Bridging gaps, building value: The ultimate guide to M&A deal strategy success

Why is M&A deal strategy so vital to business success?

As Larry Ellison, co-founder of Oracle, famously said, "Everyone thought the acquisition strategy was extremely risky because no one had ever done it successfully. In other words, it was innovative." 

In this context, it's fair to say that different types of merger acquisitions (M&A) come with various risks and opportunities that must be managed to capture deal value. Getting this right is critical because, according to Harvard Business Review, between 70% and 90% of M&As fail.

Having consulted on many transactions, I've learned in the case of M&A that strategies vary based on the relative size of the acquired entity and the degree of difference between the two companies. It's vital to understand from the inside out what type of M&A deals might make sense for the organization, can be integrated or separated with success, and can help further the business's strategic objectives. As I outline in my latest book, Outside In, Inside Out, tight integration between deal strategy and overall corporate strategy is essential. This integration starts by understanding your internal capabilities, service, and product performance, evaluating gaps, and exploring opportunities to further strategic objectives through an M&A deal.

There are four types of deals. Firstly, consolidation occurs when a company acquires another similar size and product offerings to increase market presence. In contrast, transformation involves acquiring a larger company with different business models and creating a new, stand-alone organization with new revenue streams and cost-saving opportunities. A tuck-in acquisition focuses on absorbing a smaller company with similar service and product offerings, embedding the acquirer's strengths to enhance performance. Finally, strategic growth occurs when acquiring a much smaller company with different products or services, expanding the acquirer's offerings or geographic reach through a hybrid integration approach.

Let's explore each of these in more detail.

Consolidation: Pooling strengths, creating a unified identity, and setting out to conquer the market together.

A consolidation M&A deal occurs when one company acquires another, typically a competitor,  to broaden its product or service offerings or break into new markets. The goal is to diversify and expand revenue streams. From my experience, the key to a successful consolidation is swift and thorough integration of business models. Quickly establishing a unified organizational structure helps eliminate redundancies and prevent productivity loss. This often means adopting the acquirer's or acquired company's model—or creating a new one, though that can slow things down. Both qualitative factors, like employee and customer satisfaction, and quantitative metrics, such as revenue per employee, costs, and turnover, must be measured. Standardizing systems early is crucial to streamline processes and capture operational efficiencies, with a focus on back-office "quick wins." Clear and consistent communication of the strategic goals helps avoid disengagement and unwanted turnover.

One of history's most iconic consolidation deals was the 1999 merger of Exxon and Mobil, which created a global energy superpower. At the time, oil prices were consistently low, and the industry struggled with profitability. The merger, widely regarded as a game-changer, helped Exxon and Mobil bolster their competitive positions by streamlining operations, reducing costs, and expanding their global reach. The companies had to sell over 2,400 gas stations nationwide to gain approval from U.S. regulators, ensuring the deal did not create unfair market dominance. Despite this, the merger was hailed as a success. Exxon defended it as a necessary response to price pressure on crude oil, the need for greater efficiency, and the emergence of new competitive threats globally. Yahoo Finance even called it "one of the most successful in M&A history," solidifying its status as a textbook example of effective consolidation.

In contrast, the 2015 merger between Heinz and Kraft Foods, initially heralded as the most significant consumer goods deal ever, didn't meet expectations. Combining two giants in the food industry sent shockwaves through competitors like P&G, Mars, and Nestlé, but the aftermath was less than stellar. Sales dwindled, shareholder lawsuits piled up, and the company faced scrutiny over its accounting practices. Despite the merger's scale and potential, it failed to deliver the anticipated synergies. This is a powerful lesson: not all consolidation deals are destined for success, and even the biggest, most high-profile mergers can struggle if not executed thoughtfully. It underscores the importance of thorough due diligence, realistic integration plans, and a sharp focus on ensuring that the combined value of two companies justifies the complexity and risk involved.

Transformation: It isn't just about merging assets; it's about reinvention, creativity, and taking a leap into an expanded future.

Transformational deals are pursued when a company aims to shake up an entire industry, often led by a smaller, more innovative firm looking to take on larger, established competitors. These game-changing acquisitions provide an edge by securing new technology, intellectual property, or top talent—assets that can give the acquirer a much-needed foothold in a competitive landscape.

A great example is Costco's $1 billion acquisition of Innovel Solutions in 2020. Innovel, a logistics and supply chain management company, helped retailers streamline deliveries. Costco supercharged its delivery capabilities by bringing Innovel into the fold, making it a serious contender against Amazon's dominance in the space.

Through trial and error, I've learned that transformational deals involving legacy businesses must be approached carefully. A phased integration is vital to maintaining stable performance. Initially, the acquired company should continue operating independently, particularly in product development and customer service. This gradual approach allows both businesses to mesh operations while capturing early cross-selling opportunities. Interim financial and operational structures are crucial to bridge the transition.

What makes these deals genuinely successful is the creation of a fresh go-to-market model that captures revenue synergies. Strategic planning should focus on crafting a differentiated value proposition that separates the newly combined entity. It's a balancing act between hard numbers and creative vision, blending analytical integration tasks with an inspiring new direction for the business. Retaining the acquired company's leadership is essential, too, as their expertise fuels knowledge transfer and keeps the transition smooth.

Tuck-In: Adding that special touch, enhancing capabilities, and completing the picture without disrupting the overall design.

Tuck-in deals happen when big companies snap up smaller ones within the same industry to strengthen their market position. I've been involved in a few of these myself, and they're often about transferring core strengths to the target business and eliminating competition. An established industry leader usually absorbs smaller players to solidify its dominance.

These deals are prevalent in emerging sectors where intellectual capital is the key to staying ahead. Take Microsoft's acquisition of Mover in 2019, for instance. Mover, a cloud migration start-up, helped businesses shift their workloads to the cloud, which aligned perfectly with Microsoft's goal to expand its Azure cloud platform. Post-acquisition, Mover was seamlessly integrated into the Azure migration center, enhancing Microsoft's offerings.

A crucial aspect of tuck-ins is retaining key talent. Identifying star performers and ensuring their buy-in is essential for a smooth integration. Collaborating with HR and leadership to craft tailored bonus awards for hitting integration milestones can help keep high-performing talent on board. However, retention plans shouldn't stop with financial incentives. Many employees leave because they're unsure about their future role, not just for more money. To prevent this, start integrating the back office as soon as possible. Early planning saves costs and sets the tone for cultural integration, ensuring everyone feels like part of the team from day one.

Strategic Growth: Joining forces to unlock new markets, accelerate innovation, and create a strong future together.

Strategic growth deals involve acquiring new skills and expertise to expand into fresh or non-core business areas. A perfect example is Google's 2014 acquisition of Nest Labs, a leader in smart home devices like thermostats, smoke detectors, and security cameras. This move equipped Google with capabilities in the booming smart home market, an area it hadn't tapped. But pulling off this kind of deal successfully isn't just about the technology—it's about building solid relationships with the acquired company's key employees, customers, and suppliers. These connections help retain crucial knowledge and ensure a smooth transition.

Through the deals I've worked on, I've learned that to truly maximize the potential of such deals, you must think long-term. It's not just about immediate wins—expanding offerings and geographical reach is where the real value lies. This includes facilitating two-way skills transfer between the acquirer and the acquired company, particularly in integrating back-office functions like finance, supply chain, HR, and tech.

Another critical factor is designing interim financial and operational structures while planning for a longer-term setup. Aligning the cultures of the two organizations is essential, too. You need to find synergy opportunities with meaningful input from the acquirer and the acquired business unit. Overlooking this can lead to resentment or unrealistic synergy targets that can backfire.

One notable trend in M&A over the past 50 years is how, historically, deals were dominated by the U.S., Canada, and a handful of European countries. However, this landscape is rapidly changing as giants from emerging markets take center stage. A prime example is the 2013 acquisition of TNK-BP by Russian oil giant Rosneft for $55 billion, which created yet another national champion in the global energy sector.

Bridging success through tailored M&A strategies for lasting impact.

In the world of M&A, deal strategy is not just a component of success—it is the foundation. M&A strategies must be carefully tailored from the inside-out to bridge the specifics of each deal, whether it's a consolidation, a transformational move, a tuck-in acquisition, or strategic growth. The underlying goal remains to further a company's strategic objectives, capitalize on synergies, and unlock long-term value.

Ultimately, the most successful deals are those where the inside-out integration is not just mechanical but also thoughtful and human-centred, accounting for employee morale, culture, and customer satisfaction. In M&A, strategy is more than just numbers—it's about bridging the gap and navigating complexity with foresight, empathy, and precision.

By Dr. Lance Mortlock – Author of Outside In, Inside Out – Unleashing the Power of Business Strategy in Times of Market Uncertainty, EY Canada Managing Partner Industrials & Energy, Strategist & Adjunct Associate Professor