Growth strategies take different forms. On a basic level, companies grow like they always have: finding a problem, creating a solution, and selling it for a profit. Companies can then grow by increasing their market share with current or new customers. Companies grow similarly, regardless of economic downturns. But, sometimes, because of micro or macro economic conditions growth strategies can change, or a complete pivot can occur. An increasing number of companies are looking to mergers and acquisitions (M&A) as that strategy.
The Bank of America Merrill Lynch recently conducted a survey and found that 1 in 4 CFOs[i] is contemplating M&A as a growth strategy. With the recent economic recovery, it makes sense. Strategic buyers are in a better position to make a decisive move in the marketplace—cash on balance sheets is larger and interest rates remain low. In a sense, the dust has settled and companies are actively looking for growth opportunities not considered in the past few years.
Organic vs. Inorganic
Thrillist is a digital lifestyle publication. With a strong bent towards men in their 20s and 30s, they serve a niche market. So when they acquired JackThreads, an ecommerce company, many questioned the acquisition. But the company needed a better way to grow. Before the acquisition Thrillist generated revenue through ads and sponsorships on their website and in emails. The acquisition put them into the ecommerce market and provided the opportunity to sell to its already loyal audience. Since then, they have grown sales from $5 million to over $40 million in a few years.
Without an M&A growth strategy, Thrillist wouldn’t be where it is today.
Organic growth is the default for every company, and it makes sense, because it’s a path with less risk. But as the example above illustrated, and many other recent deals also show, M&A can be advantageous for companies eager to:
- Enter new markets;
- Diversify risk
- Capitalize on operational efficiencies; or
- Grow revenue.
As James Rourke and Alastair Borthwick of Merrill Lynch shared: “…M&A is a viable choice for companies eager to take advantage of favorable market conditions to combine with competitors, complementary businesses or other strategic fits. With knowledgeable and insightful counsel from the right financial adviser, M&A can yield significant benefits for companies eager to jump to a higher level.”[ii]
M&A activity comes down to focus. Historically, privately held companies haven’t pursued that growth strategy; it has required capital and an aggressive approach. However, as acquisition financing remains attractive and companies continue to grow, we can expect more deals to happen.