Underscoring the need for meticulous planning, the surge in acquisition interest among UK SMEs – with 30% exploring this route – calls for a clear corporate growth strategy and strict criteria for identifying the ideal target company.
Once that's in place, acquisitive firms will know how to harness strategic advantages while ensuring the M&A process accelerates growth.
Here are several compelling reasons why companies may choose to pursue acquisitions.
Market expansion: Reaching new horizons
For SMEs looking to break into new markets, geographical reach is paramount. Acquiring a business with an established presence in a desired region or country offers a shortcut to market entry, bypassing the often lengthy and costly process of renting buildings, staffing and training, or IT systems . Instant access to new territories via M&A allows acquirers to rapidly expand their footprint and diversify their revenue streams.
Similarly, acquiring a business with a complementary customer base can significantly broaden market reach. By integrating customer networks, SMEs can tap into new demographics and strengthen their market position.
Diversification: strengthening resilience
In today's volatile economic landscape, diversification is key to long-term sustainability.
Acquiring a company with a different product or service line allows businesses to diversify their existing portfolio, mitigating risks associated with reliance on a single product or service. Furthermore, expanding into new industries can safeguard against sector-specific economic downturns, providing a buffer against market fluctuations.
However, some deep thinking is needed before adopting this approach. Aside from moving into unfamiliar markets - with their cultural quirks or sewn-up supply chains - it often means new business divisions, regulatory hurdles and accreditation costs, or inter-company forex fluctuations.
Economies of scale: Efficiency and cost reduction
One of the most compelling reasons for pursuing acquisition in business is the potential for economies of scale.
Combining operations often leads to significant cost reductions in production, distribution, and administration. By streamlining processes and eliminating redundancies, acquirers can achieve greater efficiency and protect profitability. Moreover, increased purchasing power resulting from combined operations allows for better deals with suppliers, further enhancing cost-effectiveness.
However, embarking on an industry roll-up can carry significant risks from debt payments to culture clashes, stifling bureaucracy and loss of agility.
Market share: competitive dominance
Acquiring similar businesses can significantly strengthen market dominance and competitive positioning. By consolidating market share, acquisitive groups can gain a competitive edge and solidify their position as industry leaders.
High profile success stories with dominant market positions include Aviva, Bunzl, Compass, WPP, Thermofisher and CBRE.
Tech innovation: Staying ahead of the curve
In the age of frequent tech-based disruption of business models, access to cutting-edge knowhow is increasingly vital for survival. Planned and done well, acquiring new tech capability accelerates innovation, drives product development, and delivers wholesale efficiencies.
Longer term, acquiring businesses with strong R&D capabilities can enhance a company’s innovation capacity, futureproofing the parent group.
For example, $2.7bn PR tech group Cision acquired social media monitoring platform Factmata in 2022 to build out an AI-based offer for PRs to measure online public sentiment.
Talent acquisition: building a skilled workforce
'Acquihiring' generally refers to the acquisition of a company primarily to hire its employees rather than to gain its products or services. This strategy allows acquirers to quickly expand their talent pool and strengthen their organisational capabilities quickly. Moreover, access to talented executives and leadership teams can bolster overall leadership capacity.
As you may expect, this approach is most often seen in the professions with the most severe skills shortages, or in nascent industries where the workforce is small compared to the commercial opportunities or addressable market.
This is one of the most difficult M&A strategies to get right. US firms acquihiring UK or European targets need good lawyers to handle non-compete agreements, IP ownership, or TUPE arrangements.
Financial synergies: Enhancing profitability
The integration of profitable businesses can positively impact the acquiring company’s financial performance. Acquired businesses with strong growth potential can contribute significantly to overall revenue growth, enhancing profitability and shareholder value. By carefully selecting target companies with strong financial performance, SMEs can unlock significant financial synergies.
Risk mitigation: minimising uncertainty
Acquisitions can also serve as a powerful risk mitigation strategy. Spreading risk across different business segments or markets reduces dependence on a single revenue stream, providing a buffer against market volatility.
Furthermore, acquiring an established business minimises the risks associated with starting from scratch in a new market, reducing the uncertainty inherent in new ventures.
Compliance as a competitive advantage
Acquiring a company that already complies with local regulations can simplify market entry, saving time and resources.
Established relationships with regulatory bodies can also be beneficial, providing valuable insights and facilitating smoother operations.
This approach is a feature in industries with high regulatory barriers to entry including waste disposal, healthcare, pharma, telecoms and aviation/defence.
Exit strategy: realising long-term value
Acquisitions can be part of a long-term strategy to enhance value and lead an industry "roll-up" before selling the group entity for more than the sum of its parts.
This strategic exit approach allows business owners to maximise returns and realise the full potential of their ventures.
For example, UK accountants have consolidated heavily in recent years, including Midlands accounting group Baldwins making seven acquisitions. Baldwins was then merged into Cogital Group with around 30 other accounting firms by its private equity owner, before rebranding as Azets.
Key takeaway: Culture vs strategy
While acquisitions should always align with a company’s overall strategic goals to stand any chance of delivering the desired incremental or transformative change, any business needs to think carefully before embarking on the M&A trail.
Ultimately it's the people involved who will make or break an acquisition on both sides - employees, management, shareholders, suppliers, key customers. As management consultant Paul Drucker noted: "Culture eats strategy for breakfast."
CapEQ helps business owners navigate the M&A world to support strategy and source acquisition opportunities for acquirers and is both FCA-regulated and an accredited ethical ‘B-Corp’ business. Discover how we can help you assess your options.
