As a former CEO of a testing company that was acquired by a major competitor and the current CAO (Chief Acquisition Officer) for QualiTest Group, responsible for M&A, I can attest to the fact that there is excellent logic and temptation, or even pressure, to merge with or acquire companies. But it's fundamental that they meet the necessary criteria and can be integrated into the new parent company. Making sure a company is the right fit and checks off the boxes of those attributes will hugely underpin the acquisition's success.
1. Pure Play Only
Not every company can be Amazon, spreading its wings into every nook and cranny of the retail world. Instead of spreading itself too thin, a company that focuses on one specific service will likely be a better addition to an existing company, either complimenting its current offerings or expanding them. One of the reasons for the demise of global book retailer Borders, for example, was that it attempted to expand into a multipurpose entertainment retailer, and ended up overly investing in music sales at a time when CDs were becoming obsolete. Usually sticking to one lane is the correct way to the finish line.
2. Profitability and a Growth Strategy
Not only should the company that you're looking to acquire be profitable (based on EBITDA), it should also have a solid growth strategy from the get go. While this isn't necessarily a must for a VC investing in a company (since they can enter the process much earlier and reorganize for a short-term sell and profit), when acquiring or merging with a company, the parent company should be sure that its new acquisition is flourishing and has an effective plan for continued growth and success. While a turnaround toward profitability is possible, it's a riskier bet, and as with most investments the soundest strategy is one that minimizes risk.
3. Good for Customers and Employees
Retaining and expanding customers is a key reason for an acquisition – but the customers need to see the logic and attraction to continue with the absorbed company and its new parent. Frost & Sullivan researched that 65% of customers left suppliers because they felt the supplier no longer cared about them. Similarly, for services business it's especially critical that there is a healthy career path for staff and that they have a chance to grow in a bigger entity.
4. The Ability to Cross Sell or Upsell
By acquiring a company with expertise in a contiguous or complimentary field, an M&A can enable the parent company to expand its offerings in its initial field (the "would you like fries with that?" model), or to break into a new industry. This is a win-win for both customers and the acquiring company – the company gains new clients to sell to, and customers gain access to new offerings under the same umbrella. For example, when computing giant Intel bought Mobileye, a leader in vision technology for autonomous driving, Intel became a leading player in the self-driving car industry and expanded its offerings to customers in one fell swoop.
5. Founder-Owned Businesses
Though not an outright requirement, founder-owned businesses are attractive for multiple reasons. Founder-owned businesses are less likely to have complicated shareholder structures, and are typically wholly owned by a few members. Founding members who are owners may also be more personally invested in the success of their business than VCs and other types of business owners and investors. In businesses generally, and especially in the services sector, when a parent company acquires another company, it's not just acquiring a product – it's also acquiring the expertise and successful formula of the managers and employees involved.
One way to stem a potential exodus of talent that can weaken an otherwise successful acquisition is to structure payments of the acquisition over time, in order to keep senior managers aligned to the same success criteria and goals and to give yourself the ability to adapt to their needs and to develop one shared vision with experience and skill behind it.
6. Willingness to be Acquired
Just say no! What is actually an extremely important factor for a successful M&A is the company's willingness to be acquired. When providing a service to customers, you want to make sure your employees want to be there; otherwise, their service will suffer and so will your customers. According to McKinsey, one European industrial company found that during a reorganization effort, 44% of critical employees were likely to leave. Retaining these employees and ensuring that they experience a positive work environment is key to the M&A's success. IBM found that employees who feel a sense of happiness, belonging, purpose, achievement, and vigor were more likely to perform better and to put in more effort, and are less likely to quit.
7. A Cultural Fit
Individual companies have distinct company cultures, and just like two partners in life or in business, they need to jive well. Instead of expecting the company culture to undergo a huge shift upon acquisition, look for a company whose culture matches or compliments yours. This will help limit any friction and tension across the companies at every level. For example, companies may have varying outlooks on corporate structure depending on their cultural perspective on hierarchies. Korean and Japanese companies, for example, might be a difficult fit with an Israeli company such as the one I work with, because the former countries have a rigid hierarchal work system, while Israel is one of the least hierarchical countries in the western world. Cultural alignment is key.
M&A is often a natural means of achieving a company's goals of expanding into new markets and geographic locations, and expanding both customer base and offerings – but it must ensure that the acquired company is a good fit before taking the leap.