It’s once again a good time to be a dealmaker. The value of U.S. mergers even just so far in Q1 2024 is $277 billion, a rise of 55% from all of Q1 2023. Several factors are in play, such as the cost of debt no longer increasing, improved business confidence, and stable economic projections. But, beneath the surface numbers, there’s a change lurking which has big implications, even for firms that wouldn’t think of doing a merger now.
It used to be that mergers were motivated by reasonably prosaic rationales. Those included attaining economies of scale, improving pricing power, reducing duplicative costs, and gaining tax advantages. Of course those justifications still apply, but many of the obvious deals to attain them have already been done. Further consolidation of industries can generate regulatory scrutiny, or it may be resisted by customers who want to maintain a diverse supplier base.
A look at the headlines suggests that the logic of recent deals is distinct. Take just these mergers from February of 2024:
- Capital One is buying Discover. This is not about a credit card issuer creating cost savings by serving cardholders more efficiently. Rather, Capital One wants to have Discover’s business of servicing card-accepting merchants, enabling it to compete directly with Visa, Mastercard, and American Express. It is buying across industry boundaries to change the nature of its strategic advantages, and even the nature of what the company is.
- Walmart is buying TV-maker Vizio. This isn’t about sourcing cheaper TVs to sell in its stores. Rather, Walmart wishes to marry its deep information about customer buying habits with Vizio’s ability to serve highly-targeted ads to consumers watching Smart TVs. Its real competition here is Amazon, which sells $47 billion in ads annually to companies wanting to hyper-target consumers. The company now has a business unit, Walmart Connect, built to sell advertising. Like Capital One, it’s using core assets to grow in totally new ways.
- Disney, Fox, and Warner Brothers Discovery are forming a business to stream sports programming to US consumers, bypassing cable operators. While these firms compete head-to-head in several businesses, they have banded together to bypass their traditional customers – cable companies – and change the economics of the sports business.
- It’s been an active month for Disney. Also in February, the Mousehouse announced that it will take a $1.5 billion stake in Fortnite-maker Epic Games. The company is seeking new forms of intellectual property, new ways to reach consumers, and new business models.
What’s going on here? Companies seem to be increasingly convinced that blurring industry boundaries will be a major route to growth. That’s requiring new capabilities and business models, and sometimes those are best attained via acquisition rather than slower organic builds.
Why now? We’re seeing a confluence of trends that make these cross-industry deals more attractive:
- Industry economics are shifting rapidly, and companies need to build new sources of growth. In the cable business, for instance, subscribers are now cutting the cord at a rapid rate, relying solely on streaming services. That’s incompatible with the high fixed costs that broadcasters incur through bidding for sports rights. Rather than tie their fate to the sinking economics of cable operators, some of the biggest broadcasters have decided to start cutting them out.
- Asymmetric competitors are inducing asymmetric responses. If Amazon hadn’t created such a large business serving ads, perhaps Walmart wouldn’t have been so motivated to enter that industry. But Amazon showed the potential, and Walmart decided to put Amazon on the back foot through its own move.
- The need for resiliency is becoming more clear. The crises of the past few years – Covid, tangled supply chains, concerns about recession, and many more – have convinced many firms that they need diverse ways to make money. Critically, this is not about old-school diversification into largely unrelated businesses built on vague hopes of cross-selling customers, but rather about tapping adjacent opportunities that have a deeper business logic.
- And, don’t discount the economic environment. A bit of stability helps companies to pay more attention to longer-term needs.
Of course this is risky. The acquirers may not truly understand the companies that they’re buying. They may try to force-fit the new business units into their alien ways of operating. And making moves in anticipation of where an industry will be in a few years’ time necessarily exposes the company to unexpected events. Careful diligence is required, not just of the traditional kind but also real strategic thoughtfulness. And occasionally those considerations can get shoved aside in the heat of a deal.
But this doesn’t seem to be a fleeting fad, like a new SPAC. Its causes are much deeper-rooted. So here’s what to look for as cross-industry deals grow in number:
- What are the business opportunities adjacent to you? What are different ways your customers are getting the same job done? What are other businesses that could profit from your unique capabilities (and, in the AI Age, data)?
- Is a traditional customer or supplier type suffering economically? Is there a way to either alleviate their pain, or to sidestep them entirely?
- How are new entrants to your industry playing the game differently? Often, they have to compete asymmetrically in order to survive. What could you borrow from their playbook?
- What if an entrant like a Big Tech firm entered your industry – how would they compete? Could you do the same, to have a totally different business approach than the one traditionally used?
- Are you a logical target for a company seeking cross-industry scope? What makes you particularly attractive? How can you either play up those assets – if you’d like to be acquired – or use them to go on the offensive yourself?
It’s an exciting time to be in business. We’ve in an age of discontinuity and disruption. When so many variables are changing all at once, imaginative thinking wins.
