Strategic Fit in Mergers & AcquisitionsMonday, March 31st, 2014
By: Kavita Verma | LLM – Managing Director of M&A and Strategic Alliances
A strategic fit is defined as “a situation that occurs when a specific project, target company, or product is seen as appropriate with respect to an organization’s overall objectives.” Most executives seeking to expand their company through a merger or acquisition will look for another company that makes a good strategic fit with their own.
There are many reasons companies might merge. For example, they might want to expand geographically or gain a competitive advantage with improved financial performance through enhancing revenue and lowering costs. Typically, an acquisition creates substantial shareholder value through cost-structure improvements and access to new growth opportunities. No matter what the reason for teaming up, the fundamental issue for companies to consider is whether there’s a strategic reason to merge. Essentially, the merger must create value.
Before you dive down into the different silos of the target company’s operations, you should first focus on the vision, the strategy, and the bigger picture of the merger or acquisition.
Much of the early discussion between parties will be focused around how the target’s current business strategy fits with yours, whether you have the same definitions of success as they have, what benefits your respective customers will get from the acquisition, and what prospective new customers will become available to you.
Before commitments are made, it is critical to thoroughly understand the business and management style of the target company in order to determine if long-term goals are compatible and if the merger is a good fit. It is important not only to look at financial records and to understand the product, but also to closely examine the corporate culture and human factor of the business—they can make or break a partnership. Skipping any part of the process can be detrimental to a successful outcome.
HERE ARE SOME FACTORS TO CONSIDER WHEN LOOKING AT STRATEGIC FIT:
Management team. Get background on the management team. Look for one that has a strong track record and an aligned vision, and one that is comfortable with change. in many cases, that may be more important than the company’s actual product or service.
Customer relationships. Understand customer relationships. during the due diligence phase, experts will look at historical records, analyze contracts (if applicable), and gain an understanding of customer accounts and relationships to help analyze future trends.
Corporate mission. Look at the strategic purpose of the acquisition and the core competencies of each business. While you may find an instant connection with a target company, understanding corporate goals and alignment, as well as the extent to which the CEO and management team are respected by their peers, is invaluable when considering strategic fit. Compatibility, long-term vision, trust, and similar corporate goals are important considerations in any acquisition. taken together, all these core components make for a solid team and result in a strategic fit.
Align the organizational structure, objectives, and administrative arrangements. Most organization failures are attributed to bad execution. Accordingly, after clearly articulating the new mission statement for the combined companies, the company’s next step is to begin adjusting all organizational arrangements to ensure that there is a direct connection between the new mission statement and the key metrics and behavioral elements of the management systems.
Without this alignment and consistency among the administrative arrangements and the company’s strategy, gaps will eventually emerge that will undermine the success of the new company.
You won’t always find the magic of strategic fit. Perfect chemistry in every deal is not a realistic expectation. While it is nice to have, it is not necessary to close the deal and may not be the deciding factor for the long-term success of any business. if chemistry is not there, don’t try to force it. instead, focus on the other positive aspects of the connection and partnership, or move on. Agility, track record, and adaptability are also important considerations when looking at strategic fit.
Mergers and acquisitions are great ways to grow a business, add capabilities to your portfolio, or enter new markets. Strategy is key to understanding where a merger or acquisition fits into the big picture. BWFA helps business leaders think about the strategic fit of mergers and acquisitions, and then helps clients determine the best way to integrate business models to achieve success.
BWFA’s Mergers and Acquisitions team can then put your plan in place and contact your merger and acquisition targets. Our team will guide you through the entire merger or acquisition process to ensure a positive outcome.