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M&A Strategy in a Rebound Economy: Top-line Growth or Bottom-line Profits?

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Many companies with stockpiles of cash are eyeing potential acquisition targets. Should they look for stand-alone companies that may improve top-line revenue growth and market share? Or should they continue to grow their bottom line by focusing on targets that can be integrated into the business?

Over the past few years, many companies methodically improved their bottom line by trimming operating costs, increasing profit margins and building up a war chest. Now as the economic tempo accelerates, investors and analysts want to see that cash put to good use. Should you spend it by acquiring stand-alone companies that will help you quickly grow top-line revenue and market share? Or should you look for companies that can be integrated into your business, eliminating redundancies and further strengthening the bottom line? 

Here’s the debate:

Focus on top-line growth.
Market share is king in today’s market place. Now is the time to buy-up competitors and grab their share of the customer’s wallet before someone else does. It’s also a fast way to add capacity to keep current customers happy. You can worry about growing profits at a later stage.
Keep both eyes on the bottom line.
Profit rules – regardless of the marketplace. Look for targets that can be quickly assimilated into your organization to reduce costs and improve profits. Winners stay lean and efficient -- through good times and bad.
Market share powers the supply chain.
A global scramble is on for raw materials, parts and semi-finished products. Prolific economies-of-scale mean bigger orders – moving you to the front of the supplier’s line.
Planning powers the supply chain.
Who needs the luxury of being able to place last-minute orders? Smart business planning provides enough lead time to shop multiple suppliers and negotiate longer-term contracts at a better price.
People want to work for the big dog.
The allure of a fast-growing company attracts top talent. They want to work for companies that provide opportunities to pursue different careers within the same company. It’s an unbeatable talent retention strategy.
People want an employer they can depend on.
A more profitable and efficient company offers better long-term rewards and a stable work environment. Who wants to risk being laid off – again?
Time to think big.
Size gives you the freedom to think big and be innovative. That’s what gets investors’ attention. Small players don’t make sound global partners.
Time to grow up.
Investors have learned their lesson watching high-flying companies crash and burn. A better strategy is to be clear about who you are and what you do – and execute better than anyone else.

My Take

Asish Ramchandran
Principal, M&A Consultative Services, Deloitte Consulting LLP

It’s a good time for many companies to pursue top-line growth – as long as they know what they’re getting into.

This year, companies that judiciously cleaned up their bottom lines and stockpiled cash during the financial crisis are eagerly eyeing less diligent companies that appear undervalued. Some acquirers see an opportunity to expand their territory while satisfying investor and analyst expectations. Others hope to quickly ramp-up operations to fulfill their customers’ pent-up demands and keep competitors at bay.

As a result, we’re seeing more companies interested in pursuing inorganic strategies focused on top-line growth. It’s a strategy that can work well – with the right due diligence. Companies that are currently struggling may have acquired targets that did not fit their overall business strategy. As a result, the acquired companies did not strengthen the parent’s core business or improve its overall market share. Meanwhile, the combined company’s operating costs increased, profits declined and analysts are questioning the long-term vision for the franchise. Smart acquirers must be careful not to repeat their mistakes.

When pursuing any M&A deal, it’s important to understand your core focus and look for targets that will complement your global business strategy. A deal that looks like a good value can still be a poor investment if it doesn’t fit the company’s strategic vision. In addition to the typical financial and IT due diligence, also scrutinize the target’s operations and market presence. In-depth due diligence may increase your upfront effort by a week or two, but can provide the information you need to make an effective go-or-no-go decision.

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