Insights / All Leadership / Article

Be Bold Yet Purposeful in M&A Strategy

September 28, 2018

Contributor: Sharon George

Successful leaders do these 4 things differently to create value with mergers and acquisitions.

Merger and acquisition (M&A) activity is hot, especially as companies look to deploy capital rather than just sit on cash. But for corporate leaders to capture real value in M&A, they can’t be distracted by startling stories of companies moving into non-traditional spaces or frenzied bidding wars. “It is critical that M&A today —  near the peak of the economic cycle — makes incredibly strong strategic sense, because there’s little chance that companies can avoid overpaying for M&A in this market. That said, for the same reason, equity-financed deals could be attractive for some finance chiefs," says Tim Raiswell, research leader at Gartner.

“ Efficient growth leaders made about the same number of deals as their rivals. They didn’t do more; they just placed larger bets”

While there is no formula to make M&As successful, organizations that have demonstrated consistent long-term growth over their industry peers — efficient growth leaders — take a more purposeful, bold and strategic approach to M&A than others.

In particular, efficient growth leaders do four things better —  and differently — than others.

They pursue larger acquisitions

Over a 15-year period, efficient growth leaders made about the same number of deals as their rivals. They didn’t do more; they just placed larger bets. The agreements they reached were 42% larger on average. Efficient growth leaders are able to consistently pick the right targets through a strong sourcing pipeline that ensures no leads were overlooked. At one U.S. financial self-service, security and services corporation, business unit heads were asked to score prospective targets against a screening template. The responses were compiled and given aggregate scores so leaders could weed out those that failed to meet a certain hurdle. Instead of pursuing deals that may not lead anywhere, companies should invest their time in casting a wider net and pursuing deals that best fit their strategy.

They resist the pull of the business cycle

Growth leaders are less reactive than their peers when it comes to the global economy. Most organizations spend more when times are good and resist deals during tougher times. Growth leaders take a long term view: Their deals are nearly three times less correlated to global gross domestic product growth than their peers. Organizations should develop a set of objective M&A guidelines independent of the business cycle. For example, one company revised its scoring criteria for M&A targets to strengthen strategic alignment. The new, proposed scoring guide gave more weight to strategic fit criteria than to business characteristics. This ensures that M&A targets now have a more clear connection to the company’s strategic goals.

They focus more on vertical mergers

All types of companies typically spend more on horizontal acquisitions than vertical mergers, but efficient growth leaders spend nearly double the amount of money on vertical ones. This approach reflects a more balanced approach to M&A. Efficient growth firms often want to capture opportunities to expand capabilities, increase operational efficiencies and cement competitive pricing advantages in their supply chains.

“ Growth leaders divest one of every six deals compared to one of every two among their competitors”

One major agricultural products producer and distributor developed a game board to help visualize strategic pathways in M&A. Strategists used this approach to focus growth conversations on important strategic variables — for them, business value chain, geography and time. This method allows senior executives to easily see and analyze trade-offs and determine how some deals might set up others.

They divest fewer deals

Growth leaders divest one of every six deals compared to one of every two among their competitors. This again shows the importance of using M&A as a long-term corporate strategy rather than as a way to get quick portfolio wins. It also may point to superior selection methods, like making sure the target is culturally compatible with the acquiring company. One wealth management firm scores potential M&A targets against a set of cultural indicators such as resistance to change, importance of learning and development, risk tolerance, etc. Since the firm works in a high-risk, high-reward environment, it prefers to target acquisitions with higher scores in these categories.

Experience Gartner Conferences

Join your peers for the unveiling of the latest insights at Gartner conferences.

Recommended resources for Gartner clients*:

M&A Capabilities Assessment

*Note that some documents may not be available to all Gartner clients.