What are the best ways to think about buy-side M&A?
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.