Shaking Things Up: How Smart Companies Overcome Industry Stagnation through M&A
Every industry goes through a similar life cycle, from emerging to evolving, then reaching maturity and finally, decline. Early on, new players enter the market, taking advantage of the broad opportunities that exist during the emerging and evolving phases and often driving stellar growth in the process.
On the road to maturity, consolidation inevitably shifts the balance of market share into the hands of a few key players, just as we’ve seen over the last few decades in the chemicals industry and more recently in consumer products, such as the U.S. toothpastes market, in which three companies control about 80% of the market share. This consolidation typically occurs through M&A, which can breathe new life into stalled portfolios and re-ignite revenue growth. But how do you know when it’s time to pursue this strategy? And what kind of specific challenges can M&A help solve?
When to Make a Move?
M&A might be a viable strategy to recharge growth when one (or more) of four primary conditions exist:
- The company has encountered stagnation in organic growth, either because of competition driving down market share or a stall in consumer consumption of certain products.
- The company’s intellectual property or technology road map is flattening out or facing a challenge.
- The entire industry is facing a threat, forcing key players to come together in order to overcome the challenge and achieve mutual success.
- In a more proactive move, other companies may want to pursue M&A to diversify the business portfolio, expand geographic reach, refocus the company or mitigate risk to stay ahead of industry shifts.
What’s to Gain?
When these market conditions exist, companies can look to M&A—and even divestiture—to overcome related challenges that may prove difficult to surmount without changing positions. There are many incentives for pursuing M&A, and the strategy has proven successful in helping companies to achieve the following goals:
- Gain synergy, mitigate risk, or achieve economies of scale. The airlines are a perfect example, with a number of deals inked to offset rising hub rental and fuel costs, expand service at minimal cost and achieve other operational efficiencies, especially after 9/11. This motive has been behind several notable transactions, including American’s acquisition of TWA (2001), Lufthansa’s acquisition of Swiss International Airline (2005) and Austrian Airline (2008), Delta’s merger with Northwest (2008), and Southwest’s recent acquisition of Air Tran.
- Offset technology slumps and grow market share. This is hardly more prevalent in any industry than it is in pharmaceuticals, in which drug makers must constantly evolve to offset the negative impact of patent expiration for their blockbuster drugs. To fill the IP pipeline when their own R&D may not be ready to put forth a product, many companies acquire competing or complementary entities. Such is the situation that gave birth to GlaxoSmithKline, drove Pfizer’s bid for Wyeth and Warner-Lambert, and spurred the Merck/Schering-Plough and Takeda/Millennium deals.
- Diversify revenue streams, leverage synergistic channels, expand geographic footprint, or enter higher margin categories. These motivators are common in the consumer products industry as companies here look to expand their portfolios with complementary product lines to enter new markets or product categories or gain economies of scale. Reckitt Benckiser’s $1.4 billion buy of Schiff Nutrition helped catapult Reckitt into the higher-margin vitamin and supplement lines. Similar motives sparked Coca Cola’s acquisition of Vitaminwater and drove L’Oréal’s purchase of Pacific Bioscience Laboratories’ Clarisonic brand to gain position in the fast-growing beauty device market with a ready-made product that was already a success.
As the company evolves, many find it necessary to divest some non-core assets as part of the portfolio optimization process in order to gain the most benefit and focus on the core business as it takes shape. For example, in Pfizer’s evolution toward becoming the largest R&D-based pharmaceutical company in the world, it decided to give up its consumer healthcare business to Johnson & Johnson and infant nutrition to Nestle. Similarly, as Procter & Gamble focused on consumer products, it shed the Pringles food brand to Kellogg in 2012. This kind of adjustment is a natural part of the M&A process as companies continually shuffle to align business units against strategic goals.
Is M&A Right for You?
Recognizing when the conditions are right is only one part of the M&A equation. Knowing what is right for your company—and ensuring successful post M&A integration—are just as important. When investigating such a move, consider these factors:
- Is the whole greater than the sum of its parts? The deal must be accretive, with the acquisition of assets adding more value than the cost of the acquisition, either immediately or over time. If 1 + 1 simply equals 2, or the deal seems risky, it may not be worth the investment and cultural upheaval. How long you’re willing to wait for accretion is also a consideration, as it may not happen overnight.
- Is it part of a strategic long-term plan? Any deal must be driven by a strategic vision, otherwise you may end up changing direction again down the road. Such was the case with Pfizer when it sold its healthcare business to Johnson & Johnson in 2006 for $16 billion, only to later buy Wyeth and several other consumer healthcare companies.
- Are you prepared for the cultural shift? The M&A process likely could change the entire focus of the company, which may or may not be a good thing, depending on your strategic goals. The success of M&A is determined less by choosing the right target than it is by how well they integrate. Most acquisitions fail not because it was a bad deal, but because integration was poorly handled or the projected time to synergy or accretion was overestimated. L’Oréal learned this the hard way when it acquired two local Chinese brands and tried to impose the L’Oréal way of doing business—it simply did not work. On the other hand, Johnson & Johnson successfully acquired state-run Dabao and overcome challenges by approaching the deal with a more open mind toward the local way of doing business.
Many people associate M&A with the idea of eliminating the competition by gobbling them up. However, that’s not always the case, nor is it always the best way to compete in a global marketplace. Consider potential targets in adjacent, complementary or up/down-stream categories as well. These deals can help you leverage existing channels, brand value, and marketing synergies. Finally, forays into entirely new categories or industries can often prove successful.
Ready to Make the Leap? While there’s some comfort in knowing that the maturation process of any industry follows the same basic flow, if venturing into M&A territory is a new experience for your company, it may feel as though you’re reinventing the wheel. When the warning signs surface and it’s time to make a move, having expert advice, current market and company data, and reliable forecasts at your fingertips is critical for making smart, growth-oriented business decisions.