M&A Strategy sounds exciting to boost performance or spark some serious growth. Companies pour trillions into acquisitions every year, making M&A a significant part of modern corporate strategy. But here’s a tough stat: studies show 70% to 90% of these deals just don’t work out.
Why such a high failure rate? It often boils down to getting the M&A strategy wrong from the start. Many business leaders don’t quite grasp the real reason they’re buying a specific target company. They mix up deals meant to slightly improve today’s operations with deals that could totally change their company’s future.
This confusion leads to paying the wrong purchase price and messing up the integration plan. Getting your M&A strategy right means knowing exactly *why* you’re buying and *what* you’re truly buying, which is fundamental for making sound investment decisions.
Table of Contents:
- The Big Misunderstanding: Why Are You Really Buying?
- Understanding What You’re Acquiring: It’s About Business Models
- Two Types of Acquisitions: LBM vs. RBM
- Leverage My Business Model (LBM): Improving Today’s Game
- Reinvent My Business Model (RBM): Building Tomorrow’s Growth
- Understanding Other Strategic Merger Types
- Getting the Price Right: LBM vs. RBM
- Integrating Your Acquisition: Handle With Care
- Learning from Integration Mistakes
- Conclusion
The Big Misunderstanding: Why Are You Really Buying?
There are basically two main reasons to acquire another company as part of a growth strategy. People often confuse them, leading to disappointing results, especially when acquisitions don’t deliver expected value. Understanding this difference is the first step to a smarter approach for acquiring companies.
The most common reason is to improve your current business performance. Maybe you want to hold onto a top spot in the market, increase market share, or find ways for cutting costs. These deals, focused on operational efficiency, rarely change your company’s long-term path dramatically.
The second, less common reason is to fundamentally reinvent your business. This strategy involves acquiring a company to shift your direction and find new avenues for growth beyond organic growth possibilities. These strategic mergers have the potential for huge payoffs, but figuring out the right potential targets, price, and integration is tricky and requires careful decision making.
Understanding What You’re Acquiring: It’s About Business Models
Success or failure often hinges on how you bring the acquired company into yours. To get integration right, you need to know precisely what you’re buying. Thinking about the target company’s business model helps clear things up before deal making commences.
A business model generally has four key parts that work together. First is the customer value proposition – what you offer customers to solve their problem better or cheaper than others, aiming for a strong competitive advantage. Second is the profit formula, covering how you generate increased revenue and manage costs, including supply chains.
Third are the resources – things like people, technology, intellectual property, products, and cash; these are the acquired assets. Fourth are the processes – the way business activities get done, like manufacturing, sales, or R&D, defining operational capabilities. Resources can sometimes be pulled out and used in your existing business.
But things like profit formulas and processes are deeply tied to how a company works. You can’t just plug and play them easily into the acquiring firm. You can, however, buy another company’s entire business model and run it separately as a platform for new growth, sometimes as a separate company within your portfolio companies.
Two Types of Acquisitions: LBM vs. RBM
Let’s call pulling resources into your current setup a “Leverage My Business Model” (LBM) acquisition. You’re using their parts to make your machine run better. This is the most frequent type of acquisition M&A activity seen.
Buying a whole business model to chart a new course is a “Reinvent My Business Model” (RBM) acquisition. This approach holds far more potential for significant, long-term growth and transforming the company size and scope. Many executives get tripped up here, especially in rapidly changing markets like Silicon Valley.
They might overpay for resources (LBM) hoping for transformation it can’t deliver. Or they might pass on a game-changing RBM deal thinking it’s too expensive based on traditional metrics. Or worse, they buy a great RBM target and destroy its value by forcing it into their old structure, failing to leverage synergies correctly.
Leverage My Business Model (LBM): Improving Today’s Game
Managers need to deliver the results investors expect right now. LBM acquisitions are often used to help hit those short-term targets and increase market position. The goal is usually simple: charge higher prices or achieve lower operating costs.
These acquisitions often take familiar forms. A market extension merger, for example, involves buying a company that does the same thing as you but in a different geographic area, expanding your market reach. A product extension merger allows you to add complementary products to your existing lineup, offering customers a broader range.
Horizontal mergers, acquiring a direct competitor, are also typically LBM plays aimed at consolidation opportunities, increasing market share, and sometimes, to eliminate competition.
Using LBM Deals to Command Higher Prices
How can buying resources help you charge more? It works best when your product or service is still evolving, and customers will pay for improvements. Think about acquiring better components, technology, or intellectual property that plugs into your existing products.
Buying the tech and the talent (key team members) behind it can be faster than building it yourself through organic growth. Apple buying P.A. Semi back in 2008 is a good example. Better chip design, specific to their products, helped them improve things like battery life, justifying premium prices.
Cisco has also used this playbook often, engaging frequently in acquisitions M&A. They buy smaller tech firms to integrate new technologies and engineering talent into their product development. This helps them stay ahead in performance and maintain a competitive advantage.
Using LBM Deals to Lower Costs
Acquisition announcements nearly always promise cost savings. But realistically, buying resources only lowers costs significantly in specific situations. This usually happens when the acquiring company has high fixed costs and can leverage synergies effectively.
Think about industries where consolidating makes sense, often called “roll-ups.” The buyer plugs resources from the target firm into their existing setup, improving operational efficiency. They get rid of duplicate functions and overhead, cutting costs.
Imagine a local heating oil company buying a direct competitor serving the same streets; this is a classic horizontal merger scenario. They are essentially buying the competitor’s customer base. They can serve these new customers with their existing trucks and routes, ditching the acquired company’s trucks and reducing fixed costs through optimized logistics.
But, if that same oil company bought a similar business in a completely different city (a market extension), the cost savings wouldn’t be nearly as dramatic. They’d still need separate trucks and operations in the new location. Scale only helps lower costs when resources are truly compatible and integrated into existing operations, potentially streamlining supply chains.
Look at Anadarko’s purchase of Kerr-McGee in 2006. Kerr-McGee’s oil fields were right next to Anadarko’s. This closeness allowed them to use the same infrastructure, creating real operational savings. Geography mattered for achieving these cost savings.
When Does Scale Actually Cut Costs?
You need to figure out if adding the target’s resources really fits with your operations. Will increased size actually lead to lower costs per unit? This depends heavily on your industry’s cost structure and requires thorough diligence work.
If fixed costs are a big chunk of your total costs (like manufacturing or distribution), getting bigger through acquisitions, particularly horizontal mergers, can lead to substantial savings. But in industries where you can be cost-competitive at a smaller size, growing bigger just duplicates your cost structure without proportional benefit. Business leaders must carefully evaluate these consolidation opportunities.
Trying to justify an LBM deal based only on saving administrative costs (like HR or legal) often leads to disappointment because acquisitions don’t always yield these savings easily. The impact just isn’t big enough. The failed New York Times acquisition of the Boston Globe shows this; operating synergies were minimal, highlighting a poor strategy market fit.
LBM Deals and Your Stock Price
The market usually figures out the impact of an LBM acquisition within about a year. Investors generally know the potential of both businesses involved. They can see if the expected savings or improvements actually happened by looking at the financial performance post-merger.
Often, investors are less hopeful than CEOs about these deals, sometimes viewing the purchase price as too high. History suggests they’re often right. The best you might see is a one-time bump in share price to a slightly higher level if the integration plan succeeds.
Don’t expect LBM deals to suddenly create massive, unexpected growth. They are primarily about optimizing the business you already have. Be realistic about the potential boost and stay focused on the core objective.
A Warning About Cross-Selling
Some LBM deals aim to acquire customers to sell them *more* of your existing stuff (cross-selling opportunities). Be very careful here. This only really works if customers naturally buy those different things together or if the acquired company provides access to a desirable customer base.
Think about a convenience store and gas station combo. People often need gas and snacks at the same time during a trip. That works because the product offerings are complementary for the situation.
But attempts to build “financial supermarkets” have consistently struggled. People need mortgages, credit cards, and insurance at different times for different reasons. Trying to sell everything under one roof rarely creates real value or cuts sales costs significantly for the acquiring firm.
Reinvent My Business Model (RBM): Building Tomorrow’s Growth
Great managers and business leaders don’t just run today’s business well; they also prepare for the future. Existing business models eventually fade as markets become saturated or technology disrupts industries. Competition and technology wear down profits, making a proactive M&A strategy involving reinvention critical.
Investors reward this kind of forward thinking. Stock prices reflect expectations about future performance, not just current earnings. Just meeting current expectations won’t dramatically increase shareholder value over time; you need a robust growth strategy.
To really outperform, you need to do things the market hasn’t already priced in. You need to find sources of unexpected growth. This is where RBM comes into play in your M&A strategy, identifying targets that offer new business activities or access to emerging markets.
The Power of Disruption
Where does unexpected growth often come from? Disruptive products and business models. Disruptive companies usually start simple and affordable, grabbing a foothold at the low end of a market, often overlooked by established players.
They then steadily improve, moving upmarket tier by tier, sometimes leveraging technologies like artificial intelligence or new platforms like social media. Investment analysts often underestimate how far these disruptors can go. They focus on the current market niche, not the potential to take over larger segments or redefine industry insights.
This persistent underestimation by the market means disruptive companies can deliver surprising growth for years. This surprise factor drives share prices up faster than market averages. Acquiring a disruptive business can bring this dynamic into your own company, fundamentally altering your competitive advantage.
RBM Acquisitions in Action
Consider EMC’s purchase of VMware. VMware’s software allowed companies to run multiple virtual servers on one machine. This disrupted traditional server hardware vendors but was complementary to EMC’s storage business, offering significant leverage synergies.
EMC bought VMware for $635 million when its revenue was just $218 million. Boosted by its disruptive model, VMware’s revenue exploded. EMC’s investment grew dramatically, showcasing the power of a well-chosen RBM deal, as documented by experts like Dale Stafford and Suzanne Kumar in various white papers.
Johnson & Johnson’s Medical Devices unit also used RBM acquisitions to ignite growth. Several acquisitions of small, disruptive businesses transformed the division’s growth from average to exceptional. These deals changed the company’s trajectory and improved its overall corporate strategy.
Amazon’s acquisition of Whole Foods could also be viewed through an RBM lens. While having elements of market extension, it fundamentally aimed to combine Amazon’s logistics, technology, and customer data prowess with Whole Foods’ physical retail footprint and grocery expertise, potentially reinventing parts of both companies’ models and impacting their supply chains.
Using RBM as a Defense
RBM acquisitions can also be a smart defense against your core business becoming a commodity. Markets often shift profit pools over time. What was once unique and profitable becomes standardized and less lucrative.
If your industry is heading this way, simply trying to optimize your current model with LBM deals won’t fix the fundamental problem. You need to migrate to where the value is moving. Identifying potential targets for an RBM deal becomes crucial for long-term survival.
Think about large pharmaceutical companies today. Many face pipeline challenges and outdated sales models. Buying more of the same from competitors (LBM) hasn’t reversed share price declines for companies like Pfizer, showing the limits of purely horizontal mergers in a shifting landscape.
A potentially better M&A strategy might involve moving towards emerging value points. This could include acquiring companies managing clinical trials, developing advanced artificial intelligence for drug discovery, or innovative, disruptive drugmakers. It requires reinventing the model, not just tweaking it through LBM tactics.
Understanding Other Strategic Merger Types
Beyond the LBM/RBM framework, it’s helpful to understand traditional merger classifications and how they relate. These categories often describe *who* is merging, which can inform *why* they are merging (LBM vs. RBM). Key types include horizontal mergers, vertical mergers, market extension mergers, product extension mergers, and conglomerate mergers.
Horizontal mergers, as mentioned, involve companies in the same industry offering similar products or services. These are almost always LBM plays focused on increasing market share, achieving economies of scale, and cutting costs by eliminating redundancies. Careful diligence work is needed to verify projected cost savings.
Vertical mergers involve companies at different stages of the same supply chain. For example, a manufacturer buying a supplier (backward integration) or a distributor (forward integration). A vertical merger could be LBM (securing supply chains, lowering input costs) or potentially RBM if it enables a fundamentally new, integrated business model offering greater customer value.
Market extension and product extension mergers, discussed earlier, are typically LBM strategies. They leverage the acquiring company’s existing model to sell more of the same (in new markets) or related products (to the existing customer base). The goal is often increased revenue through expanded reach or cross-selling opportunities.
Conglomerate mergers involve companies in completely unrelated industries. Historically, these were sometimes pursued for diversification, but they often lack clear strategic logic or synergies. While seemingly fitting an RBM profile by entering new territory, successful conglomerate mergers are rare, as managing disparate business activities effectively is challenging, and true value creation is often elusive.
Getting the Price Right: LBM vs. RBM
It’s strange but true: companies often overpay for LBM deals and underpay for RBM ones. Warnings about overpaying are common in M&A discussions, usually related to LBM deals where the target firm’s value is more easily quantifiable based on existing operations.
Executives get excited about potential cost savings or market share gains and pay more than those benefits can realistically justify. For an LBM deal, value should be based on the calculated impact on your current profits, considering potential synergies and integration costs. Pay less than that calculated value, and your stock might get a small bump, assuming good M&A execution.
RBM deals are different. Analysts trying to value disruptive companies often use traditional comparisons from the *target’s* current, limited market. This makes the disruptor look wildly overpriced based on current revenue or profit multiples, especially compared to established players.
This faulty comparison scares buyers away from potentially transformative RBM acquisitions. The right way to value a disruptive RBM target involves assessing its potential to reshape markets and comparing it to *other disruptive companies* and their growth trajectories, regardless of industry. Their potential is often much greater than near-term financials suggest, requiring sophisticated investment decisions.
Studies show that disruptive companies, even with high initial price-to-earnings ratios, often deliver spectacular long-term returns to investors. They are frequently undervalued because the market doesn’t fully grasp their trajectory or the power of their unique business model. The “right” purchase price depends entirely on the buyer’s M&A strategy and whether it’s an LBM or RBM play.
Before finalizing any purchase price, comprehensive due diligence work is essential. This involves scrutinizing the target company’s financials, operations, legal standing, customer base, intellectual property, and potential liabilities. Proper diligence helps validate the strategic rationale and ensures the acquiring firm isn’t overpaying or inheriting unexpected problems.
Integrating Your Acquisition: Handle With Care
How you integrate an acquisition should depend entirely on *why* you bought it. Did you pursue an LBM or RBM M&A strategy? A well-defined integration plan, developed before the deal closes, is critical for mergers succeed.
If you bought a company for its resources to boost your current model (LBM), you typically need to break down the acquired company’s structure. Fold its useful resources—technology, people (team members), customer lists—into your existing operations. Get rid of the rest (redundant functions, excess overhead) to achieve those expected efficiencies and cost savings.
This is what Cisco usually does with its tech acquisitions. Integrate the pieces you need; discard the redundant shell. The goal is efficiency and enhancement of the core operational capabilities.
But if you bought a company for its entire business model (RBM), the approach must be different. You bought it because its model works and has growth potential, often precisely *because* it’s different from yours. Trying to force-fit it into your operations, imposing your existing processes or culture, will likely destroy the very value you sought.
Keep the RBM acquisition’s business model intact. Operate it separately, perhaps as one of your portfolio companies. Let it run, providing resources and oversight but preserving its unique identity and operational structure. Best Buy did this with Geek Squad, running its distinct service model alongside its retail operations. EMC kept VMware largely separate, allowing it to thrive.
Developing the integration plan involves identifying key objectives, assigning responsibilities to specific team members from both companies, setting timelines, and establishing metrics for success. Communication is vital throughout this process to manage expectations and maintain morale. It’s key to get this right, as poor integration is a primary reason why acquisitions don’t work out.
Below is a table summarizing the key differences:
| Feature | LBM Acquisition (Leverage My Business Model) | RBM Acquisition (Reinvent My Business Model) |
|---|---|---|
| Primary Goal | Improve current performance (e.g., cut costs, increase market share, add product/market extension). | Create new avenues for growth; find future profit pools; gain competitive advantage via disruption. |
| What is Acquired | Specific resources (technology, customers, facilities, intellectual property, key team members). | Entire business model (value proposition, profit formula, resources, processes). |
| Valuation Focus | Based on projected impact on current operations (cost savings, revenue uplift); compare to similar operational assets. | Based on future growth potential and disruptive capability; compare to other disruptive companies. |
| Integration Approach | Absorb resources into existing structure; eliminate redundancies; requires detailed integration plan focused on synergy capture. | Keep acquired business model largely intact; operate separately or with high autonomy; protect unique processes and culture. |
| Typical Merger Types | Horizontal Merger, Market Extension Merger, Product Extension Merger, some Vertical Mergers. | Acquisition of disruptive innovator, potentially Conglomerate Merger (if diversifying strategically), some Vertical Mergers (if creating new model). |
| Risk Profile | Lower strategic risk, higher risk of overpaying or failing to achieve synergies. | Higher strategic risk (entering new territory), potential for high rewards, risk of stifling innovation via poor integration. |
Learning from Integration Mistakes
Some of the biggest M&A failures happened because companies integrated incorrectly. They didn’t understand if they’d bought resources (LBM) or a whole model (RBM), leading to flawed deal making from the start. Daimler’s purchase of Chrysler is a classic, painful example highlighted in many M&A white papers.
It looked like one car company buying another – seemingly an LBM deal aiming for scale and cost savings. But Chrysler’s real value wasn’t just its factories or brands; it was its faster, leaner design processes and distinct profit formula – its unique business model that had recently fueled its success.
Daimler focused on cost “synergies,” aiming to strip out billions by merging operations. In doing so, they destroyed Chrysler’s distinct processes – the engine of its value. Keeping Chrysler separate, respecting its operational capabilities as an RBM acquisition, likely would have been a much better M&A strategy.
Conclusion
Acquisitions can be powerful tools for growth, cost reduction, or transformation in a company’s journey. But buying another company isn’t magic; good M&A requires careful planning. Success hinges on having a clear M&A strategy before you even start to identify targets. Do you need resources to optimize your current operations (LBM), perhaps via a market extension or product extension? Or do you need a new business model for future growth (RBM)?
Confusing these two paths leads companies to buy the wrong potential targets, pay the wrong purchase price, and integrate them incorrectly using a flawed integration plan. This explains why so many deals fail to deliver value and why acquisitions don’t always lead to success. Understanding the difference between leveraging your existing model and reinventing it is fundamental for effective corporate strategy.
By carefully matching the type of acquisition (LBM vs. RBM) to your strategic goals, performing thorough diligence work, setting the right value, and choosing the correct integration path supported by dedicated team members, you can dramatically improve your odds. A thoughtful M&A strategy helps make sure your deals build value and competitive advantage, rather than destroy it, ultimately contributing positively to your company’s future.
