on value creation throughout the deal process. You can never remove the risk from M&A, but you can achieve success if you understand the risks and diligently mitigate these risks.
1 See McKinsey article for their analysis of different M&A strategies. The five types of successful acquisitions, July 2010 | by Marc Goedhart, Tim Koller, and David Wessels.
