External Growth Strategies

Mergers and Acquisitions (M&A) represent a topline growth strategy that can expand a company’s capacity to serve. This approach requires discernment and careful consideration. As Christ-centered leaders, we are called to make Kingdom-driven decisions while weighing the risks, complexities, and sense of calling that accompany this path.

M&A is not a modern concept. When Abram and his nephew Lot left Egypt, they merged their households for safety while traveling through foreign lands. As their numbers grew, tensions arose, and they ultimately chose to separate. This example illustrates both the benefits and challenges inherent in M&A.

Today, a unique convergence of societal and economic factors makes M&A particularly viable. Robust growth, abundant capital, low interest rates, and high equity valuations have fueled an unprecedented surge in activity. Even in turbulent times, well-prepared companies can find significant opportunity in pursuing this strategy.

Generational dynamics also play a role. Analysts describe a “silver tsunami” as baby boomer business owners retire and look to sell. The reasons for exiting include retirement (55 percent), favorable valuations (31 percent), and other factors (14 percent). This environment creates a wide range of buying opportunities.

Benefits of an M&A Strategy

A successful M&A opportunity must have clear value-creation goals, with benefits that outweigh the risks. Six common benefits include:

1. Improve performance of the target company Example: Private equity firms purchase companies they believe they can grow, reduce costs for, and increase margins, with the goal of improving value for a future sale.
2. Consolidate to reduce excess capacity or competition Example: Pharmaceutical industry consolidation has removed duplicative overhead while retaining value.
3. Accelerate market access Example: Mortgage lenders acquire local banks to enter new markets with established customer bases.
4. Acquire skills or technologies faster and at lower cost Example: Apple acquired Novauris, a speech-recognition company, to enhance Siri’s capabilities.
5. Exploit industry-specific scalability Example: Volkswagen, Audi, and Porsche share platforms across several models to reduce costs and increase efficiency.
6. Identify and develop winners early Example: Johnson & Johnson acquired orthopedic device manufacturer DePuy in 1998 and significantly increased its revenue.

The Seven Markers of an Undisciplined Pursuit of More

1. Unsustainable quest for growth, confusing big with great
2. Undisciplined, discontinuous leaps that neglect the core business
3. Declining proportion of the right people in key seats
4. Easy cash eroding cost discipline
5. Bureaucracy undermining responsibility and discipline
6. Problematic succession of power and leadership transitions
7. Personal interests placed above organizational interests

Evaluating the Viability of an M&A Growth Strategy

Structuring an acquisition requires weighing advantages and disadvantages along with other influencing factors. Many businesses hesitate to pursue acquisitions due to the complexity involved. A step-by-step decision-making process provides clarity and confidence.

Discerning God’s Will for an Acquisition

M&A can be a highly effective method for growth, but clarity of goals and awareness of risks are essential. Andy Limes, a C12 member and co-founder of SDR Ventures, suggests a three-legged stool approach to discern the Spirit’s guidance:

• Spirit Hindrance: Do you have hesitations or concerns that warrant counsel?
• Wise Stewardship: Have you been thorough in your assessment? Does the acquisition advance a culture of ministry or impede it?
• Spirit Permission: Do you have peace and a sense of a “green light” from Christ?

With God’s guidance, leaders can answer critical questions:

• What makes a company a good buy for us?
• Are we the right buyer?
• Is this the right time?

M&A experts agree on one principle: 1 + 1 should equal 3 or more to make the acquisition worthwhile. Diligent evaluation of why you would or would not pursue a nonorganic growth strategy is an exercise in stewardship.

Closing

Topics like these are central to what members, areas Christian business leaders at C12 Northeast Ohio discuss during our Forums. Around the C12 table, we dive deeply into business, ministry, leadership, and other core issues that shape how we lead and serve. Learn more about membership at c12neohio.com.