Growth through M&A is a popular route for many companies, be it for acquiring new talent, technologies, processes or plant, market or territory penetration, or disruption. But M&A is not the only possible route to growth.
Growth through M&A is a popular route for many companies, be it for acquiring new talent, technologies, processes or plant, market or territory penetration, or disruption. But M&A is not the only possible route to growth.
M&A represents a significant risk, not only financially but also reputationally. A lack of ability to realise deal benefits can put boards off all but bolt-on acquisitions.
There are other forms of business alliances that can deliver significant benefits:
Alliances like these can be a more compelling option than M&A for several reasons:
Firms can pool complementary capabilities such as assets, technology and shared services in a way that mutually achieves inorganic growth
Whereas M&A takes time to deliver benefits, alliances offer a faster and more responsive way of disrupting the market through new value propositions
Firms can scale up with strategically important partners that would be too big to acquire
In general alliances offer greater flexibility in response to market conditions thanks to their cost, speed and scale advantages.
Alliances can have their challenges
The key for a successful alliance lies within both parties having aligned outcomes and ‘currencies’ for growth. This isn’t always the case, and alliances don’t always run smoothly. Just like M&A, they have their fair share of failures.
There several reasons alliances can be challenging, including:
A successful alliance must be underpinned by a strategy and set of plans which exhibit clarity around desired capabilities, tradeoffs, and strategic priorities. It is important to always start with a strategy and to be guided by the desired outcome rather than reacting to events.
At the start, it is important that partners invest time collaboratively to confirm objectives, priorities and the capabilities required to set the alliance up for success. Alliances are finite with an average duration of four years. It is important to plan the exit strategy at the start so that there is clarity about this right from the beginning.
Dwight Eisenhower said: “Plans are nothing, planning is everything.” The very act of planning is about getting to know the other side, their company culture and what makes them both the same as and different to you. An ‘end-in-mind’ approach that focuses on growing the pie as opposed to carving off individual slices helps to establish a deeper level of collaboration, commitment and above all, trust. Without trust, there is no alliance.
Using an inappropriate legal agreement that does not match the operational realities of joint working will stifle capability. It is important to invest time and expertise in getting this right at the outset
Part of the reason M&A is such a popular strategy for growing a business is the culture and environment in which decisions are taken. The powerful personalities that drive board level discussions can be predisposed to the idea of ‘takeover’ and averse to cooperative strategies like joint ventures or partnerships. Surely strong personalities alone should not drive business decisions but the needs of the business should drive them.
Creating a framework for success
An FD can step into a role that takes a more strategic view of any deal by using the operating model, the firm’s engine of growth, as the lens through which success is achieved, feeding this into a currency framework and overlaying some governance into decision making.
Devising and implementing this type of framework isn’t just about achieving a balance for its own sake. There will be times when it is more beneficial to form a strategic alliance, joint venture or partnership than to go through M&A, and the framework will help reveal the right approach at a particular time.
Through a collaboratively created currency framework, the board can consider a whole range of strategic and tactical factors that will ensure the final decision taken is aligned with the organisation’s overall strategy. The factors that are important to an organisation might be implicitly understood, and will include, for example, territory, margin, product strategy, application of ESG, ABC, risk policy, financial policy and shareholder expectations. But remarkably these factors and their relative importance might not be formally articulated but the framework will provide a means to achieve this.
An appropriate framework will create the right environment for decision making through informed discussion, rather than, as can be the case, the bulldozing through of a preference in a more ego-driven boardroom.
Applying the framework more broadly
Once it has been formulated, the framework can also be used to inform the business on whether it is able to design and execute a plan for the actual processes involved in integrating another business. This work includes all the practical, tangible and less tangible aspects of integration, such as technology, culture, leadership, brand, data, regulatory and legal requirements, financial management, people and value proposition, from opportunity to order and order to cash.
Large, successful companies get M&A offers with striking frequency. They don’t have to accept every offer, but they should be in a position to look dispassionately at each one, and evaluate its fit with business needs and capabilities. Equally, they should be able to examine business growth needs and decide whether an M&A approach or some other growth strategy might best meet that need. An evaluation framework is an ideal tool for these tasks, and the FD is in the ideal position to implement it.
