Why making multiple M&A deals could be better than one large deal

The business press has been filled with stories of mega-deals for decades. Little surprise, the pipeline of consolidation deals among titans of industries has been plentiful since the turn of the millennium.

The mega-deal to merge United Technologies and Raytheon created Raytheon Technologies, now one of the world’s largest aerospace and defence companies. It consolidated commercial aviation, space, military hardware and advanced weaponry expertise into one company, employing 175,000 people and around US$80 billion in revenue. The efficiencies of scale and the strength in size armed the company with the ability to compete in some of the world’s most competitive markets.

Other mega-deals over the past decade have seen companies consolidate positions or diverge into new specialities. Oil giant Chevrons' recent US$3billion acquisition of Renewable Energy Group saw it capture a sizeable slice of the biofuel market and diversify further outside of crude oil-based fuels. Square’s deal to buy Afterpay gave the digital payment platform an avenue into the burgeoning “buy now pay later” digital payment market.

The strategic reasons for buying another company are numerous - capture market share, consolidate your position, circumvent expensive R&D, buy-in new expertise, pivot to new markets or buy part of your supply chain. Companies increasingly use M&A to achieve goals more cost-effectively than building something organically.

There is an almost infinite list of M&A deals throughout history and they all have one thing in common and reflect what has long seemed to be a typical agreement. Despite their complexity, they are all simply one business merging with or acquiring another. 

Plimsoll is today asking whether that remains the best option and if companies should look at a series of smaller deals instead of one large, blockbuster purchase? Of course, there will be duplication of legal and integration costs that onboarding multiple companies will entail. The chances of personnel and cultural issues arising could be amplified by consolidating multiple businesses into one group.

However, leading M&A analysts Plimsoll have revealed four key reasons why companies might be better suited to making a number of smaller deals than one big one:

More effectively reduces your dependencies

One of the key reasons an M&A deal fails to deliver the returns the initial strategy envisioned is because a business ends up buying more of a declining market. Blockbuster buying up more of the in-store video rental market didn’t raise any eyebrows at its peak. However, they were buying more of a declining market. Interestingly, at the turn of the millennium, they could have bought a smaller rival called Netflix for less than they paid for regional store operators.

The cautionary tales of buying more of the same are many. Splitting your strategy and making smaller acquisitions across multiple niche industries helps to reduce your dependencies and ensure you have a foothold in more than one market whether at home or overseas.

Plimsoll offers a host of analytical tools that will help you identify your financial strengths and weaknesses to provide context to any strategic review you might perform. Just how vulnerable is your business to future shocks?

 Increase your group skillset and expertise

Building expertise and skills within a business can take years, even decades, and involve a concerted investment to develop. Worse still, there is no guarantee that building something organically will necessarily lead to success. That’s why companies are increasingly replacing R&D and long development lead times with M&A deals. It’s much easier to buy an established, innovative company than build one from scratch.

But, what if you can add two or three new skillsets instead of one? Buying several smaller companies can often enhance the skillset and expertise much better than one larger company. A larger company is likely to carry redundancies and elements that are of no strategic use to your business. Why not focus your M&A strategy on several smaller options that specialize in what you do need? 

Plimsoll provides analysis and insight on thousands of industries and the millions of companies that work within them. Once you have identified the speciality companies whose skills you would like to acquire, we can help you to find the best options.

Better spread your risk

Buying another is always fraught with risk. What if the business you buy turns out to be a poor strategic and cultural fit? Will you be able to integrate the company into your business? Is there an opportunity cost of buying the wrong target? History is littered with examples of companies that bought another company for too much and the deal went sour, bringing the whole group down.

Buying a number of smaller options more naturally spreads your risk. Of course, all M&A deals should be subject to enhanced analysis and due diligence, but a series of little deals rather than one large one helps to spread the risk of a poor return.

Plimsoll provides individual analysis and valuations on M&A targets based on your own criteria so you can start your due diligence process at the very start of the search process. Getting an M&A deal wrong should never be the result of poor planning and incomplete insight.

Secure your supply chain

In 2022, there is an ongoing crisis of supply as geopolitical and public health crises drive up demand for materials, shipping and auxiliary supplies. However, buying up your supply chain can be an outstanding strategy to secure resources and disadvantage the competition.

Buying a series of smaller suppliers allows businesses to better protect different parts of their supply chain rather than buying one key company. It also allows you to develop new competencies in multiple different markets rather than a larger, more established entity.

Plimsoll provides the analysis required to better understand acquisitions of potential trading partners. As with all deals, knowing as much as possible as soon as possible is critical, but never more so than when the acquisition will feed directly into your ability to operate effectively.

Plimsoll is a leading provider of mission-critical analysis and insight. From our fully bespoke Acquisition Finder Service to our individual industry analyses, we provide a much better understanding of all your options, regardless of your strategic objective or requirements.

We have worked with more than 40,000 of the world’s leading companies to help them with their acquisition intelligence needs. Companies of all sizes and in all industries use Plimsoll to reduce the time it takes to identify and isolate their best options from months to minutes.

For more information on how Plimsoll can help you please click here.