Advice From the Trenches: How to Beat the Odds for Successful M&A

I love perusing the EOY reports and predictions that come out at this time of year; Looking back at the M&A market (it took a beating in 2023) and the forecast for 2024 (we could be primed for a big year) was especially interesting this year.?

Kevin Dowd at Carta published a great article in December on this topic, and his arguments are compelling. He predicts that the M&A market should heat back up in 2024 for 3 reasons:

1. There is still a lot of dry powder available, and investors need to deploy the capital or give it back. And we know investors never want to give $$ back.
2. Market uncertainty has reduced significantly over the last 6 months
3. The big strategics are back in the hunt and many tech companies’ stock are up and they can use these gains to fund deals

I would offer a fourth contributing factor. Many of the early stage companies and their investors are coming to terms with much more realistic valuation expectations. We at Maxio have been deeply involved in several M&A processes over the past 18 months as we work toward building out our product’s capabilities with some great tuck-in acquisitions. We have not closed any yet, but we believe there are good deals to be done, and we’re on the lookout for great companies who can augment our capabilities to expand our TAM and SAM.

This brings me to this Secret of Success which goes deep on how to think about M&A as a buyer. While I have never been a banker or a PE investor, I have been around M&A for 20 years—mostly as an employee at a company that was acquired or helping integrate acquired companies. Over the past eight years, I’ve been in the driver’s seat as a CEO who took a public company private, sold another private company to a strategic company, and then led several M&A processes that resulted in two acquisitions and one strategic investment.?

So, while not an expert, I’d like to share some things I’ve learned about M&A over the past 20 years. In this article, I’ll describe why people (primarily CEOs and Boards) do M&A in general, then outline seven specific M&A strategies, including more details for those considering a “financial leverage” strategy. Finally, I share a set of resources for those who might want to learn more about the topic.

Why M&A?

The ultimate goal of M&A is to enhance long-term shareholder value. This involves financial engineering and strategic alignment, where the acquired company contributes to the acquirer's growth trajectory, innovation, and competitive positioning.?

When a company wants to boost corporate performance or jump-start long-term growth, M&A can be extraordinarily seductive. Indeed, companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions between 70% and 90%.?

So what is going on?

Many researchers have tried to explain those abysmal statistics, usually by analyzing the attributes of deals that worked and those that didn’t. According to Clayton Christen and others in their book The Big Idea: The New M&A Playbook , executives can dramatically increase their odds of success if they understand how to select targets, are reasonable in terms of how much to pay for them, and are thoughtful in terms of when/how to integrate the target.

Seven Types of M&A Deals

Various strategic objectives usually drive a company’s M&A. Each offers distinct shareholder value creation and its own inherent risks. The most common strategies include:?

1. Expand the TAM through market expansion

Often, M&A allows you to enter new markets, acquire new customer bases, and expand your product portfolios more quickly than through organic growth. However, entering unfamiliar markets can carry risks related to cultural misalignment and regulatory challenges.

2. Expand the TAM by acquiring interesting technology

Acquiring companies with complementary products can diversify a SaaS company's portfolio, reducing reliance on a single product or market. The primary risk here is the dilution of the acquiring company’s brand identity and core competencies, i.e., losing focus.?

3. Acquire talent (acqui-hire)

Sometimes, you acquire a company because they have highly skilled teams who can provide a competitive edge. The main risks with this approach include integration challenges and the potential loss of talent post-acquisition.

4. Economies of scale and operational efficiency

Mergers can create economies of scale, reducing costs per unit and increasing operational efficiency. These benefits are significant in a SaaS model, where infrastructure and development costs can be spread over a more extensive customer base. The risk lies in potential operational disruptions and the complexity of integrating systems and processes.

5. Take out a competitor

M&A can be used to acquire or merge with competitors, thereby reducing competition and increasing market share. While this can lead to higher pricing power, if you are REALLY big (think MSFT or Google), then there is the potential of attracting regulatory scrutiny and potential antitrust issues?

6. Expand customer base and create cross-selling opportunities

In this case, M&A provides access to new customer segments, allowing cross-selling of products. An example of this was the SaasOptics and Chargify Merger of Equals, executed by Battery Ventures in 2021 . This type of deal can significantly boost revenue but requires a deep understanding of the new customer base to align the product offerings.

7. Financial leverage/synergies

This strategy focuses on creating leverage by combining resources, improving financial stability, and/or accessing larger pools of capital. However, this introduces a risk of over-leveraging and the challenge of managing complex financial structures—especially if you are a big company. See below for more on Financial Leverage as an M&A Strategy.

How to Mitigate the Risk When Pursuing M&A

In my experience, you mitigate M&A risk by doing the following three activities before you commit to buying a target:

1. Thorough due diligence?
2. Detailed integration planning
3. Thoughtful change management

Perform Thorough Due Diligence

The key to a successful due diligence process is defining the information you need at each stage of the process. It is crucial to start with a clear sense of the questions you want to address, then use your meetings with the target company to build your POV on what you like and where you have concerns. Each executive team member needs to take point on their functional area and be able to articulate what would give them the conviction to do the deal. At the end of the day, the leadership team has to understand why a company is doing an acquisition so they can help lead change over the 6-12 months post-acquisition.

Plan the Integration in Detail

Many people put all their energy into getting the deal done, investing time and energy into the diligence process without also planning the integration before the deal is done. In my experience, it’s critical for functional leaders to get clear about what a successful integration looks like at three, six, nine, and 12 months.?

At the highest level, an integration plan makes clear the “what” and “when” for myriad questions such as:?

• Which products do we combine??
• Which systems/processes will we allow to continue, and which will we insist have to be adopted??
• How do we engage customers, and when do we migrate which ones??
• How do we integrate a target’s people? Who do we keep for a transition? Who do we want to keep long-term??

Be Thoughtful About Changing Management

Many thought leaders write that the number 1 M&A deal killer is cultural misalignment. If the teams don’t have a similar worldview or way of doing business, things can be much more difficult. The acquiring company has to be sensitive to the target company’s current culture and how to integrate the people, traditions, and core processes into its DNA. The leaders need to be sensitive to the fact that the acquired company’s people often are not excited about being acquired—they’re worried about their job security and that the company and culture they originally joined is changing.?

This requires doubling down on the reason behind the merger or acquisition, and LOTS of personal outreach and engagement. In the end, you will find that 30% of employees will end up thinking this is a great idea, 60% will sport a “prove it to me” mindset, and the last 10% will hate everything about the deal. It’s important to find the advocates, work with those who need more encouragement, and then move out the 10% of “haters”; otherwise, they act like a cancer in the system.

A Note on Financial Leverage Deals

Financial leverage in M&A, particularly in the context of acquiring a company at a valuation lower than the acquirer's current valuation, is a great way to maximize shareholder value. This approach hinges on the principle of valuation multiple arbitrage, especially tied to EBITDA(S).

• Value Arbitrage: Acquiring companies with lower valuation multiples (e.g., ARR or EBITDA multiples) can be immediately accretive to the acquirer's earnings, assuming the acquired company's multiples are increased to the acquirer's level post-transaction. This gap in valuation offers a direct opportunity for value creation.
• Enhanced Financial Performance: The acquired company, when integrated effectively, can contribute to improved financial performance, including higher EBITDA(S). This can be achieved through synergies, such as cost reductions, increased revenues (cross-selling, market expansion), and operational efficiencies over time.
• Debt Financing: Using debt to finance acquisitions can be beneficial due to tax shields (interest is tax-deductible) and the potentially lower cost of capital compared to equity. When you add additional ARR, you also expand your debt capacity, meaning you can access more debt to help fund the deal.

Financial leverage deals have some key risks. For example, companies often overestimate potential synergies while underestimating integration challenges, cultural misalignments, and market reactions. Over-leveraging by taking on more debt can also lead to financial distress, especially if the acquired company's performance doesn't meet expectations. This is why it is SO important to understand the realities of the target’s customer base, GRR trends, and sales performance during due diligence. The acquiring company’s leadership and board need to be clear-eyed about the post-acquisition financial expectations and ensure they model out downside and upside scenarios.?

Thus, while financial leverage through M&A can be a powerful tool for value creation, it requires careful consideration of the acquisition's strategic fit, operational integration, and risk management. The focus should be on creating real, sustainable value rather than solely relying on financial arbitrage.

As mentioned above, most M&A deals fail (as defined by not being accretive to shareholder value over time). In my experience, this mostly comes down to cultural misalignment and/or deal misalignment (i.e., including an earnout that does not play out).?

What tips and tricks have you learned from your own experience as an operator doing M&A? What is the best advice you have received? What was the worst experience you had and what were the lessons learned?