Build vs. Buy in M&A- a Strategic Guide

Build the capability or buy it through M&A?

Every company considering either option needs to ask itself this question before jumping ahead.

When working with clients aiming to drive business growth, we don't immediately assume that buying a business is the best solution.

Although acquisitions are our expertise, we encourage our clients to consider both building the capability internally and acquiring it through M&A.

Each option has its advantages and disadvantages, along with associated risks.

We regularly encounter situations where picking the right path might mean tens of millions (or more) of $ value differential. Make sure you choose carefully.

Here are the main factors we consider when evaluating the two options:

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1. Strategic alignment: Does the new capability align with your long-term strategic goals?
2. Time to market: How quickly do you need to implement this capability?
3. Cost: What are the financial implications of building vs. buying?
4. Expertise and resources: Do you have the necessary internal expertise and resources to build this capability?
5. Risk: What are the potential risks associated with building or buying?
6. Cultural fit: If buying, will the new entity integrate well with your existing company culture?

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Now let's look at each option one by one.

Option 1: Build the capability internally

Benefits of building

1. Customization: The organization can tailor the capability to meet its specific needs and objectives.
2. Control: Maintain full control over the development process and outcomes.
3. Gradual integration: Integrate the new capability gradually, reducing disruption to existing business lines.

Drawbacks of building

1. Time-consuming: Developing capabilities internally can be a lengthy process.
2. Resource intensive: Requires significant investment in terms of time, money, and human resources, and can take mindshare and resources away from current initiatives.
3. Uncertainty: Potential for unforeseen challenges and delays.

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Option 2: Buy the capability (M&A)

Benefits of buying

1. Speed: Acquiring an existing capability can be faster than building from scratch.
2. Established operations: Leverage an existing business’s operations, market presence, and customer base.
3. Expertise: Gain access to specialized expertise and technology that might be difficult to develop internally.

Drawbacks of buying

1. Integration challenges: Merging different corporate cultures and systems can be complex.
2. Cost: Acquisitions can be expensive, with potential for hidden costs. The acquirer is almost always going to pay an additional acquisition premium for buying an established company.
3. Risk of overpaying: There is a risk of overvaluing the target company, especially if the acquirer is buying the business through an auction process.

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Analytical Framework

This is a loose analytical framework we use to compare the two options side by side.

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Customary caveats and additional notes:

1. No framework is exhaustive, so include other factors that might be relevant to your organization's situation.
2. We employ other secondary levels of frameworks to go deeper into some of the topics above.
3. A framework provides guidance, but applying it to real-world situations—where information is messy, stakeholders have differing opinions, and outcomes are uncertain—can be challenging. Reach out if your organization may need help applying this or driving consensus.

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