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Inorganic growth: strategic rationale for a merger or acquisition.

Most companies update their strategic plan annually. It is during this time that board members and company executives are forced to assess their current situation, and confirm, or reaffirm, the future direction of the company. Company executives, as part of the strategic planning process, are forced to realistically evaluate whether or not they can achieve their growth objectives organically. If the executive team determines that the company may have difficulty achieving its growth objectives, then the company may want to consider inorganic growth options such as a merger or an acquisition. There are many reasons for a company to pursue a merger or acquisition. A company may want to protect itself against a new competitor and/or a new technology, or diversify by entering a new geographic region or market.


According to Chris Zook's Profit from the Core., many failed growth strategies were a direct result of the wrong diversification away from the company's cove business. For this reason, he examined three strategies for leveraging the core business: (1) strengthen and develop the core to its fall potential; (2) expand into logical and reinforcing adjacencies; and (3) a shift or redefinition of the core. As a result, it is often helpful, when considering inorganic options, to consider Zook's classification of growth strategies when explaining the rationale for any M&A activity.


By contrast, the approach presented in the Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne, which does not specifically focus on M&A activity, recommends that companies create "blue oceans" or uncontested market spaces to create profitable growth. As a result, the blue ocean strategy, when considered in an M&A context, could suggest that, a company looks to make a strategic move through acquisition by moving beyond their core business. Their approach suggests looking beyond conventional boundaries to create a blue ocean. For inorganic growth, companies could investigate looking across alternative industries and/or strategic groups within their industry to identify potential candidates which could provide a greater opportunity for profitable growth.

Once the strategic rationale has been defined, the company can then begin to focus on identifying the right candidates (or target companies) to satisfy the company's growth objectives. There are factors to consider to help narrow down the list of potential candidates: revenue, market share, geographic location and target markets, key customers and partners, product/service portfolio fit, technology, intellectual property, and, if possible, cultural fit. Although not an exhaustive list, the aforementioned factors provide a preliminary filter to narrow down the list of potential candidates to a "short" list of preferred candidates. Once the preferred candidates have been identified the company can review the preferred candidates with the objective being to eventually rank the candidates and ultimately select a target company.

Contacting the target company (cither directly or through an intermediary) would be the next step in the process to determine if a merger or acquisition is actionable. Assuming that the target company was interested, the acquiring company would then begin due diligence. The due diligence process provides an opportunity to assess and confirm whether or not the target company satisfies both the strategic rationale and the growth objectives. It is also important for the acquiring company to gather information on recent comparable transactions in advance of negotiating a deal.

In some cases, after due diligence, the acquiring company may decide not to proceed with the merger or acquisition. However, if the company does decide to move ahead with the target candidate the focus shifts to negotiating and structuring a deal. During the negotiations, the acquiring company may decide to share its strategic rationale for the deal with the target company in order to facilitate a deal and to align the future direction of the combined company.

Upon completion of a deal, it will remain important for the acquiring company, throughout the integration process, to remind the integration team of the strategic rationale for the deal to ensure that every integration activity is focused on capturing the pre-deal synergies and maximizing the benefit for all stakeholders.

Companies will always need to balance organic growth against inorganic growth options. Moreover, once a company decides to pursue a merger and/or an acquisition it remains important for the company's executives to clearly articulate the strategic rationale for the deal and select the right target, at the right price, to maximize the likelihood of hitting their company's growth objectives.

Whether you consider Zook's approach or Kim and Mauborgne's blue ocean approach, it remains important for company executives to be able to clearly articulate their vision and the strategic rationale for any M&A activity. Here is a summary of some of the reasons companies consider a merger or acquisition:

* To defend their competitive position within a market segment or at a particular customer.

* To diversify into a new market and/or geographic region.

* To gain access to new customers and/or partners.

* To acquire new and/or complementary products or services.

* To acquire new expertise or capabilities.

* To accelerate time to market (for a product and/or service).

* To improve the company's rate of innovation either by acquiring new technology and/or intellectual property.

* To gain control over a supplier (backwards integration).

* To position the company to benefit from industry consolidation.

Selection criteria


* Supports entry to new geographies--global expansion

* Proximity to existing offices/Locations

* Cross border MSA considerations


* Revenue/margin (company size)

* Proximity to existing offices/locations

* Revenue synergies/cost-saving opportunities

* Tax benefits


* Supports entry to new markets

* Targets a growth market

* Positions company for industry consolidation

* Supports ability to maintain/increase market share


* Access to new customers and/or channel/technology partners

* Reinforce existing accounts


* Access to new/complementary products and/or services

Technology/Intellectual Property

* Access to new technology and/or intellectual property

Supply (Backwards integration)

* Gain control over a supplier

Human resource

* Cultural fit

* Access to new skills/expertise

Matt Davies, CMC, FLMI, is the vice-president of corporate development at a global technology company. He is a graduate from the University of Ottawa and has also attended The Wharton School's executive education program for mergers and acquisitions. Matt has held various management positions at Akara Corporation, Deloitte Consulting, and Andersen Consulting.
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Title Annotation:business strategies
Author:Davies, Matt
Publication:CMA Management
Date:Jun 1, 2010
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