Although many entrepreneurs dream of taking their business to massive heights, there are many wiser owners that realize that their best route is to pursue mergers and acquisitions. In some instances, trying to compete with larger enterprises is a recipe for failure. By seeking investment partners via mergers and acquisitions, you can sell shares in your business while continuing to guide your company towards further success under the umbrella of another organization. So, when does selling your business make the most sense?
Mergers and Acquisitions: Determining the Strategic Fit Between Two Companies
The Ultimate Goal of M&A
M&A’s aim is to join two companies in order to create more value for both businesses. By working together, two companies can accomplish more than one alone. However, this is only possible when there is a clear strategic benefit to merging with or acquiring another business. A cost-benefit analysis is performed in order to compare the cost of completing a merger or acquisition with the potential benefit that it will provide.
However, this cost-benefit analysis is not as simple as measuring a company’s existing revenue or growth. Ideally, the acquiring business will be able to multiply the acquired business’s growth potential, or conversely, leverage the acquired business’s assets to boost their own growth. To find synergy between two companies, an M&A advisor or broker will focus on the activities within each company that create value.
What Creates Value?
The core of any business is the unique activity that creates value in their sector. For Starbucks, that’s selling food and coffee. For Salesforce, it’s proprietary CRM software that other businesses pay to use. Naturally, for an M&A to be synergistic, there needs to be an overlap between the activities of both businesses. Consider Adobe’s acquisition of Figma. Adobe had already been experimenting with UX/UI design software, while Figma had developed software specifically for this purpose.
From Figma’s perspective, a combination with Adobe was an amazing outcome. Figma’s owners cashed out to the tune of a whopping $20 billion, while Adobe added one of the industry’s best UX/UI design tools to its already robust library of programs. Figma’s software could help Adobe grow into a new space, and it meant that Figma wouldn’t have to eventually compete with one of the industry’s biggest players.
Mergers and Acquisitions Can Serve Different Purposes
The Adobe Figma example is just one instance of synergistic M&A. However, there are many different reasons why a company might want to buy your business. Although the end goal is always to increase a company’s value and boost profits in the long term, how M&A accomplishes that goal varies. Some acquisitions make businesses more profitable by spurring sales growth. Others give a company diversity and thus reduce exposure to specific industry risks.
M&A can bypass competition and keep the road clear for further growth. M&A can also make a company more efficient by vertically integrating another business into the company’s existing workflow. Your company may be able to provide value to a number of partners in different ways. Consider how each of these possible angles could apply to your business, along with some interesting examples of companies that have followed these paths to M&A success.
M&A to Bolster a Company’s Growth
Sometimes an acquisition simply makes sense because it will help the parent company acquire more customers and thus spur growth. Luxottica acquired smaller fashion brands with dedicated followings like Oakley and Ray-Ban. As each of these brands targeted a unique segment of the market, Luxottica was able to boost their growth by acquiring new customers through other brands. However, that’s not the only way Luxottica used M&A to boost its growth.
A company that owns many sunglasses brands needs somewhere to sell them. Rather than try to negotiate deals with separate vendors, Luxottica started to acquire retail stores like Sunglass Hut in 2001. They expanded acquisitions into ophthalmic locations like Pearle Vision, which also strategically gave them a source of prescription lenses. Today, you can get custom fitted Oakleys with prescription lenses thanks to Luxottica’s pursuit of acquisitions. How could your company fit into another company’s big picture?
M&A to Broaden Your Business
M&A can help a company to diversify or expand into adjacent product lines that would require huge amounts of capital to develop independently. A great example of this kind of M&A comes from AMD and Xilinx. AMD has consistently competed with Intel for silicon supremacy, producing high-end consumer and enterprise chips. However, Xilinx produces a unique kind of chip known as a Field-Programmable Gate Array, or FPGA. FPGAs can be tweaked after fabrication to perform specific functions.
FPGAs have found their way into many applications, including the burgeoning cloud computing market. Nevertheless, developing FPGAs is extremely complex and requires a unique process that AMD’s partners don’t perform. AMD themselves would have to invest far more than the $35 billion valuation of Xilinx, making this acquisition a logical solution.
M&A to Avoid Competition
Although massive acquisitions may fall under increased scrutiny from regulators when they are perceived to greatly reduce competition, sometimes being a threat is the best way to get the most value for your company. If your business has the potential to disrupt the market, you may find companies willing to buy your business out now before it becomes a serious competitor. For a clear example, look no further than Amazon’s acquisition of Audible.
Amazon started out in the book business, so it only made sense that they would go after an online audiobook store. However, the price that Amazon paid reveals their likely motive. The $300 million deal was far more than what Audible was worth on the stock market. Nevertheless, Amazon saw growth potential that exceeded that price tag, as well as the value from having one less digital book content vendor in the market. Could your business find a similar offer?
M&A for Vertical Integration
Vertical integration brings economies of scale and makes operations more efficient when executed properly. Why should a company pay another business for something that is essential to operations? Vertical integration is why your local car dealership also has a service center; without one, they’d have to send cars elsewhere for service, increasing their own costs and making their dealership less attractive.
If your business performs a service that might serve another company in the same value chain, you could be a great merger or acquisition target. Broadcom, for instance, acquired VMWare for $61 billion. VMWare pioneered virtualization software, which is commonly used in data centers to allocate resources for clients. Broadcom, meanwhile, makes components that go into data centers. Together, the two companies can deliver unified solutions under one roof. This vertical integration promised an additional $8 billion in annual profits.
How to Secure Mergers and Acquisitions
If you’re looking for M&A partners for your business, you’ll want the help of an M&A advisor. The examples we’ve touched on highlight how massive corporations can combine for strategic benefits. However, those large companies have their own team of experts to seek out and execute M&As successfully. You need your own.
Contact ASA Ventures Group to learn more about how we can help you exit your business by finding the right strategic fit.