Why do cross-sector M&A transactions occur?

Cross-sector mergers and acquisitions (M&A) happen for a variety of strategic reasons, and they can provide several benefits to the companies involved. Here are some common reasons why cross-sector M&A deals occur:?

1. Diversification:??

Diversification: Businesses often seek to broaden their revenue sources to reduce their reliance on a single industry or market. They may achieve this by acquiring or integrating with companies from various industries, thereby spreading risk and expanding their customer base. For instance, CEOs frequently use the term "opportunistic" when acquiring companies below their intrinsic value. This illustrates a strategic approach to diversifying the company's holdings, ultimately aiming to minimise risk and expand their portfolio – a fundamental aspect of diversification.?

2. Synergy:??

Cross-sector M&A deals can create synergy by combining the complementary capabilities of two companies. For instance, a technology company may acquire a healthcare company to capitalise on its data analytics expertise for medical research.??

In the past, claims of substantial synergy gains were frequently exaggerated. However, when Amazon acquired Whole Foods in 2017, they intended to leverage their eCommerce expertise in traditional food retail. This strategic move had a noticeable impact, causing a decline in the performance of other U.S. food retailers.?

3. Market Expansion:??

Companies may want to expand their market presence rapidly by entering new geographic regions or sectors. An acquisition can provide immediate access to those markets, saving time and resources over organic expansion.?

Why start a company from the beginning in a foreign country when you can acquire a cash-generating entity and use it as a platform for your own company's expansion in that country??

Examples:?

A merger between Habyt, the largest European co-living company, and Hmlet, the largest Asia-Pacific co-living company, would be an example. Following this merger, Habyt became the largest co-living provider worldwide.?

The Spanish bank Santander, which has acquired banking chains in nine nations outside of Spain to become one of the world's largest retail banking institutions, is arguably the most successful example of this strategy.?

4. Innovation and Technology:??

Businesses frequently acquire firms from unrelated industries to obtain access to new technologies, intellectual property, or research and development capabilities. This can assist them in remaining competitive and innovative within their industry.?

Examples: Google has acquired over 30 artificial intelligence (AI) startups over the past decade, accumulating a range of capabilities in a technology that is expected to have a significant impact in the years to come.?

5. Cost Savings:??

Merging with a company from a different industry can result in cost reductions through economies of scale, shared resources, and streamlined operations.?

Examples: This is a common practise in the airline industry, where British Airways has merged with several other companies over the years to form IAG (International Airlines Group), a conglomerate of airlines that controls the airways more than almost anyone else.?

6. Risk Mitigation:??

When a company expands into a new industry, it can reduce its exposure to risks associated with economic downturns or specific challenges that could affect its primary business.?

Examples: This is the typical situation when a private equity firm acquires a company. William Blair, an American investment banker, utilised DealRoom to advise TaskUs Inc.'s management on a sale to private equity giant Blackstone, who paid more than $500 million for TaskUs Inc.?

7. Brand and Reputation Enhancement:??

The acquisition of a company in a different industry with a strong brand or reputation can boost the acquiring company's overall image and credibility.?

Examples: In 2019, The Walt Disney Company acquired 21st Century Fox, a media and entertainment conglomerate. By aligning with Fox's diverse portfolio, which included popular franchises such as "Avatar," "The Simpsons," and "X-Men," Disney improved its reputation and brand appeal strategically. This acquisition allowed Disney to diversify its content offerings and elevate its brand to encompass a wider range of audiences and content genres.?

8. Cross-Selling Opportunities:??

Companies may see potential for cross selling their products or services to each other's customer bases, increasing revenue and market share.???

Examples: Starbucks' acquisition of Teavana for $750 million in 2017 is a recent example of a cross-selling transaction. What could be more revenue-enhancing than selling tea and coffee together? Now, both Starbucks and Teavana offer tea and coffee, respectively, and everyone wins.?

9. Regulatory and Tax Advantages:??

In certain instances, mergers and acquisitions that span across different industries can offer tax benefits or assist companies in effectively navigating intricate regulatory environments.?

For instance, businesses may sometimes shy away from M&A activities to minimise their tax liabilities, but this can be a prevalent motivation. A specific goal is to acquire companies with positive cash flow and tax loss carryforwards, thereby mitigating their own tax obligations.?

10. Talent Acquisition:??

Acquiring a company in a different sector can also be a way to attract and retain talent with valuable, sector-specific skills and knowledge.?

Examples: In 2014, Facebook made a highly publicised acquisition of virtual reality pioneer Oculus VR. Facebook recognised the value of Oculus VR's talent pool, which consisted of engineers, designers, and virtual reality development pioneers. Through the acquisition of Oculus VR, Facebook positioned itself as a leader in this exciting area of technology by acquiring not only cutting-edge technology but also a team of experts in the emerging field of virtual reality. This acquisition exemplified how M&A can be used as a talent acquisition strategy to maintain an industry advantage.?

It's important to note that while cross-sector M&A deals can offer significant benefits, they also come with challenges, including integration complexities, cultural differences between the merging companies, and the need to manage diverse business operations effectively. Therefore, careful planning and due diligence are crucial when pursuing such transactions.?