The goal of a merger or acquisition can vary by industry, company size and scope however there are some similarities in what drives them:

• Gaining control of a competitor’s assets

• Preventing a competitor from accessing an opportunity in the market

• Bolstering combined strength of value and performance of two companies in the same space to increase market share

• Instantly increasing top-line revenue through new customer channels typically leading to a dramatic increase in sales and profitability

• Merging of skills and technology to innovate within the industry and bring in new technology and skills to further advance the business.

These are often referred to as scope or scale deals. Scale deals involve a high degree of business overlap between the target and acquirer, fueling a company’s expansion in its existing business. In scope deals, the target is a related but distinct business, enabling an acquirer to enter a new market, product line or channel. Both can be useful— and “scale vs. scope” has been a great debate in the M&A world for quite some time.

Understanding the types of acquisition available

Once you have decided on your goal, understanding which type of the merger or acquisition activity required can help provide much-needed context and clarification.

• Synergistic – usually in the same line of business in terms of products/services and/or markets/customers. This type of deal often creates immediate value through the addition of new customers and market share, as well as cost synergies through the streamlining of other functions to create efficiencies in procurement and operations. An obvious example would be the merging of Anheuser Busch, an American company, and InBev from Belgium which proved to be enormously successful. In fact, today Anheuser Busch InBev is the biggest brewing company in the world.

• Strategic – may offer similar products/services but sell to different end markets. It may also offer different products but sell to the same end markets. The potential revenue synergies and growth opportunities may be vast.  Apple and NeXT would be a good example of this – it led to the complete invigoration of the Apple Macintosh through the birth of the Mac OS X operating system, which was largely based on NeXT software.

• Complementary or congeneric – A merger justified on the basis that the combining companies’ business lines complement each other and will enable growth either through combined offerings or cost savings. This type of merger is unlikely to offer any significant synergy value other than indirectly through the sharing of resources, knowledge or best practice. One widely cited example of this type of deal is the 1981 merger between Prudential Financial and stock brokerage Bache & Co. Although both companies were involved in the financial services sector, prior to the deal, Prudential was focused primarily on insurance while Bache dealt with the stock market.

• Diversification – This type of acquisition is usually high-risk, high-reward. This is the quickest way to move out of unattractive industry environments and maximize the use of potentially underutilized resources. There are some very famous success stories of related diversification strategies in practice such as General Electric and Disney however the entry of Quaker oats into the fruit juice business with Snapple led to a very costly failure.

• Conglomerate – a merger between two firms which are carrying on business activities unrelated to each other. An example of this would be when Procter & Gamble, a consumer goods company, acquired Gillette. At the time, Procter & Gamble was largely absent from the men’s personal care market, a sector led by Gillette. The companies’ product portfolios were complementary, however, and the merger created one of the world’s biggest consumer product companies.

• Transformative merger – creating value by transforming core operations, processes and/or business units  can offer significant innovation and breakthrough performance for an organization . However, transformational acquisitions involve complexity that can go beyond the capabilities of management – thereby having  the potential to bring operations to a standstill if not properly managed. It is therefore vital that any organization considering an acquisition of this nature ensures it has the sufficient people and resources to manage it.

Building these M&A capabilities requires the appropriate operating model, and even the most successful acquirers need to ensure that theirs is up to the task. Such operating models need to evolve over time, quickly reflecting changing requirements, which demands constant and accurate observation as well as a solid understanding of market developments and related competitor movements. The team at Hundred can help provide support in all these areas.