M&A strategy: benefits of merging businesses 

A mergers and acquisitions (M&A) strategy has been a primary tool for businesses to strengthen their market positions. It created empires across the manufacturing, transportation, and technology sectors, allowing them to last over a hundred years.

As the business landscape continues to evolve with today's AI and other advancements, the M&A strategy has taken on a new shape, remaining a defining characteristic of the world's most successful enterprises.

Explore the whats, whys, and hows of implementing an M&A strategy. We will also discuss real-life examples and invaluable tips from experts on unlocking the full potential of M&A to drive long-term success.

Engaging in an M&A strategy can be beneficial if you aim to expand your market reach and customer base. The strategy can also help you gain a competitive advantage by combining critical assets like technology, allowing you to diversify your brand. 

However, not all mergers and acquisition strategies are successful. Harvard Business Review reports that about 70 to 90 percent fail, often due to financial constraints, integration challenges, and human factors like poor teamwork. To increase the chances of a successful M&A strategy, you need the right team, resources, goals, and methods.

Horizontal mergers

Horizontal mergers occur between companies offering similar products or services to become more significant enterprises. This strategy increases market share, reduces competitors, and enhances pricing power. The production cost per unit also lowers as merging companies can easily streamline operations and share resources.

Walt Disney studios and Pixar merger

An example of a horizontal merger is Disney purchasing Pixar. For decades, the former has been the industry leader in animated films. However, Pixar broke that streak when it introduced 3D animated movies. After competing head-on with Pixar, Disney decided to collaborate instead for Toy Story.

The success of the collaboration paved the way for Disney to acquire Pixar in 2006. The horizontal merger strategy has brought tremendous gains to both businesses.

Walt Disney Studios incorporated Pixar's technology to expand its market and product offerings. Pixar enjoys substantial financial support, which allows it to pursue more opportunities. The merger increased sales, with movies grossing billions of dollars worldwide.

Vertical mergers

A vertical merger happens between companies with complementary services or products vital to creating one product. For instance, a business that sells chocolates merges with a business that harvests and processes cocoa.

In a vertical merger strategy, the acquiring company gains control of the supply chain to optimize production costs and quality. But, it can be a complex and expensive process, as the companies may have different production stages to manage.

Amazon and WholeFoods merger

Amazon wanted to gain significant market share in the grocery market. However, its Amazon Fresh and Prime Pantry services struggled to compete with established players like Walmart. Meanwhile, Whole Foods was facing plummeting sales.

With Whole Foods' premium brand and extensive physical presence, Amazon saw an opportunity to acquire and accelerate its entry into the grocery sector. The M&A strategy allowed Amazon to anchor on Whole Foods' reputation for high-quality, organic products and capture the premium market by leveraging its technology and logistics expertise to improve efficiency.

The acquisition was generally well-received by customers, who benefited from lower prices, improved convenience, and access to a wider variety of organic products. Whole Foods also managed to modernize its operations and stay afloat.

Conglomerate mergers

But what strategy can two merging companies implement if they do entirely different things?

Well, this type of M&A strategy is a conglomerate merger. Imagine if a toy company and an ice cream shop merged, two very different businesses that could help each other in unique and diverse ways. In a conglomerate merger, one company typically has more significant financial resources. This can be advantageous, allowing the combined entity to grow and better withstand market risks.

3M and Acelity merger 

3M specializes in manufacturing products like adhesives, abrasives, and electronics. The company also produces medical protective equipment such as face masks and bandages. Acelity is a medical technology company known for advanced advanced wound care solutions, including tissue regeneration and therapeutic support systems. But, Acelity was burdened by a significant debt load, which limited its growth.

Seeking to expand its market presence in the wound care industry, 3M viewed Acelity as an attractive acquisition target due to its established product portfolio. The $6.7 billion acquisition in 2019 allowed 3M to diversify its healthcare offerings by incorporating Acelity's wound care technologies.

Market extension mergers

Market extension mergers are similar to horizontal mergers, where companies involved are in the same type of business. The difference in a market extension merger strategy is these two companies deal with different product areas, anchoring on their shared goals of fueling growth and improving their offerings.

Starbucks and Teavana merger

Starbucks wanted to capture a larger share of the beverage industry by expanding into teas. Enter Teavana, a young but prominent tea brand with stores across the United States.

However, the tea company's success also attracted numerous competitors. Teavana failed to expand its product range and keep up with changing customer preferences, leading to its quick decline.

In 2012, Starbucks acquired Teavana for $620 million, a strategic move that opened doors for diverse opportunities. This acquisition allowed the coffee shop chain to attract tea drinkers and propel its growth in the booming tea market without starting from scratch.

Product extension mergers

The companies offer different yet complementary products and services in a product extension merger strategy. For example, a retail company specializing in women's clothes acquires another selling women's accessories. This acquisition allows both businesses to cross-sell, expand their product portfolio, and boost the market through complementary strengths.

Microsoft and LinkedIn

Microsoft was ready to explore the cloud services and products market, prompting it to acquire LinkedIn, a professional networking platform. The product extension merger allowed Microsoft to integrate tools like Outlook and Teams, effectively breaking into the professional cloud space.

LinkedIn's revenue grew to over $10 billion five years after the acquisition as more users availed of premium subscriptions due to its new Microsoft-powered features. Microsoft CEO Satya Nadella shares, "LinkedIn has become a leader across multiple secular growth areas spanning B2B advertising, professional hiring, corporate learning, and sales intelligence."

As part of its strategy, Microsoft allowed LinkedIn to maintain its branding and operation independence, which helped avoid serious cultural clashes and alienation of its existing loyal customers.

Mergers and acquisitions can be challenging, even for large companies. Many have failed, resulting in significant losses. Let's explore the potential risks and some helpful tips to overcome them.

Integration challenges

The $180 billion deal between British telecom company Vodafone and German telecom and engineering company Mannesmann was the most expensive merger in history. Vodafone aimed to become the world's leading telecommunication company, taking advantage of Mannesmann's broad reach and market presence in Europe.

However, combining the two companies was not a manageable strategy. They had to merge massive systems with employees undergoing training, which took time and money. As two giants in the same industry, there was a clash in decision-making, leading to some managers eventually leaving because of the new structure.

Merging companies is not only between two CEOs as it affects everyone in the business. Misunderstandings can happen, people will lose focus due to the changes, and change in structure is inevitable. That said, it is essential to have strategic solutions for potential challenges ahead of time.

Ensure operational efficiency and alignment and communicate developments clearly to employees so they know what to expect. Leverage technology and agree on a unified system. And set clear goals and monitor progress as the companies ease into the integration process.

Cultural conflicts

Another risk of a mergers and acquisitions strategy is work culture clashes caused by differing beliefs, values, and practices between the camps. Failure to mitigate culture clashes often results in employees disengaging with management and resisting changes. Culture clashes made employees unhappy, massively impacting performance and productivity.

Two automotive giants, Daimler-Benz (a German luxury car company) and Chrysler (an American mid-range car and truck company), merged under the new name DaimlerChrysler. When the deal was made between brands, they agreed to operate as equals.

However, both companies failed to uphold the so-called "merger of equals." Daimler was criticized for calling most of the shots, cultural integration problems surfaced, and differences in operating methods eventually created a rift. The German company emphasizes perfection, while the American company prioritizes speed and practicality.

Due to irreconcilable differences between the companies acting individually, the merger resulted in financial losses. Nine years later, Daimler decided to sell Chrysler.

Financial risks

Mergers and acquisitions can create financial strain for companies for several reasons:

1. Overpaying for the acquired company. The upfront cost can create a financial burden if the new company does not generate sufficient revenue from an M&A strategy. 
2. Integration costs. Merging systems, training employees, and paying severance during layoffs add significant expenses. 
3. Changing market conditions. If the market environment is unfavorable, both companies may lose their investments.

In the mid-1990s, the internet industry experienced a boom, with stock prices skyrocketing by 800%. In 2000, AOL attempted to build a media empire by acquiring Time Warner for its extensive assets. With AOL's failure to predict the future, the dot-com bubble followed shortly after the merger. 

The surge in risky investments in internet-based companies led to inflated valuations for startups, even when their profitability was uncertain. Without seeing the promised returns, the excitement over the internet industry faded.

The market has changed. This, combined with the company's execution challenges and growing cultural conflicts, ultimately led to the failure of the $165 billion deal. The resulting $99 billion loss has cemented the AOL-Time Warner merger as one of the costliest and worst mergers in history.

Mergers and acquisitions are an effective growth strategy. If you have the right approach, they can expand your market reach, increase revenue streams, and strengthen your market hold.

Assess for strategic fit

A merger is a huge commitment that deserves careful discernment. It will cause disruption—internally and externally—and require significant investments and other resources. 

That said, strategic fit is crucial. Ask yourself the following questions:

The strategy needs to make sense in boosting growth and saving costs. If your strategies and perceptions of the future align, then there's a higher chance it will work.

Analyze the M&A’s financial impact 

A mergers and acquisitions venture is not cheap. You need to prepare financially for three things: the purchasing cost of acquiring a company, the operations overhaul, including staffing, and other hidden fees. 

Audit both companies to get an idea of their financial health. Are there any existing debts? Look at the profit margins, as one can drag the other down if it is at a loss. How much will it cost to combine your resources and hire more people? Every cost matters, no matter how small.

Next, assess the new company's profitability or revenue potential. Be realistic about how much cross-selling products and services can earn you and consider future costs. Finally, leverage financial modeling, such as discounted cash flow (DCF) analysis, to project future earnings. This helps estimate the time it takes to recoup investment and other expenses related to the merger.

Evaluate cultural compatibility between the companies

Cultural conflicts are common during mergers and acquisitions. This often stems from differing approaches to running a unified company. Concerns about job security and system changes can also make employees resistant. So, start by learning about each company's culture—the rules, traditions, beliefs, values, and work styles. Find common ground, such as shared goals, to give both companies something to focus on.

Begin at the leadership level, where executives from each company learn to collaborate and communicate effectively with their teams. Establish new rules and enforce them to guide employees through the integration process. Finally, cultivate a workplace that welcomes feedback and diverse ideas, creating a culture where everyone feels valued.

Identify key success factors

Successful post-merger integration (PMI) is crucial for an effective mergers and acquisitions (M&A) and growth strategy. PMI involves creating an integration plan and aligning key business areas like operations, finance, technology, and sales and marketing. This ensures consistent systems and enables different teams to adapt to changes and work together towards a common goal.

A dedicated integration team with members from each department should be appointed to keep the process on track. Mergers can be stressful, so provide support and listen to employee concerns. Remember that satisfied employees lead to happier customers and higher productivity.

External communication is also vital. Inform existing customers about the merger and highlight their expected benefits, such as improved product efficiency and customer service. Keep customers updated on any relevant changes.

Mergers and acquisitions open doors to more significant opportunities, amplify growth instead of building a company from scratch, and help enterprises keep up in a fast-paced environment. They are crucial for businesses that capitalize on emerging opportunities through globalization, digitalization, and innovation.

But, as our examples have shown, implementing an M&A strategy takes time and effort and carries many risks. If you’re an emerging business looking to expand and merge with another company, you can increase your chances of success by working with a trusted startup branding agency like Ramotion.