The best acquirers know how to pick their targets by doing four things right:
- Consider M&A as an extension of their company's growth strategy where the primary purpose of M&A is not to grow big fast, but to do what they do better.
- Invest in their core and expand into highly related businesses that reinforce their core
- Use acquisitions to buttress their basis of competition or to shift to a stronger basis of competition
- Develop clear view on growth opportunities and M&A needs.
- Define a growth strategy articulating growth aspirations, portfolio priorities (invest/divest), prioritized growth opportunities and method of growth (organic, M&A, JV/partnership)
- Articulate M&A strategy, clearly stating M&A objectives and sources of value tied to growth strategy and role of M&A within it
- Plan for opportunity long before any opportunity arises by creating a pipeline of priority acquisition targets, each with a customized investment thesis and systematically cultivate relationships with high-priority targets.
- Build M&A programs around frequent, continuous deal making and focus on small acquisitions initially before setting their sights on larger targets and/or targets adjacent to their core with increasing accumulated M&A experience and institutional knowledge (M&A capability).
Successful deal making requires a well-defined strategy and experience. Our work with clients and our research reveals the importance of the learning curve in M&A:
- Frequent acquirers that buy consistently over time out-perform binge acquirers as measured by excess stock market returns.
- Acquirers that focus on smaller deals tend to outperform those doing larger deals–they start small and absorb what they learn before tackling big deals.
- The rewards are greatest for experienced acquirers making big, transformative deals.
- The penalties are most severe for inexperienced acquirers attempting one-shot mega-deals or sitting inactively on the sidelines.