10 Reasons to Pursue M&A(with Examples)

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Whenever a large transaction is announced, leadership is usually open about their motives behind the transaction.

The top ten most common M&A motives are discussed below.

10 Reasons for Companies to Acquire or Be Acquired

• Acquire New Technology/Expertise
• Scale in a New Economy
• Increase Market Share
• Achieve?Synergies (“Value Creation”)
• Diversify Geographically
• Vertical Integration
• Cross-Selling
• Optimize Taxation
• Increase Revenue
• Opportunistic Reasons

Motive 1: Acquire New Technology/Expertise

Industries change and if companies don’t adapt, they don’t survive. In order to keep up with the ever-changing markets, companies are often on the lookout?for other companies that will give them new technologies and expertise.

For example, in the next decade, as the energy transition continues, we can expect many of the oil and gas majors to begin investing in renewable energy firms.

Examples:

Over the course of the last decade, Google has acquired over 30 artificial intelligence (AI) startups, acquiring a range of capabilities in a technology that is set to be hugely influential in the years ahead. For more on the topic of acquisition examples, check out the?11 Powerful Acquisition Examples (And What We Learned from Them).

Motive 2: Economies of Scale

Bigger is often better.

That’s the thinking behind acquiring economies of scale. Larger companies enjoy cost savings and competitive advantages that are often not possible for smaller companies.

Examples:

For example, British Airways has merged with a few different firms over the years to create IAG (International Airlines Group), essentially a conglomerate of airlines which has more control over the skies than almost anybody else.

Motive 3: Market Share

Market share may be the most common motive for transactions; companies are constantly looking at where they stand in their industries relative to their peers so market share acquisitions are never far from CEOs' thoughts.

Of course, one issue here is that too much market share attracts the ire of antitrust organizations.

Examples:

Virtually every big retail bank obtained their growth through acquiring smaller regional retail banks.

Motive 4: Synergies (“Value Creation”)

Synergies are often exaggerated.

But sometimes, the logic, if not the numbers, makes absolute sense. In 2017, when Amazon acquired Whole Foods, it was a clear attempt for Amazon to bring the power of its eCommerce machine to traditional food retail.

Clearly, the markets thought it was going to be a success: within hours of the deal, most other food retailers in the US were down by a few percentage points on the news.

Motive 5: Geographical Diversification

Geographical diversification has been a huge value-driver in M&A over the years and this stands to reason:

Why build a company from scratch in a foreign country when you can acquire a cash generating entity that already exists and use it as a platform for your own company’s growth in that country?

Examples:

One example is the merger between Habyt, the biggest European co-living company, and Hmlet, the biggest Asia Pacific player in?communal living.?After the merger, Habyt became the largest co-living player worldwide.

Arguably the most successful example of acquiring for geographical diversification is the Spanish bank Santander.

Santander has acquired banking chains in nine countries outside of Spain to become one of the world’s largest retail banking institutions.

Motive 6: Vertical Integration

Vertical integration involves a company acquiring different parts of the value chain. Typically, this begins with a company that has grown to a certain size buying its own distribution so that it doesn’t need to hire third party distribution.

Examples:

We’ve touched on vertical integrations in a previous article (see?here). LiveNation’s acquisition of Ticketmaster in 2010, where it acquired Ticketmaster’s retail distribution, is a good example of vertical integration.

Motive 7: Cross-selling

Cross selling can be a powerful way to deliver revenue synergies: the concept that two companies have more to offer their customers by being together.

Examples:

One recent example of a cross-selling deal is provided by Starbucks’ acquisition of Teavana for?$750 million?in 2017.

What could be more synergistic for revenues than selling tea and coffee together? Now, you can get tea at Starbucks and coffee at Teavana.

Motive 8: Taxation

Perhaps unsurprisingly, tax is one area where companies are loath to admit that they’ve undertaken M&A to avoid taxes (note: avoid, not evade).

It doesn’t play well with consumers knowing that a company is openly avoiding taxes but this is one of the most common motives for M&A. An example would be a cash flow positive company acquiring a firm with carry forward tax losses to reduce its own tax burden.

Motive 9: The Financial Motive

What about when a company is being bought essentially for its stream of cash flows?

This is usually the case when a private equity firm is involved in an acquisition.

Motive 10: Opportunism

Companies aren’t always looking for an acquisition when one lands on their doorstep.

JP Morgan’s 2008 ‘fire sale’ deal for BearStearns, which it acquired at a supposedly knockdown price, is an example of a deal that found a company rather than the other way around.

Conclusion

More often than not, when a transaction goes through, those publicizing it will mention at least one of the motives we’ve included here, if not two or three.