Mergers and Acquisitions (M&A) have been a key strategic tool for corporate development since more than 100 years. Since then, the market for corporate control continuously developed over time in terms of deal numbers but also cumulated annual value that exceeds the GDP of large economies such as the UK. While the average success-rates are disappointing, they range between 40-60%, there is some empirical evidence that firms with regular M&A activity can add variety to their business models, achieve a better fit to their environment, and thus, display increased survival rates (Almor, Tarba & Margalit, 2014). This leads to a key question of strategic management, namely why some acquirers are successful while others dramatically fail. In this article, I will highlight in this article that the overall acquisition logic should drive the acquisition process, to avoid e.g. conflicting integration measures that have often been observable in the past. Such conflicting measures could be e.g. the desire for achieving low-hanging fruits or bottom line synergies fast, while the key value driver of the acquisition were innovation capabilities that are likely destroyed with structural integration measures.
The Underlying Strategic Logic of Acquisitions
A key concept in strategic management research and especially M&A research is “strategic fit”. Strategic fit, as a grand concept describing the underlying value sources of an acquisition is either conceptualized as the degree of relatedness in terms of industries, similarity in terms of resources, or complementarity, indicating that resource differences can be mutually supportive. While the key value source of the first two concepts are overlaps in terms of markets or resources that should result in market power, scale effects, and efficiency gains, the latter concept focuses on additional growth going beyond increased cross-selling possibilities. However, if we see acquisitions as a tool to adapt to changing environments, to add variety to business-models and to improve survival rates of firms, we might start rethinking our traditional conceptualizations of strategic fit as it can cause strategic tensions. Especially in cases of ambiguity, that might be internally or externally triggered e.g. by stock-market reactions, many firms start with so-called “safe pathway” integration approaches that are purely asset driven and require sometimes brutal structural integration measures with uncertain outcomes. As the Bayer AG perceived serious stock-market pressures after the acquisition of Monsanto, they immediately announced an additional efficiency program resulting in 12.000 layoffs on top of the already planned integration measures that should result in $1,5 billion cost-synergies and a parallel already established corporate-wide efficiency program. It is doubtable if these measures can really contribute to long-term value creation from the acquisition of Monsanto. Interestingly, even if we know that not all M&A are alike (Bower, 2001), we still see that in cases of internal or external pressures, firms change integration strategies and begin to focus on cost cutting. The key reason is that his likely results in measureable P&L and cash flow relevant results even though it might destroy the overall value of an acquisition. Thus, keeping with the initially planned strategy might be the better pathway to success as there is evidence that even implementing imperfect strategies might be more valuable than changing those (Lee & Puranam, 2016). Contrary to the common practice, I argue that firms should focus on the strategic logic of an acquisition, and that this strategic logic determines appropriate integration approaches that should be followed and only adapted if the strategic logic changes. I will demonstrate this connection with two small examples.
Example 1: Let us assume a firm has the strategic aim to strengthen its market position in a saturated market with an acquisition of a similar firm (strategic fit is given), the key value driver is size. Increased size results in scale effects, increased bargaining power, and increased efficiency by focussing on bottom line synergies that involve reduced costs by e.g. using shared infrastructure, headcount optimization, etc. In such cases, the possible performance outcome is not exponential but rather linear as all measures taken would not be too different to an organization-wide efficiency program. To realize the proposed effects of such an acquisition, firms need to focus on the integration of specific firm functions such as the purchasing, production, and various support functions quickly. As such, the value of an acquisition derives from functional level integration along the value chain and becomes immediately measureable in the P&L.
Example 2: A firm that is positioned in a saturated market and has the strategic aim to transform itself by becoming more innovative or to develop new markets. As such, this firm acquirers a smaller but highly innovative company that is characterized by low cash flows and little efficiency but enormous potential. This displays a high-risk acquisition, as the value of the acquisition depends on the exploitation of anyway economically risky innovation capabilities. However, a focus on the “safe pathway” integration in terms of reducing costs would be the guaranteed way to failure, as the value sources of this acquisition are not rooted on the functional level like in the first case. Far more, value derives on the business-model and strategic level and functional level integration might be dangerous as it could disrupt and even destroy the acquired value sources. In summary, the value of such an acquisition can be found on the business model and strategic level and a smart combination of value creation, value delivery and value capture can result in exponential performance effects that might not immediately affect the P&L but have positive long-term effects.
Acquisitions differ and what causes success in one case is not necessarily the opposite of what causes failure in another one. As such, I believe that involved managers must understand the underlying acquisition logic and all measures taken, should aim at exploiting the underlying value logic. Acquisitions are always complex and involve ambiguity. Managers however should not immediately fall back on “safe pathway” integration approaches, as they might be dangerous and destroy the strategic value of an acquisition.
Almor, T., Tarba, S. Y., & Margalit, A. (2014). Maturing, technology-based, born-global companies: Surviving through mergers and acquisitions. Management International Review, 54(4), 421-444.
Bower, J. L. (2001). Not all M&As are alike–and that matters. Harvard business review, 79(3), 92-101.
Lee, E., & Puranam, P. (2016). The implementation imperative: Why one should implement even imperfect strategies perfectly. Strategic Management Journal, 37(8), 1529-1546.