3 Tips to Ensure Your M&A Growth Strategy Is Successful

09 October, 2014

Turn to the financial section of any newspaper today and you’ll likely see an article concerning M&A activity. After nearly a decade of austerity, companies across a wide spectrum of industries are seeking to grow their business, counter tepid business markets at home, add synergy, enter new markets, or diversify their product line by acquiring other companies.

Cisco embarked on a journey two decades ago that provides an excellent template for this type of growth strategy. In 1993 a new switching technology emerged that threatened the leadership position that Cisco commanded in network routing. Cisco’s engineering team was confident they could develop their own superior switching product, but it was clear to then CSO Mike Volpi that several well-funded switching companies were already years ahead of Cisco in the race to market. Instead of developing their own product, Cisco decided to acquire an emerging switching company, which turned out to be a huge success. The descendants of that product line provided Cisco with an additional ten billion dollars in revenue.

That acquisition set Cisco on a path that resulted in seventy-five acquisitions over the next seven years and at its peak represented 50% of Cisco’s revenue. It also cemented Cisco as a role model for tech M&A.

Since then many other prominent companies such as Google, Facebook, Groupon, LinkedIn, Zynga and Twitter, have explored similar M&A growth strategies with great success. But those are the ones we tend to hear about. The harsh reality is that the majority of acquisitions that take place do not produce value. The M&A market is a lot like the publishing industry—publishing houses generally rely on one or two bestsellers to subsidize a much vaster pool of books that merely break even or lose money. When looking at companies with aggressive acquisition strategies it’s not uncommon to find that ten to fifteen percent of the capital deployed for acquisitions yields seventy to ninety percent of the value created. In other words, a significant number of acquisitions don’t contribute to value creation, but the ones that do have a huge impact.

From facilitated a vast array of acquisitions worth tens of billions of dollars, we’ve learned a few things:

1. Know Your Acquisition Criteria

Once you’ve defined M&A as part of your company’s growth strategy, it’s critical to develop a comprehensive acquisition criteria checklist that will enable you to define both the ideal and essential characteristics of the businesses you are targeting. A good acquisition criteria checklist allows you to define carefully enough what you’re looking for so that your search efforts are well directed, but not so narrowly that you overlook qualified targets. The process of developing an acquisition checklist can also reaffirm your company’s goals and bring your overall strategic plan more clearly into focus.

2. Facilitate the Due Diligence Process

One of the greatest benefits of an aggressive acquisition growth strategy is that you will often be targeting businesses that had not thought of themselves as for sale until you approached them. This means that there will most likely be no other competition for the business, but it also means that they may be unprepared for due diligence. To facilitate the process, provide the target company with a due diligence checklist. This not only helps the target company prepare, but it ensures that you get exactly the information you want. 

Secondly, provide the target company with the file-sharing repository where you want due diligence documents housed. A company that is unprepared for due diligence may be hesitant to turn over their IP and other confidential information to a prospective buyer without some assurance that that information is controlled and secure.

At ShareVault we provide a state-of-the-art virtual data room that gives users complete control over who gets to see what and a comprehensive level of security controls that even provides for virtually “shredding” documents after they’ve been downloaded. Additionally, our virtual data room has a built-in Q&A module that provides a convenient forum to ask questions, get answers, and ensure that the deal process goes as smoothly as possible.

3. Focus Early on Post-Merger Integration

Often organizations that are negotiating a merger or acquisition don’t stop to think about what will happen after the deal is done, and those that do often focus solely on financial and legal issues. But smart managers know that deal success also hinges on aligning the people, organizational and cultural assets of the new entity.

The most effective strategy for dealing with potential cultural integration issues is anticipating them well in advance of the M&A process and formulating a plan for resolving them or minimizing their negative effects.

Once the deal process is disclosed, maintain open communication with employees throughout the remainder of the process. Clearly explain the motives behind the deal and let employees know how the merger will most likely affect them. Encourage employees to voice any concerns they may have about the process. Listen carefully and respond with constructive feedback.

M&A can be a powerful growth strategy for your company, but it should be approached both thoughtfully and intentionally. Nuances and risks abound, as do rewards, if done correctly. Companies that shy away from acquisitions because of fear of failure could be missing great opportunities. At ShareVault we’ve found that following the strategies outlined above go a long way in making the M&A process successful.

Download a sample due diligence checklist: