Mergers and acquisitions make perfect sense in a variety of situations. For example, maybe an opportunity presents itself that requires fast, decisive action. Or maybe a competitive threat compels a defensive move to get bigger, faster.
Here are five situations in which mergers and acquisitions have proven useful as a growth strategy:
1 – Fills critical gaps in service offerings or client lists
When the marketplace changes in response to external events or new laws and regulations, it can create a gap in a firm’s critical offerings. It is a prime opportunity for a strategic merger.
After 9/11, the national security and defense industry lacked the relevant skills to match rapidly changing federal requirements. Companies quickly realized they would be sidelined without the skills and experience necessary to meet the new security demand. The firms with the requisite experience and relevant client lists suddenly found themselves strategically valuable and highly sought-after acquisition targets.
2 – Efficient way to acquire talent and intellectual property
Many industries are seeing an acute shortage of experienced professional staff. Cybersecurity, accounting, and engineering are just a few examples that immediately come to mind.
The reality is, intellectual property (IP) is the new currency of modern business. Once squirreled away and carefully guarded, IP is now actively bought and sold. For many companies, the acquisition of a firm and its IP is the quickest path to market dominance—or at least a roadblock to competitive incursions.
3 – Opportunity to leverage synergies
A strategic merger, if done as part of a thoughtful growth strategy, can result in synergies that offer real value for both the acquired and the acquiring.
There are two basic types of M&A-related synergies: cost and revenue.
Cost synergies are all about cutting costs by taking advantage of overlapping operations or resources and consolidating them in one entity. In a strategic M&A, a number of areas are suitable for cost-cutting, such as redundant facilities, workforce, or business units and areas of operation. But cost synergies can also result in an increase in buying and negotiating power thanks to the larger combined budget.
Revenue synergies alter the competitive balance of power and create opportunities to change market dynamics, sell more products, or raise prices. Companies can take advantage of revenue synergies and make more money in many ways, including the following:
- Reduce competition
- Open new territories
- Access new markets (through newly acquired expertise, products, services, or capacity)
- Expand the customer base for cross-selling opportunities
- Develop sales opportunities by marketing complementary products or services.
4 – Add a new business model
Many professional services firms are based on a billable-hours business model, but that is certainly not the only option. Some firms generate revenue as a fixed fee or through performance incentives. Others may employ subscription models (popular in the software industry).
Of course, the value of an effective M&A growth strategy is not just about how you are paid. A merger may also offer a new type of service, such as brokerage, insurance or money management. If you’re considering a new business model, the easiest way to develop and test it out is to acquire a firm that’s already using the model successfully. That way you avoid possible missteps from inexperience.
5 – Save time and long learning curves
Much like adding a new business model, a strategic M&A may help you save considerable time an expense in your growth strategy.
Let’s say you’re considering a new service for your business. Your firm is fully capable of developing and delivering that service on its own, but it will take more time, money and resources than you’re willing to devote. It might be easier and more cost-effective to simply acquire the capability.
Not only is this a practical and smart shortcut to the sought-after service and expertise, you also acquire a built-in customer base and target audience.
By Lee Frederiksen, Ph.D.