You Too Can Execute a M&A Strategy
Building Competency in Acquisitions- Part One: Developing an M&A Strategy
Mergers & Acquisitions (M&A) Strategy- Author’s note: The activities that lead to the identification and ultimate execution of an opportunity are very intertwined and subject to continuous learning and improvement. With that in mind, I will summarize four main activities in the M&A (mergers and acquisitions) Process Lifecycle over the course of four different articles as follows:
-
- M&A Strategy (part 1 below)
-
- Sourcing
-
- Approach
-
- Execution
What is an M&A Strategy?
M&A Strategy details the principles, priorities and approach to acquisitions and investments that support the vision and objectives of a company. Developing this strategy calls on a careful review of the target market to determine the existence of satisfactory opportunities and the possibility of a transaction, as well as how best to execute on a transaction(s) in the context of a companys budget, operational readiness, and other boundaries and constraints. As such, the M&A Strategy provides important feedback to the Corporate Strategy about the achievability of its objectives based on the feasibility of M&A.
Major Components of an M&A Strategy
Framework Corporate Focus Areas and Requirements (From Corporate Strategy)
The basis of the M&A Strategy lies in its alignment with the key focus areas articulated by senior management in the Corporate Strategy. The description of the assets and capabilities necessary to meet the stated corporate mission and objectives provides the detail by which the M&A Strategy can validate availability of targets and transaction market dynamics.
Financial Guidelines
Financial guidelines represent an important parameter in the development of the Corporate Strategy. Companies should publish, regularly review and update (as necessary) budget guidelines for acquisitions and investments and required return metrics and benchmarks, consistent with its capital allocation methodologies and market practices. Market practices are largely aligned around similar metrics but differ in the methodologies, weighting and priority ascribed to each. Two metrics most that appear to form the basis of most decisions are the IRR (Internal Rate of Return) and Cash Payback, which are very much consistent with the methodologies employed to review internal projects and to make capital allocation decisions.
Acquisition and Investment Opportunity Evaluation (By Focus Area)
A detailed market analysis of each requirement should identify the availability of acquisition and investment targets that fit within financial boundaries and key desired characteristics. Early insight into the availability of potential partners or targets will better inform whether M&A is indeed achievable for a particular area and what approach is appropriate.Comprehensive Analysis, Prioritization and Execution Strategy
Bringing together the analysis of the individual focus areas provides the leadership team a view of the probabilities and risk trade-offs between the various acquisition areas, enabling it to make more informed capital and resource allocation and prioritization decisions around M&A.
Broad Integration Principles
An M&A Strategy will also outline the basic principles and alternatives of the integration models that the Firm would utilize, based on the contemplated acquisition and investment volume, business model execution strategies, resource and assets requirements, as well as to any other characteristics of the potential target company universe.
Target Metrics Any M&A Strategy should look to define the target metrics to provide senior leadership the tools to evaluate progress, allow for course corrections and to accurately measure success periodically.
Some integration success factors include:
-
- Revenues
-
- Profits
-
- Cost synergy
-
- New customer wins
-
- New sales channels
-
- Customer penetration
-
- Retention
-
- Hiring new skills
In part 2 of this series, we’ll look at M&A Sourcing and how that impacts the M&A Process Lifecycle.
Related content:
Acquisition What Is your Company’s Valuation?
