Why Do Middle Market Companies Execute Acquisitions?

Acquisitions are about growing your company and every successful deal starts by defining your strategic rationale. In this post we’ll explore the top five reasons middle market executives are interested in pursuing M&A according to our State of Middle Market M&A 2018 report.

1. Increase existing market share

Grabbing more market share a is an excellent tactic, especially if you are operating in a growing market, for example, healthcare, organic foods, cybersecurity, or veterinary care. The advantage is that you are already familiar with the market and can leverage your knowledge, connections, and customers. Usually this type of deal is less risky and often companies end up acquiring competitors.

On the other hand, this solution may not appropriate for long-term growth if you are operating in a declining market. What good is executing a deal in a declining market? You could have 100% of a very small pie – that is not a pathway to success. This is why we strongly recommend you do market research first before pursuing companies.

Deal in the news: Wyndham to buy La Quinta for $1.95 billion

2. Access new markets

Geographic expansion can include entering into a new country, or even simply buying a branch in the next town over while vertical expansion could mean acquiring a supplier or customer to streamline operations.

When expanding into a new market, whether its geographic or vertical, companies can face barriers to entry, cultural issues, and regulatory hurdles. The main benefit of acquiring is you establish your presence in the new market quickly while avoiding many of these challenges. The company you acquire will already have strong expertise and understanding of the market.

Deals in the news:

3. Acquire talent or employees

Also known as an “acqui-hire,” this strategy is often used by technology companies when acquiring startups for their team of engineers. The principle is that it may be more efficient to purchase the company and gain an entire team of talented employees that have a specific capability than to recruit this team individually.

Deal in the news: Square pays $1 million for Yik Yak engineers

4. Build brand strength

A brand is the outward appearance of your company to your clients and building brand loyalty takes time and effort. A strong brand shares a consistent message and builds up value so people know exactly what to expect when they turn to you. Think about companies like Nike, Coca-Cola, Disney, Apple.

It’s often easier to acquire a company than to build a brand from scratch, and if done right, you will gain access to a set of target customers.

Deals in the news:

5. Acquire technology or other assets

Typically it is faster to buy a new technology than build it yourself, especially if that technology is already on the market or about to hit the market. By acquiring an existing technology, you reduce the risk of failure by buying something that has already proven to be successful. This has long been a tactic that pharmaceutical companies use to bypass the hiccups of startups and fill their pipeline with new drugs.

Deals in the news:

While there are many reasons for executing M&A, it is important to select only one strategic rationale per deal. Do not attempt to kill two birds with one stone; you’ll only end up dividing your attention and losing focus on what matters the most. Stay focused to remain strategic and increase your chances for a successful acquisition.

Photo Credit: Barn Images, Public Domain