In our ever-changing business environment, companies are continually seeking ways to maintain or enhance their competitive edge. Historically, Research and Development (R&D) was a key line item for innovative companies to remain ahead of their competition.  Another strategy that has become increasingly prevalent is M&A, to the extent that it now often has its own space in multinational firms’ annual budgets.

Why so?  M&A offers numerous benefits for companies striving to remain competitive in their respective industries. We will explore today the various advantages that M&A activity can provide to companies in their efforts to gain and/or sustain competitiveness in today’s global markets.

Enhanced Market Position

One of the primary benefits of M&A activity for companies is the opportunity to strengthen their market position. By acquiring or merging with other businesses, companies can expand their product offerings, customer base, and geographic reach. This expanded market presence enables companies to leverage economies of scale, increase market share, and enhance their bargaining power with suppliers and distributors.

We can look at Disney’s for great examples of enhanced market position through acquisitions. For instance, in 2006, The Walt Disney Company acquired Pixar for $7.4 billion in an all-stock deal. Three years later, in 2009, the company acquired Marvel Entertainment for $4.0 billion.  In 2012, the acquisition of Lucasfilm for $4.0 billion added valuable content -Star Wars, Indiana Jones- to Disney’s catalog in a niche segment not yet covered. Finally, in 2019, The Walt Disney Company completed its acquisition of 21st Century Fox’s entertainment assets for $71.3 billion (just to mention the largest acquisitions in content production).

These acquisitions have allowed Disney to significantly expand its content offerings, including gaining control over popular franchises. As a result, Disney strengthened its market position as a leading entertainment conglomerate, with a broader portfolio of intellectual property and increased bargaining power with streaming platforms and distributors. These acquisitions have also allowed for its incursion and rapid growth in the streaming platform sector with Disney+, a platform that is able to offer proprietary content for all age groups.

As another example, in 2017, Amazon acquired Whole Foods Market for $13.7 billion, marking its entry into the brick-and-mortar grocery retail sector. The acquisition provided Amazon with a physical retail presence and access to Whole Foods’ established customer base. Through Whole Foods Market retail locations, Amazon has not only gained significant physical presence to leverage and optimize its last logistical expertise, but it also gained expertise and reach in a new area retail with a strong, upscale customer base with tons of opportunities to cross-leverage both business models for improved customer’s experiences.

Access to New Technologies and Capabilities

In today’s fast-paced landscape, staying ahead of the curve is crucial for companies. M&A activity provides companies with the opportunity to gain access to new technologies, intellectual property, and capabilities faster than trying to develop them internally.  By acquiring companies with innovative technologies or expertise in emerging fields, companies can also accelerate their own R&D efforts, shorten time-to-market for new products or services, and better differentiate themselves from competitors.

In 2014, for example, Google acquired DeepMind Technologies, a UK-based artificial intelligence (AI) company, for a reported $500 million. DeepMind’s expertise in AI and machine learning has since bolstered Google’s capabilities in various areas, including improving search algorithms, enhancing user experience across its platforms, and advancing autonomous systems such as self-driving cars through Google’s subsidiary Waymo.

Additionally, by acquiring an innovative company with a technology that may threaten its existing position in the market, companies can not only achieve faster results in this new space but can also sometimes buy some time to perfect their products or solutions before competition arises in the space.

However, integrating new technologies and capabilities acquired through M&A into existing systems and processes may pose critical challenges, leading to delays or disruptions in realizing the expected benefits. There are countless examples of those challenges expressed in public companies reports, usually in association with substantial write-offs. for example, in 2015, AT&T acquired DirecTV for approximately $49 billion to expand its footprint in the television market. In 2021, AT&T announced that it would spin off DirecTV into a separate entity and merge it with Dish Network, effectively abandoning its initial acquisition strategy. AT&T wrote off a substantial portion of the value of its DirecTV acquisition, citing challenges in the traditional Pay TV industry, changing consumer preferences, and increased competition from streaming services.

Operational Synergies and Cost Efficiencies

Another significant benefit of M&A activity is the potential for operational synergies and cost efficiencies. By combining operations, streamlining processes, and eliminating redundancies, companies can achieve cost savings and improve operational efficiency. This may involve consolidating facilities, optimizing supply chains, or integrating back-office functions. These efficiencies not only contribute to improved profitability but also enable companies to offer competitive pricing to customers while maintaining or improving product quality.

The auto industry has countless examples of this, as do many other industries that have gone through consolidation throughout the years.  Most recently, in 2021, FCA and PSA Group completed their merger to form Stellantis, one of the world’s largest automotive manufacturers. The merger aimed to achieve operational synergies and cost efficiencies through platform sharing, joint procurement, and streamlining of administrative functions. By consolidating operations, optimizing production facilities, and reducing overlapping costs, Stellantis expects to realize billions in annual cost savings, enhancing its competitiveness in the global automotive market.

Although a very important part of M&A, unfortunately, synergies are oftentimes overestimated when evaluating an acquisition or merger and usually tend to be used as excuses to internally justify paying a premium.  Overestimation of potential synergies or underestimation of integration complexities may result in cost overruns or operational disruptions, undermining the anticipated financial benefits.

Similarly, cultural differences between two organizations merging into one is another aspect to take into account. Merging organizational cultures and management styles can lead to conflicts and resistance among employees, hindering efforts to achieve operational synergies and cost efficiencies.

Diversification and Risk Mitigation

M&A also allows companies to diversify their business portfolios and mitigate risks associated with dependence on a single product or market. Through strategic acquisitions, companies can enter new markets, expand into adjacent industries, or diversify their revenue streams. This diversification reduces exposure to market fluctuations, regulatory changes, or other external factors that may impact a company’s core business. Additionally, by diversifying their business portfolios, companies can enhance their resilience and adaptability in the face of evolving market conditions.

The Amazon-Whole Foods Market example above is also a great example of diversification through M&A. By diversifying its business into the grocery industry, Amazon mitigated risks associated with its reliance on e-commerce and expanded its reach into a new market segment, strengthening its overall business resilience.

Of course, there are, here too, risks associated with acquiring other companies for this purpose. Strategic misalignment is clearly one risk that comes to mind. Diversifying into unrelated industries or markets may open new growth opportunities but it will also dilute management focus and resources, potentially leading to suboptimal performance or missed opportunities in core business areas.  Similarly, managing a diversified portfolio of businesses with different operating models and market dynamics can be challenging, potentially limiting synergies and coordination across the organization.

Talent Acquisition and Retention

In addition to tangible assets and capabilities, M&A activity is also a great way to facilitate talent acquisition and retention. Acquiring companies often bring onboard skilled employees, experienced management teams, and specialized expertise that are valuable assets to the acquiring company. In fact, as described by the neologism acqui-hire, sometimes, the main purpose of an acquisition is to gain access to a company’s talent.

Additionally, M&A activity can provide significant career advancement opportunities for employees of both the acquiring and acquired companies, leading to increased employee satisfaction and retention. As a talented and motivated workforce is essential for driving innovation, executing strategic initiatives, and sustaining long-term competitiveness, these acquisitions can also lead to significant growth in the other areas covered above.

In conclusion, M&A activity offers a myriad of benefits for companies striving to remain competitive in today’s business landscape. From enhancing market position and accessing new technologies to achieving operational synergies and diversifying business portfolios, M&A can be a valuable strategic tool for companies seeking sustained growth and profitability. However, as we’ve said numerous times, it is essential for companies to approach M&A activity with careful consideration, thorough due diligence, and a clear integration strategy to realize the full potential of these benefits and ensure long-term success. By leveraging M&A strategically, companies can position themselves for continued competitiveness and success in an ever-evolving marketplace.

Image Credits: OpenArt, Kevin Schneider, Pixabay.