How to build a winning mergers and acquisitions strategy

When implemented well, a mergers and acquisitions strategy can help grow into new markets, spread out their investments, and get important new skills much faster. 

A whopping 95% of respondents to our business solutions survey stated that the rising inflation costs have challenged their business. A smart mergers and acquisitions strategy can fight inflation by cutting costs through bigger operations, better supply chains, and stronger buying power.

In this article, we cover the key information of M&A strategies, including the different types of strategies and exactly how to create a winning plan.

What is a merger and acquisition strategy?

Why a clear M&A strategy gives your business a strategic edge

5 key different types of M&A strategies

How to develop your merger and acquisitions strategy in 5 practical steps

Use data to inform your M&A narrative

Master your company's M&A strategy with Intuit Enterprise Suite

What is a merger and acquisition strategy? 

An M&A strategy is a company's overarching plan for identifying, evaluating, and executing mergers or acquisitions with other businesses. It establishes a clear plan for financial decisions, risk management, and boosting company value. This allows CFOs and executives to make smart choices that align takeovers with long-term goals. 

Key components of a merger and acquisition strategy: 

The ultimate goal of these strategies can vary, some include:

• Gaining market share
• Expanding into new markets or product lines
• Acquiring valuable technology or intellectual property
• Achieving economies of scale
• Eliminating competition

How do companies develop an M&A strategy?

Developing an effective M&A strategy requires careful consideration of the competitive landscape, the business’s financial standing, and overall long-term vision. 

Companies often rely on expert advice and tools, such as the capabilities of an enterprise resource planning (ERP) system, to navigate the complexities of mergers and acquisitions. ERPs can help with everything from financial modeling and valuation to legal and operational integration.

Additionally, leveraging solid enterprise accounting tools is crucial throughout the entire M&A process, from carefully checking out a company to smoothly bringing it into your business afterward. This ensures clear finances and helps you get the value you expect.

Why a clear M&A strategy gives your business a strategic edge

A clear merger and acquisition strategy gives your business a major advantage. This strategic foresight helps you achieve key objectives like focused growth and market expansion, enhanced competitive positioning, and improved risk management and value creation.

Focused growth and market expansion

With an M&A strategy, a company can identify the target markets or technologies it wants to acquire. This will make the growth strategy strategic and intentional, rather than opportunistic. Overall, this helps employees and resources maximize business efficiency for pursuing an acquisition or investment.

In addition, mergers and acquisitions strategies serve as powerful tools for accelerating market expansion. Organic growth often moves slowly, but acquisitions strategically allow companies to enter new geographic or customer segments rapidly. 

Real-life example: Microsoft's acquisition of LinkedIn shows this kind of growth benefit. By integrating LinkedIn's professional network with its enterprise software like Office 365, Microsoft expanded into the professional cloud market.

Better competitive positioning

A well-executed M&A strategy significantly enhances a company's competitive positioning. By strategically acquiring or merging with other businesses, a company can effectively eliminate key rivals or consolidate market share, strengthening its overall stance in the industry.

This business process helps companies find and grab valuable assets, like unique skills or patents, before rivals do. Ultimately, this gives them a key advantage in the market and makes their offerings more appealing to customers.

When businesses combine, they also gain synergies. This means they can lower costs (by streamlining operations or sharing resources) or become more efficient, giving them a strong competitive edge on pricing.

Example: A local independent bookstore, "Books & Crannies", might improve its competitive position by acquiring "New Leaf", another nearby bookstore. This acquisition would allow Books & Crannies to immediately double its inventory and consolidate its market share against larger chain bookstores in the area.

Improved risk management and value creation

A well-crafted mergers and acquisitions (M&A) strategy helps you mitigate risks more effectively and generate greater value.

Here's how a solid M&A strategy achieves this:

• Early problem detection: It starts with a careful due diligence process to thoroughly vet prospective companies, allowing you to spot problems early, determine their real worth, and avoid overpaying or making expensive mistakes.
• Seamless integration: A solid M&A strategy doesn't stop at buying a company; it also covers integrating the businesses after acquisition, which is crucial for maximizing benefits and avoiding major operational efficiency issues.
• Investor confidence: Implementing a clear M&A strategy demonstrates a thoughtful growth plan, which in turn boosts investor confidence by suggesting stability and a commitment to long-term value.

Real example: In 2017, New Belgium Brewing acquired Magnolia Brewing Company, diversifying its business beyond packaged beer into brewpubs. This strategic move created value by expanding New Belgium Brewing's product portfolio and leveraging Magnolia's established brand and direct retail presence.

5 key different types of M&A strategies

Just as many reasons drive the pursuit of M&A, distinct approaches also exist for structuring these deals and achieving specific goals. Understanding these different types of M&A strategies is essential for any business that considers inorganic growth.

Horizontal mergers 

Objective: Capture a larger market share and benefit from economies of scale (the cost advantages businesses gain when they scale operations).

When two or more companies in the same industry that sell similar products or services join forces, it's called a horizontal merger or horizontal integration. By merging, they can eliminate duplicate costs, increase business efficiency, and purchase larger quantities, improving profits.

However, horizontal mergers can make the market less competitive. With fewer companies, the new, bigger business could raise prices, hurting customers. Because of this, government regulators closely examine these mergers to make sure they don't create a monopoly or unfairly reduce competition, which could stifle new ideas or harm consumers. 

Specific regulations, like the Sherman Antitrust Act of 1890, help prevent businesses from becoming monopolies and protect consumers from unfair prices and limited choices. 

Additionally, section 7 of the Clayton Antitrust Act of 1914 prohibits mergers and acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly."

Vertical mergers

Objective: Increase efficiency, reduce costs, and gain greater control over the entire manufacturing process, from sourcing raw materials to delivering to customers.

Vertical mergers, or vertical integration, happen when companies involved in different steps of making the same product or service join together. An example of this is a car company buying a tire factory. 

By merging vertically, a business can ensure it always has the necessary parts, rely less on outside companies, and even improve the quality of its products. 

However, vertical mergers can also be challenging because they involve managing different types of businesses, and sometimes the acquired company may have conflicts of interest if it previously served competitors.

Conglomerate mergers 

Objective: Reduce overall business risk by operating in unrelated industries. This allows the merged entity to enter new markets and generate additional revenue streams. 

Companies from completely different industries join together in conglomerate mergers. Unlike other types of mergers, these don't aim to dominate a market or control a supply chain. 

Instead, the goal is to spread out risk by having businesses in various sectors. This way, if one industry struggles, the others help stabilize the company.

Conglomerate mergers present their own difficulties. Leaders often find it tough to manage businesses with very different skills, market trends, and ways of operating. Additionally, different company cultures can clash, making it harder to integrate effectively. 

Market extension mergers

Objective: Expand a company's market reach by combining with another company that sells similar products or services but operates in a different geographic area. 

Companies selling similar products or services in different physical locations decide to join in market extension mergers. This strategy works well because the acquiring company can use what it already knows about its products, its brand name, and its way of doing business in these new places.

Market extension mergers allow businesses to expand into new markets much faster than they could independently. For example, if a store chain from one state merges with a similar chain in another state, it can quickly double its size.

While this promotes quick growth and customer acquisition, companies still need to truly understand and adapt to the local culture, what customers in the new market prefer, and any different rules to make the merger truly successful.

Product extension mergers

Objective: Expand a company's product portfolio by combining with another company that offers complementary but different products within the same market. 

Companies in the same market but selling different yet related products or services combine in product extension mergers. By joining forces, the acquiring company uses its existing sales channels and customer connections to introduce the new products. This creates opportunities to sell more to the same customers and potentially keep them for longer.

For instance, a running shoe company might buy a company that makes athletic clothes or fitness watches. Both operate in the sports market, but they sell different things. While this kind of merger can boost a company's product range and market share, it's important to carefully bring together the different products.

How to develop your merger and acquisitions strategy in 5 practical steps

To develop a successful M&A strategy, businesses should build a robust framework for identifying, evaluating, and integrating acquisitions that drive strategic growth and create lasting value. This framework consists of five steps:

Step 1: Define your strategic objectives

The first and most important step in a successful M&A strategy is determining the main goals. As a company, you need to clearly state why you want to buy or merge with another company. 

What specific things are you trying to achieve that you can't do as well by just growing your own business? A clear goal acts like a map, ensuring that everything you do next fits your overall business plan.

Step 2: Map your acquisition criteria

After you know your main goals, determining what kind of company you want to acquire is the next important step. This means turning your "why" into a detailed description of your perfect target. Based on your goals, you'll decide on key features like the company's:

• Industry, size
• Market standing
• Financial health
• Alignment with your existing business

When you're doing this, you should also look closely at what's happening in your industry and what your competitors are doing. Integrating business intelligence into your strategy can help you spot gaps in the market, understand competitor moves, and find companies that have the assets or skills you need to reach your goals.

Step 3: Establish your due diligence process

Once you know what kind of company you want, setting up your due diligence process is the next big step. This phase requires you to develop a comprehensive and systematic method for evaluating potential targets. 

You need to look under every rock to understand the true state of the company you're considering acquiring, ensuring no hidden surprises could derail your strategic objectives.

A good due diligence process covers several key areas:

• Financials: You'll dig into their money records, like balance sheets and cash flow, to see how healthy they are.
• Legal: You'll check for any lawsuits, government issues, or problems with their patents or trademarks.
• Operations: You'll look at how efficiently they run, their processes, how they get supplies, and their technology.
• Culture: You'll assess whether your company cultures, leadership styles, and how employees work together will actually fit.

Doing due diligence well reduces risks and gives you all the information you need to make smart decisions and accurately value the company you're thinking of buying.

Step 4: Outline your integration approach

Beyond the acquisition itself, outlining your integration approach is a critical step for realizing the true value of any M&A deal. This involves developing a detailed plan for integrating the acquired company into your existing operations. 

Your integration plan needs to cover several important areas:

• How the new organization will be set up: Figure out how jobs, teams, and departments will fit together or be simplified.
• Bringing technology together can be tricky, as different companies often use different computer systems, software, and data handling methods.
• Combining company cultures: This means ensuring both companies' values, communication styles, and work habits blend well. The goal is to create one strong company culture that gets the most out of the merger and causes the least upset for employees.

A good integration plan is vital for a smooth transition after the merger and for getting all the strategic benefits you hoped for.

Step 5: Define your success metrics

The last important step for a strong M&A strategy is deciding how to measure success. This means setting up clear key performance indicators (KPIs). These KPIs will help you track progress and see if your M&A efforts actually worked. 

Without them, you can't really tell if the acquisition met your goals and created the value you expected. These success measures should link directly back to the goals you set in Step 1. 

Examples of common success metrics:

• Financial metrics, like return on investment (ROI), revenue growth, profitability, cash flow improvement, and market share increase. 
• Operational metrics, including decreased employee turnover rate, customer retention rate, and operational efficiency improvements. 

By regularly checking these KPIs, businesses can learn how well their M&A strategy is working, make smart changes, and improve future acquisitions to create lasting value.

Use data to inform your M&A narrative

When it comes to mergers and acquisitions, just going with your "gut feeling" poses a big risk. Instead, analyzing data provides solid proof of a target company's overall viability (or the lack of it). 

This data-driven approach confirms your ideas, measures risks, and builds a strong case for buying a particular company. Many tools and platforms play an essential role in tracking and analyzing financial information in an organized way. 

For example, financial management solutions like Intuit Enterprise Suite meticulously track expenses, categorize income, and create important financial reports.

Beyond basic accounting, it offers specialized business intelligence (BI) reports that pull data from operational databases, transactional systems like ERP solutions, and inventory management. This information can help visualize complex financial trends and even use predictions to guess future performance.

Master your company's M&A strategy with Intuit Enterprise Suite

A strong mergers and acquisitions strategy isn't just an option—it's essential for businesses to grow steadily and stay ahead of the competition. By clearly setting goals, carefully checking out potential buys, planning how to combine companies, and using data, businesses can handle the tricky world of M&A to gain major value and ensure their future success.

For many enterprises, consistent and accurate record-keeping provides a valuable starting point for assessing a potential acquisition target's financial health through its revenue, expenses, profitability, and cash flow reports. 

Build a compelling narrative for stakeholders, with data-backed insights from Intuit Enterprise Suite.