Creating value from mergers, acquisitions and alliances

Mergers, acquisitions and alliances—collectively M&A—are long-established routes for changing corporate scope, capability and competitive position.

When to use it

Use this assessment for every proposed merger, acquisition or alliance, from initial rationale through valuation and integration planning.

Origins

This six-task assessment synthesises corporate finance, strategy, due diligence and integration practice rather than reproducing one named model. Its economic test is conventional but demanding: the acquirer creates value only when realisable synergy exceeds the control premium plus transaction, integration and risk costs. Successive merger waves gradually brought rationale, target selection, diligence, valuation and execution into one connected process.

What it is

“Eat or be eaten” captures the pressure behind many deals, but pressure is not a rationale.

Underperforming companies can become targets; acquirers can also destroy value by acting defensively or impulsively.

Survival of the combined entity is an inadequate success measure. The relevant test is incremental shareholder value.

At minimum, the value of AB after the transaction should exceed the pre-deal standalone values of A and B together.

Research conducted since well before the author began M&A work in the mid-1980s repeatedly finds that a majority of transactions destroy rather than enhance shareholder value.

Overpayment for control is the immediate cause. It commonly arises because:

Managers become committed to completion—through strategic conviction, competition or empire building—and allow negotiation momentum to override price discipline.

Pre-deal strategic analysis is too shallow.

Due diligence leaves material uncertainty unresolved.

Integration cost, difficulty and delay are underestimated.

The underlying acquisition logic can be stated plainly. If A buys B for a strategic reason:

Combining A and B should create cost savings, revenue gains or capital efficiencies.

Those synergies should make AB worth more than A and B separately.

B’s shareholders will normally demand a premium over the pre-bid standalone value to surrender control.

A’s shareholders gain only when synergy value exceeds that premium and all additional deal costs.

The core analytical challenge is therefore to estimate realisable net synergy without deal enthusiasm contaminating the assumptions.

How to use it

Complete six connected tasks:

1. Confirm the strategic rationale.
2. Select the right target.
3. Assess the risks.
4. Value both standalone entities.
5. Value net synergies.
6. Confirm that value remains after premium and risk.

Each task should have an evidence owner and a documented walk-away condition.

Confirm the strategic rationale

An unexpected target can tempt the team to begin diligence before establishing why ownership is strategically useful.

Resist that sequence. Deals consume scarce leadership and specialist capacity, so a company cannot pursue half a dozen seriously at once.

Define the rationale first, then compare the opportunity with other targets and non-acquisition routes.

Address three questions:

1. Which strategic objective must be achieved?
2. Is acquisition the best route?
3. Which strengths can the acquirer transfer without weakening the existing business?

Common objectives include:

• Entering new markets or products.
• Obtaining skills or technologies.
• Creating scale or scope economies.
• Diversifying risk.
• Reducing competition, subject to competition law.

State whether the motive is offensive, defensive or mixed and how the deal changes the competitive position.

Compare four routes—organic development, acquisition, merger and alliance—on speed, investment, control and integration. Ownership is justified only if its benefits exceed the alternatives.

The strategic rationale for acquisition

Inventory transferable strengths and constraining weaknesses before estimating synergy. Candidates may include R&D, operating efficiency, marketing, distribution and financial control.

Nestlé’s application of marketing and distribution strength to Rowntree’s product range is a classic example. Kraft offered a similar, more controversial rationale for acquiring Cadbury in 2010.

Select the right target

Use four steps:

1. Define strategic-fit criteria.
2. Separate mandatory criteria from preferences.
3. Screen every candidate consistently.
4. Rank those that pass.

Do not collapse these stages.

Divide fit into hard and soft criteria so culture and behaviour are not ignored.

Hard criteria include size, product–market scope, technology, competitive capability and financial standing.

Tie every criterion to the rationale. A skills acquisition requires strength in the desired capability; a complementary combination may favour weakness where the acquirer is strong; scale economics require a defensible position in important segments.

Soft criteria include customer and employee orientation and attitudes towards innovation or cost control.

Greater cultural distance normally increases integration difficulty. Where business philosophies differ, reduce expected synergy and increase cost, time and retention assumptions rather than merely noting the gap.

Treat essential conditions as screening criteria and eliminate any target that fails one. Use desirable attributes only to rank the survivors.

This two-stage design prevents a high aggregate score from hiding failure on a non-negotiable condition. A candidate that passes every screen and ranks reasonably is safer than one that excels overall but fails a critical requirement.

Screening acquisition candidates for fit

Weighting should reflect deal form. Shared philosophy may be helpful in an outright acquisition but essential in an alliance that requires continuing joint control.

Apply the same evidence standard to the entire candidate universe. Remove failures without allowing familiarity or deal excitement to create exceptions.

The example ranks four passing candidates—A, B, C and D—against weighted criteria.

Ranking acquisition candidates for fit and availability: an example

First assign relative weights; the illustration gives cultural fit substantial importance.

Then score each candidate, with B emerging as the strongest fit.

Compare that result with availability. Here the choice lies between preferred candidate B and more available candidate D, supporting initial conversations with both.

Apply the same process to an unsolicited approach; availability does not make candidate C strategically suitable.