What's your "big idea" in M&A?

Although Zweig Group's M&A Survey offers a variety of responses to the question "why are you considering an acquisition", there are, essentially, only two reasons that firms pursue inorganic growth. These reasons are to either boost the acquiring company's current performance, or to redirect your company from it's current business model. 1. To boost the acquiring company's current performance. Firms that fall under this general motivation might be interested in pursuing companies that also occupy a niche within the acquiring company's market. The overall objective is to acquire firms that enhance the firm's current revenue stream, or, less frequently, firms that influence the cost structure of the acquiring firm. This model works best when the acquiring company has a solid operating model and is ready to expand that model by bringing its knowledge or expertise to other firms that it "understands." A large MEP engineering firm acquires a smaller MEP engineering firm in a nearby market that the acquirer has had difficulty breaking into - this is an example that will boost the acquiring firm's current performance. The acquiring firm here will actively seek out targets that are motivated for growth, with strong leadership that recognizes the opportunity that a large firm brings to its existing staff. Strategic planning is a great way to identify the specific complementary attributes that can support inorganic growth as a way to boost the acquiring company's current performance. 2. To reinvent your business model and redirect your company. The second motivation is a less common one. This motivation reflects a fundamental change in a company's operating model. This model is a great way to protect your firm from commodization. This type of acquisition occurs, for example, when an architecture firm that specializes in repetitive roll-outs for big box retail stores acquires a small, boutique firm with high design in the retail sector. The new attention to design detail is an investment that the larger firm is making to avoid becoming dependent on one or two large big box stores. The trade-off is that the efficiencies realized through the acquisition might be questionable. How much additional revenue can the two firms generate after the join forces? How do we make "1 + 1 = 3"? The buying firm will likely need the key rainmakers and practice leaders to stay engaged for longer after the closing to help ensure that business stays stable as the model changes. This is a challenging motivation, because there is inherent risk in taking on a new operating model, but it is one of the more successful "arranged marriages" that we see in this industry. It's also more difficult to price an acquisition target that is outside of the buyers' immediate purview. By the way, the most common reason that firms are considering an acquisition, according to our 2015 M&A Survey? Entering new markets, followed closely by geographic expansion. Are you ready to develop an acquisition strategy? Call us at Zweig Group!