May 4, 2018 //
The last article shared a framework we use to guide clients through their acquisition decisions in a disciplined way, and explored the four questions every acquirer must be able to answer. Here we dig deeper into the first step in the framework, and the question of purpose, looking at the alignment of acquisitions with corporate strategy.
The first reason for acquisition failure is a lack of alignment with corporate strategy. At Stillwater Capital we are always amazed by how many companies seek acquisitions without defining their corporate strategy or how an acquisition target will support it.
McKinsey strategy consultants Robert Uhlaner and Andrew West, said, “one of the most often overlooked, though seemingly obvious, elements of an effective M&A program is ensuring that every deal supports the corporate strategy” . In a major study of more than 1,700 deals, David Harding and Sam Rovit found that less than one-third of the 250 CEOs interviewed had a clear strategic rationale that proved accurate for the transaction, or properly understood its contribution to their company’s long-term financial future . Even if we assume that management practice has improved since they collected their data, the number points to a serious problem.
Broadly, the link between strategic alignment and organizational performance is well established in the strategy literature. More specifically, a mismatch between strategy and an acquisition is repeatedly found to be a major cause of deal failure. In their research into drivers of M&A performance, Bain & Company Chairman Orit Gadiesh and her colleagues identified poor strategic rationale as the most important issue to address because it guides pre- and post-merger behaviour and can result in the other four causes of failure.
This is very much in line with our own experience. I’m a firm believer that the starting question in every acquisition must be “why?” , which begins with defining your corporate strategy. Not just saying: “we want to grow”, or “we want to be the number one in this business”, but defining in depth the markets you want to take, why you are best able to win in these markets, and how you propose to do it.
Before digging into corporate strategy and its connection with M&A decisions, it’s worth asking why this is such a common mistake. Here’s what I see:
There are many schools of strategic thinking, and I recommend the classic book Strategy Safari by Henry Mintzberg et al to anyone wishing to do a deep dive. But at its heart, as Michael Porter says, “strategy is about making choices, trade-offs; it’s about deliberately choosing to be different … you can’t be all things to all people.” Crucially for M&A, this means it’s as much about what you don’t do as the opportunities you do choose to pursue. To quote Porter again, “the company without a strategy is willing to try anything”. I might paraphrase this as “willing to buy anything”.
For our purposes, the Chartered Quality Institute’s definition works well: “Corporate strategy defines the markets and the businesses in which an organisation chooses to operate. Competitive or business strategy defines the basis on which it will compete […] the Strategy will affect the overall direction of the organisation and establish its future working environment.”
When I think about corporate strategy, I ask where we are trying to get to. What is our goal? This does not mean the mission statement, although the mission statement will help us reach our goal. Do you want to own the aerospace market for landing gear parts? Or do you want to be a fully integrated 3PL focused on the food industry?
One useful framework comes from the book Play to Win, by ex-P&G Chairman Alan Lafley, and former Rotman School of Business Dean Roger Martin . By working through these five questions, you can rough out your company’s strategy:
Answering these seemingly simple questions requires a deep knowledge of your organization and industry – and a willingness to make tough choices. Where will we not play? What will we not do to win? What activities are we doing out of habit, or because our competitors do them? Which highlights the link between strategy and leadership. Says change expert John Kotter, “leaders establish the vision for the future and set the strategy for getting there”. Perhaps one reason that acquisitions without strategy often fail is that its absence in fact signals a fundamental lack of leadership. And this missing quality will undermine every aspect of the acquisition process.
So what does it mean to align an acquisition with corporate strategy, and are some kinds of alignment better than others? I consider questions like:
McKinsey consultant Marc Goedhart and his colleagues say, “in our experience, the strategic rationale for an acquisition that creates value typically conforms to at least one of the following six archetypes:
An acquisition’s rationale should be a specific articulation of one of these archetypes, not a vague concept like growth or strategic positioning.” And that articulation should be driving forward some critical aspect of your corporate strategy.
In the next article, we will take this thinking further, exploring basic acquisition strategies and how they link with corporate strategy and different kinds of acquisitions.