How to ensure that your organization is poised for growth

In an era of nonstop change, leaders across industries are looking to mergers and acquisitions (M&A) to accelerate growth, expand their geographic footprint and reinvent their businesses. Amid economic uncertainty, shareholder demands and technological disruption, CEOs may be tempted to chase non-strategic acquisitions in hot markets and emerging trends.

However, trying to add unrelated services or products to your portfolio and do everything well is a recipe for disaster. Without intentionality, an acquisition can create significant inefficiencies, take resources away from things that add value and impact the long-term viability of the company.

The influence of private equity has brought a new dimension to the M&A landscape, making it imperative for leaders to prioritize these three tenets for success:

1. unwavering focus on the founding mission of the organization;

2. alignment of foundational strengths and operating principles;

3. prioritization of the company’s areas of specialization.

 

The shift in M&A dynamics

Historically, M&A activities were largely the domain of publicly traded firms, and they didn’t need to create a lot of value through the acquisition for it to be accretive. Their privately held counterparts typically did not focus on M&A as a lever for growth – they didn’t really need to, and with a higher cost of capital, it was a comparatively expensive proposition.

The rise of private equity (PE), however, has transformed the landscape, making M&A a viable growth strategy for closely held private equity backed firms. PE’s ability to mobilize large amounts of capital quickly has made them competitive with the publics in the M&A markets. This has led to an increase in both the volume and value of transactions.

In turn, the leaders of PE-backed companies are increasingly focused on M&A to drive growth – and the need to create value through the process.

With more firms vying for attractive acquisition targets, increased competition has driven up transaction prices, making it critical for companies to have a clear value creation plan (VCP). Without a VCP, it becomes challenging to justify the high valuations and achieve the desired returns.

It also makes it almost impossible to outbid more strategic buyers, who will place a higher valuation on the "right" acquisition targets – and be willing to pay more as a result – due to the perceived value they could create together.

Aligning acquisitions

In this environment, leaders need to ensure that any acquisition will align with their company’s founding mission and culture, strengths and operational model and unique capabilities – the three tenets of successful M&A.

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Tenet #1: An unwavering focus on founding mission and culture

A company’s founding mission and cultural values are the bedrock of its identity, and acquisitions should align with the company’s mission to ensure long-term success.

For instance, a company focused on providing consulting services would benefit from acquiring firms that share a similar mission and can contribute to its core objectives. This alignment creates synergies that enhance the overall value of the combined organization.

Cultural fit is just as important – in fact, cultural incompatibility is one of the most common reasons acquisitions fail. You may have the best strategic plan in the world, but if the cultures don’t align, the acquisition is likely to face significant challenges.

Acquiring a company with a similar culture ensures a smoother integration process and minimizes potential conflicts while fueling collaboration, cross-selling opportunities and increased efficiencies. It also helps ensure that the employees you acquire in the process can seamlessly integrate into your operations.

But integrating a new company’s culture into the existing organizational framework requires careful planning and communication. You need to ensure that the new entity feels like a natural extension of the company rather than an add-on.

Prioritize integrating back-office and support functions such as IT, HR, accounting and marketing to increase process efficiencies and ensure that the organizational infrastructure is designed to evolve as the company scales, and don’t forget to ensure that employees feel valued and included during the transition.

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Tenet #2: An alignment of foundational strengths and operating principles

A popular strategy of the past was to acquire a company that was operating suboptimally; the thinking was that you would pay a lower price for the company, amp up its profits post-transaction, and increase market valuation. However, that strategy comes with risk.

Typically, a suboptimally performing company is not going to have an operating model or culture conducive to operational efficiencies and higher margins. Therefore, turning a business around can result in significant employee and client attrition and may result in a marked drop in performance before achieving the desired results.

Today, however, an increasing number of leaders and private equity firms believe that buying companies that are already optimized can be more beneficial. You don’t have to change their operating models or cultures and can instead drive growth through synergies, cross-selling and other tactics while boosting the value of the combined companies.

Acquisitions should fill specific gaps or build on existing strengths; otherwise, you risk diversifying the portfolio too broadly. This will require being selective about what you bring into the fold. It’s not about acquiring everything that is profitable – it’s about enhancing what you already do well.

Take a close look at your company, across the management team, employees and clients, to define and understand your founding mission, cultural values and operating strengths. Armed with those insights, you can create a template for firms that will be a good fit.

It will also create a template for your value creation plan, because as you look at the things that you do really well, you can identify areas of opportunity for you to either collaborate with or improve the performance of the businesses you are looking to acquire.

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Tenet #3: A prioritization of the company’s areas of expertise

If your company is a recognized leader in a specific field, prioritize acquisitions that align with that specialization. This approach allows your company to leverage its expertise and deliver superior value to clients.

For example, a specialty consulting firm may look to acquire other specialty firms that offer closely related, complementary specialty services, broadening its capabilities and more effectively meeting its clients’ needs.

Conversely, if that same company looked to acquire more generalist firms, there would be less of an opportunity to collaborate and create value, because they will likely have different operating models, limited market overlap and disparate go-to-market strategies.

Consider your unique capabilities and how you approach the market, then assess if that’s in alignment with the target company.

Unlocking new paths for growth

The days of acquiring firms without a clear value creation plan are over – you won’t be able to make a winning offer in a competitive market or make the firm you’ve acquired any more valuable. M&A is a powerful tool for enhancing growth, but it requires a disciplined, intentional approach.

By aligning acquisitions with your company’s founding mission and culture, strengths and operating model and areas of specialization, you can boost the overall value of the acquisition while ensuring long-term success.

Opinions expressed by The CEO Magazine contributors are their own.