Components of a Successful M&A Deal

The most successful M&A transactions are those that allow multiple synergies to be realized, and in which each business increases cash flow beyond what it could have achieved on its own. Let’s examine components of a successful M&A deal.

What a Company Can Gain from M&A
A newly merged entity can significantly grow revenue in several ways:

  • Product or service offering diversification.
  • An expanded geographic footprint which provides greater access to new customers.
  • New distribution or marketing channels that open new opportunities for market share.
  • Excellent products, services, technology, or branding that better serves clients.
  • Greater sales, improved R&D, or new products.
  • Saving costs by eliminating redundant functions or operational inefficiencies.

A Case Study: The eBay PayPal Acquisition
One example of an effective merger can be found in eBay’s acquisition of PayPal. The two entities leveraged each other’s customer base, offered complementary services, and integrated in a way that improved customer convenience. This created synergies that offered new business for both companies. PayPal edged out its competitors to become the default for online payments. Ebay eventually required users to use PayPal. PayPal’s popularity made this a request most customers were willing to abide.

There’s a clear lesson: Ebay forced users to use PayPal. Because PayPal offered convenient options, there was almost no resistance from users. PayPal increased sales volumes and dominated the market, while Ebay benefited from the payment convenience offered by the payment processor.

Another Case Study: National Oilwell and Varco International
National Oilwell was a leading oilfield drilling equipment designer in the early 2000s. In 2005, it acquired 51% of Varco International’s stock. Varco was a leading provider of consumable replacement parts and engineered products. The $2.5 billion deal created the largest oilfield-services equipment manufacturer in the U.S.

The acquisition provided National Oilwell’s oilfield customers with replacement parts, drilling equipment, and maintenance at high margins. This secured recurring cash flow.

The merger also gained National Oilwell new relationships from Varco’s operations in 40 nations across six continents. National Oilwell further gained access to Varco’s IP, offering a significant competitive edge.

The two entities had separately acquired more than 100 related businesses. So the accumulation consolidated numerous competing and similar vendors. Over time, customers had fewer options, ultimately pushing them toward National Oilwell as the obvious vendor choice.

The lesson here is that an acquisition can offer access to quality products and IP, in addition to eliminating competitors. National Oilwell magnified its energy sector presence thanks to the merger, and has gained significant cross-selling options.

The ultimate goal of any merger is to enhance positioning, decrease competition, realize synergies, and increase growth. The two businesses should have complementary cultures, products, and services. Ultimately this should improve the lives of customers, making the merged entity a natural, easy choice. Align the merger with the voice and needs of the customer, and the deal becomes a win for everyone. Looking at the deal through a customer-focused lens may be the most intelligent strategic decision owners make before a merger.

Preparation for a Successful Transaction
Before the team at Nuvescor Group brings a company to market, we work with them to identify synergistic market opportunities. We then take that information and survey the market to find buyers who can take advantage of those opportunities. This is just one step of many that we go through prior to taking a business to market. This process has typically allowed our clients to enjoy multiples higher than the standard valuation methods show. Our process mitigates the risk of bringing a business to market when value expectations cannot be met. It also facilitates finding the buyer with the right fit and ability to close the deal.