M&A Appetite and Indigestion

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We facilitate acquisitions. So it’s good for us if M&A activity pays off for everyone involved. But too often it does not. The Economist has an excellent post on the difficulty with many M&A deals, focusing on a new study on acquisitions by public companies that, pretty simply,   concludes that the shares of acquirers underperform their less acquisitive peers. Profit margins also fall, as do returns on capital.

The good news (for us at least, since we swim in the smaller end of the M&A pool) is that small acquisitions perform better than large ones. But the larger truth hurts, and this one is painful: “Buying another business looks like decisive action, and is a lot easier than coming up with a new, best-selling product.” Or, we would add, invigorating an older one.

Cultural fit is often (and rightly) seen as key. However in our experience with smaller clients — who are often acquired by large public companies — the best results from M&A are when the gap between buyer and bought is easily bridged: an acquisition (and particularly buying a small company) should fill a very specific need: technical expertise, an adjacent product or service for which the acquirer has a captive installed base, or entry to a niche with clear similarities to an existing market with proven expertise. The desire to suddenly invigorate a more mature business rarely works — a marathoner may admire and emulate a sprinter, but the effects wear off. To find the right companies to buy, start with a long hard look in the mirror.