February 2023 Issue
Growth – whether achieved by scaling up and expanding, branching out into new markets, developing new products or pursuing acquisitions – enables companies to increase the value of their business and improve shareholder returns. There are many reasons why companies with the resources to expand may opt to pursue M&A.
On one hand, a balanced, carefully crafted organic growth strategy might be considered a safe and sustainable way to grow a business. Conversely, M&A can provide big gains in a relatively short timeframe, allowing companies to quickly realise their ambitions – though not without risk. Inorganic growth can present significant financial challenges and can complicate operations such as systems, sales and support. For some, both organic growth and M&A have an important role to play.
When pursuing growth, companies must make a number of practical determinations, balancing desires and constraints. Three key areas of any decision-making process are likely to be cost, quality of internal processes and speed. Any of these factors could constrain a company’s ability to grow, either organically or through M&A.
Organic
With organic growth, companies are essentially demonstrating their internal ability to earn more and expand market share year over year. This can be particularly impressive when those companies reinvest their own earnings into growth, rather than tapping external financing or investment to fuel development. A key aspect of organic growth is leveraging existing relationships, skills, knowledge and capital to create opportunities and expand market share. Especially in an uncertain economic climate, this might be less risky than pursuing transactions.
“There is no right answer to the question of organic growth versus M&A; both strategies will have wide-ranging and long-lasting consequences for businesses.”
However, organic growth does pose a number of potential challenges. First, the process can be long and arduous, particularly when compared to dealmaking. Company leaders and stakeholders must be prepared for the long haul. Additionally, organic growth is rarely cheap, requiring companies to invest heavily in the expertise, labour, equipment and resources they will need to dedicate to growth. Of course, there is also no guarantee that pursuing organic growth will deliver results; many different factors, include those that are difficult to control or legislate for, will affect the outcome.
Achieving organic growth requires strong management and effective planning from the outset. Without this, companies will be unable to move quickly to take advantage of changes in the market which may provide a platform for expansion.
Dealmaking
Similarly, growth by acquisition presents a number of advantages alongside challenges to overcome. In recent decades, across virtually every industry and size of business, companies have utilised M&A to quickly acquire new skills and knowledge. The process can almost immediately provide a larger market share and more assets. It can facilitate access to capital, as well as new markets. Carefully planned transactions offer viable opportunities to achieve cost synergies and unlock operational efficiencies. Companies can also gain access to talented experts and create teams that would otherwise take years to build up through traditional recruitment methods.
According to McKinsey, the four common drivers of deals that are aligned with accelerating growth are: (i) audience consolidation or expansion; (ii) filling gaps within core product offerings; (iii) acqui-hire; (iv) and speed to pursue opportunities in adjacent markets.
Of course, there are myriad risks related to M&A. Pursuing an M&A-led growth strategy requires companies to take a disciplined approach. Acquirers must avoid being trapped by a short-term focus and any attempt to ‘save’ their way to deal success.
Even then, despite extensive planning, deals can – and frequently do – fail to reach completion. According to IMD, during the first quarter of 2022, the value of abandoned or cancelled deals reached $215bn, the highest level since 2018.
For those deals that do get over the line, post-completion integration, if mishandled, can be the undoing of long-term value creation. Cultural differences and onboarding new staff members can cause friction between workforces – friction that can quickly disrupt operations of the combined entity. Efforts must be made to care for new and incumbent personnel during and after the deal process, as losing staff can quickly erode the value of a target business and cause problems in both the short- and long-term.
Focusing on key issues, from early in the deal process right through to the integration phase, will allow companies to develop an understanding of the actions and initiatives required to drive short- and long-term value.
Planning
There is no right answer to the question of organic growth versus M&A; both strategies will have wide-ranging and long-lasting consequences for businesses. However, with the right preparation, whatever the chosen strategy, companies can maximise the chance of achieving their goals and capturing the expected value of growth opportunities.
© Financier Worldwide
BY
Richard Summerfield