The aim of this post is to present 1) empirical bases that support the way I think about buy-side M&A 2) a methodology for finding and prioritizing targets.

The empirical foundations that support the way I think about M&A

Historically, M&A activities have received a bad reputation due to a frequently cited failure rate of 70% to 90% (HBR).

However, this research does not analyze the failure rate by type of transaction, hiding what has the potential to work in M&A.

The first research I look at comes from Credit Suisse which analyzed the probability of success of M&A according to the type of transaction.

The second research I look at comes from McKinsey who wanted to understand the type of M&A strategy that creates the most value. They found that companies that had a well-established M&A program and made several small acquisitions were the most successful. The characteristics they found are:

  • On average, executes at least one transaction per year.
  • No transaction exceeds 30% of the company’s value.
  • Accumulating more than 30% of the value of a business over 10 years.

Methodology for identifying and prioritizing targets

First, we need to do a market mapping of all product and service categories adjacent to the acquirer’s primary products and services to look at the targets that play into those categories.

Then, we do a first prioritization of the list of targets by looking at the price vs. the availability of targets and the ease of organic growth:

  • Price vs. availability of targets: this describes the relative valuation of targets compared to historical valuations and takes into account the scarcity of the asset.
  • Ease of Organic Growth: Illustrates the acquirer’s ability to replace the proposed M&A initiative by developing its capabilities organically.

Finally, we apply a list of criteria to narrow the list of targets.

The criteria fall into two categories:

  • Performance measures to assess the attractiveness of targets: product and service capabilities, market leadership and financial profile.
  • Risk mitigation considerations to ensure ease of integration: technology fit, similar buyer profile, and bundling of complementary products and services with the current go-to-market model.

That gives us a final list and the team can begin to define reachout strategies. Typically, I update this list quarterly depending on what is happening in the market.