The SIX strategies that drive M&A

Whilst it looks glamorous and gets headlines, acquisitions are expensive and fraught with risk. 70% of acquisitions are deemed a failure.

So why is over $2.5tn spent each year by companies on acquisitions?

In 95% of cases, the buyer for your business will be trying to achieve one of six strategies.

Why does this matter?

Firstly, you can use these strategies to go looking for potential buyers. This will give you a structured way to identify buyers by looking in different places. As you'll see, this could be current competitors, the leaders in overseas markets, big players in markets adjacent to yours or PE-funds doing a roll up in your niche.

Secondly, your pitch needs to be totally different depending on what strategy your buyer has for buying you. Understanding this is critical to making a pitch that will resonate, and impressing them during the early negotiations.

Thirdly, you can use these strategies to evaluate whether a potential approach is legit or a time waster (or worse, someone digging for data).

General principles

Before we get into the six strategies, there are two common benefits which apply across all M&A.

1. Speed. Your buyer is in a rush. Sure, they could start from scratch to build what you have, recruit a team, launch the marketing... but buying you can get them there faster.
2. Uniqueness. You have something that they can't copy, or that will be very difficult for them to do themselves. If they could do it themselves, they would. For more on this, see Why M&A is always Plan B.

Legal Whizz

As we run through the strategies, let’s use the example of Legal Whizz, a fictional company, to bring these deal types to life.

Legal Whizz sells software to UK law firms to help them organise and run courses to train and up-skill their staff. Their customers use the product to build training sessions, courses and quizzes for their lawyers and new joiners.

Legal Whizz has made rapid headway in a few years. Well-backed by venture capital, they have brought modern software and a cool brand to an old fashioned industry.

1️⃣ Buy a competitor.

Your buyer is competing with you directly - serving the same customers with same or similar products. This is also called horizontal integration or horizontal M&A.

You might be friendly, you might be at war. Maybe they can see that you're stealing their customers. That's great!

There are some things which you're doing far better than them... your product is modern and fast and clean, their tech is slow and old. Your sales team is more efficient. You've nailed a feature that they can't. You got the jump on them with AI.

They can keep fighting you, but they want to join forces. Often you'll see numbers 2 and 3 consolidate to fight the number 1 together, especially in a business where economies of scale matter.

And they will probably see ways to save money and be more efficient as a combined team. That might mean a single sales teams, migrating customers to single product, merging the back office.

In these deals, the two businesses tend to be closely integrated. This can be a difficult process, and earnouts are most challenging when two companies need to fully entwined as one entity.

A side point – anti-trust regulators tend to be most concerned about horizontal deals, as the merging of competitors leads to less choice for consumers and perhaps more pricing power.

Legal Whizz

Legal Whizz's acquirer could be the number one player in the legal corporate training space. They have been the market leader for 20 years, but they have a stale software offering. They are being disrupted by the modern tech and cooler branding of Legal Whizz, and they're starting to see some of their customers defect. Game on!

2️⃣ Launch an adjacent product.

This is similar to the strategy above.

The buyer has the same customer base as you, but you are serving them with different products or services. These products can be complimentary and make sense to be sold together.

This is the strategy with the fiercest debate about organic vs acquisition. The buyer probably has the tools to build this themselves. That will take time and then they will have to outcompete you, with a head start. So M&A starts to look appealing.

Legal Whizz

The buyer is a provider of CRM software to law firms. They have great relationships, trusted and well-known by all. But they are hitting saturation and growth is slowly. They can't increase prices any more. How do they grow?

They need a suite of products to sell to these trusted clients, and want to do it quickly. But their DNA is in CRM. Legal Whizz fills the gap, a high-quality adjacent product which they can cross-sell through the same team, and perhaps even integrate the products.

3️⃣ Enter a new market.

A company wants to enter a totally new market. The leap is greater than just an adjacent product – that want to launch in a totally new industry or a new country.

An acquisition is often the answer. You already have the product, customers, brand and operations in place. You know that industry or country inside out. Your product has been built specifically for that market, not retrofitted later.

So buying you will seem a much more plausible plan.

As the products are much more distinct, and maybe operating in different countries, you tend to get more left alone post acquisition with less integration.

Legal Whizz
The buyer runs a similar training software product, but for engineers. They've seen that the legal training market is large and growing, and would make a great second market as they expand. But they have no understanding of the legal industry and no contacts. Legal Whizz has a great brand, loyal customers and is growing fast – it makes more sense to buy them than to start from scratch and try to compete.

Similarly, an offer could also come from a legal training provider from the US. Their product is very similar to yours, but customised for the specific needs of US law firms. They are starting to reach saturation in the US and want to keep growing at a rapid rate, so are looking at launching overseas... but they know nothing about the UK market.

4️⃣ Integrate the value chain.

This is also called vertical M&A. The buyer is your customer or supplier (directly or indirectly), working in the same 'value chain'.

The value chain refers to the sequence of companies that operate within an industry. Take a loaf of bread from the supermarket... that's been through this value chain:

> Farm owners
> Farmers
> Grain technology
> Agriculture machinery suppliers and maintenance
> Millers
> Bakeries
> Transport / logistics
> Grocery stores

This is most common in traditional businesses where a physical supply chain is critical to the business, but can happen in technology too.

The aim of buying a company in your value chain is to get cost savings, more control over logistics and perhaps stop your competitors from accessing the product.

So in our bread example, Hovis (a UK bakery) might buy a chain of bakeries to sell their product direct to customers rather than in grocery stores. Or they might buy farms so they have control over the growing of grain, their most costly input.

A recent example is Microsoft (the owner of Xbox) trying to buy game developer Activision Blizzard, so they could provide exclusive access on Xbox to games like Call of Duty.

These deals are less common, and are much harder to pull off. The buyer and the target can have very different economics and cultures which make integration challenging.

Legal Whizz
This type of deal is less likely for Legal Whizz. A buyer could be a law firm. They are starting to spend a lot of money on training. They see owning your IP as a key long-term competitive advantage, and want to bring it in-house and own the technology rather than just being a customer.

5️⃣ Purely financial, or rollup.

In some cases, the buyer has a portfolio strategy – buy unrelated businesses to hold as a group.

This was made popular by Warren Buffett and Charlie Munger at Berkshire Hathaway. As well as public stocks they've also acquired over 60 companies outright through M&A. These are mostly unrelated companies, which span insurance, construction, clothes, food and others.

The buyer cares less about the specifics of your product and your customer base. They are more focused on your financial performance and growth, and how you can prove that more growth is likely in future.

Sometimes, the buyer is running a 'roll-up' strategy. This is common in private equity. That means aggregating lots of small businesses in the same industry into a consortium, or looking to merge them together into a large single entity with economies of scale.

They tend to be very price conscious acquirers, looking at huge numbers of targets and only going ahead when the price is right for them.

Legal Whizz

Perhaps there's a PE fund out there looking to do a roll up of 'legal tech' businesses, and likes the look of Legal Whizz's financials and growth story.

6️⃣ Audience, IP or team

Finally, you could get acquired because of something unique and hard to replicate within your audience, customer base, IP, tech or team.

The buyer doesn't care too much about underlying business, but wants to get access to something within it.

If the team is the source of their interest, this is called an Acquihire. That might be some great engineers that are doing some pioneering work in a new technology, which is valuable enough for the entire company to be bought.

Or perhaps you are a B2C business with a large and valuable customer base. For example, an education app for kids with a huge membership of parents. That's attractive to any company that wants to sell to those parents.

These deals tend to be more common for businesses which are struggling and where there's not an obvious buyer under any of the strategies above. So more of a last resort...

Unless the IP is extremely valuable and can spark a bidding war, you should get a lower valuation multiple here. The buyer isn't too interested in the business itself, but just wants a part of it, so will likely pay less.

Legal Whizz

These deals are hard to predict, and often come out of the blue from an unlikely source.

For Legal Whizz, their paranoid legal customers wanted to protect their training materials to a very high standard. This required some innovation in pioneering security technology, creating a novel solution. A cyber security company hears about this and wants to roll it out across their products. They don't care about the legal training market, but see great value in that IP.