When Organic Growth Stalls, Consider M&A

Robust mergers and acquisitions activity is often an indicator of economic growth, but the recent flurry of deals do not reflect a confidence in the economy, Andrew Ross Sorkin writes in Dealbook.

Revenue growth of US companies has declined from 11.2% in 2010 to 5% to 2020, a Citigroup report indicates.  “Strategic actions such as M&A…have become a key priority to generate growth in the current environment. The lack of an organic impetus to growth is apparent in the outlook for capital expenditures.”

For many companies, acquisition is a powerful tool for growth when organic growth stalls. In today’s market, strategic acquirers are pursuing acquisitions in order to grow their business in the future.

If you’re facing a similar situation, proactively considering strategic acquisitions is a wise move. You may be growing this year, but what do your growth prospects look like down the road in five or ten years? Being proactive, rather than reactive, will put you a position that allows you to choose what you want. You will have more flexibility in considering the best acquisition prospects that meet your criteria and have more time to develop and execute your plan. Waiting until the last minute typically makes the process more difficult and limits your options.

Another trend to watch out for is cost cutting, which remains one of the main reason for executing deals in today’s market. While cost savings can be a legitimate reason for acquisition, I will raise a cautionary flag. Cost cutting is rarely a long-term growth strategy. You can only reap the benefits from cost saving synergies one time. Once you’ve trimmed the excess – closed a plant, realized tax savings, consolidated general overhead expenses – you have to ask yourself, “What’s next?” Strategic acquirers should remember to consider acquisitions in context of their overall growth strategy.