M&A Can Be Exciting, but There’s a Right Way and a Tricky Way To Do It

Mergers and acquisitions are one of the more exciting opportunities in business. If you’re the acquired, you get to walk away with money (especially as the founder). And if you’re the acquirer, you suddenly have a new piece to add to your multitude of offerings. There are so many publications and investment bankers get paid so well because M&A is lucrative.

However, mergers and acquisitions are not nearly as successful as the excitement might show. According to Harvard Business Review from 2011:

Indeed, companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.

If we contextualize that, anywhere from $1.4-$1.8 trillion is wasted every year. That is a ton of economic value that is failing, which could go toward many things, including investing in organic growth, paying owners dividends, or anything else.

But M&A is sexy. There’s no other way to describe it. Even though we see so many of these fail, CEOs return to this as a strategy time and time again.

That said, I think there are right ways to do it. But, ultimately, it boils down to whether you are buying an expansion of your current business or trying to buy into a new business.

Buying an expansion

Let’s say you are a media company dedicated to the world of fitness. You currently operate a publication about weight lifting where you are monetizing with subscriptions, advertising, and you even sell a line of protein powder that weight lifters are obsessed with.

You have the core competency to create great content, acquire an audience with that content, and then monetize it with three different revenue streams. That’s arguably a very healthy business and one that will continue to grow as you find new weight lifters interested in learning from your content.

But you decide that you’re not growing quickly enough and want to move into new markets. You have two choices. The first is you can launch a new publication, perhaps about running. You might have some weight-lifting readers that would be interested in it, so you’re not launching from zero.

The second option is you buy one. Perhaps there’s another running publication out there that is not doing as well as it should be, or you believe that you can do better. So you decide to buy it and now have two publications.

We are seeing a lot of this in the media space today. With interest rates still very low, we see many activities where holding companies bring together multiple publications with related audiences. This provides some economies of scale. Also, you know how to run one publication, so it’s likely not much harder to run two.

Last July, I wrote about Outside, which has been acquiring many lifestyle-related publications to create a house of brands with a unifying membership product:

For example, HR doesn’t need to automatically expand because of the addition of a new publication. Neither does technology, marketing, design, and various other functions at the company. If new publications are continuously added, then yes, more people will be needed. But it’s not 1:1.

To add another magazine to the network doesn’t change much. Of course, you need to hire more people, but certain shared services can extend across the entire network. These provide some of those economies of scale I mentioned above.

In many respects, buying an expansion is one of the most straightforward approaches to M&A.

Buying a new business

Sometimes, though, CEOs and operators decide that they need to expand into a new business. Sure, you could buy a related publication, but what about buying a new business model?

I believe this is a more complicated M&A strategy where operators make more mistakes. I’ll explain more below, but first, let’s look at an example.

Let’s say you’re running a publication about the oil and gas sector and your primary business is reporting on what these businesses are doing. Maybe you’re monetizing with ads and you’ve got an events business. Unfortunately, growth is slowing, so you decide to revolutionize the business entirely.

You identify a small but growing data platform that tracks the prices of various types of energy and the transportation costs for said energy. Subscriptions cost thousands of dollars and there’s a team dedicated to enterprise sales and user management.

You have no experience running this sort of a product, but you think it’ll revolutionize your business, so you buy it. In my book, this is considered “buying a new business.”

Integration matters

If you can’t tell, I think the second strategy is much harder to get right. This is because integrating these “new businesses” requires you to understand so many unknowns.

Compare that to buying an expansion. How hard is it to add one more to the portfolio if you already run a few publications? Yes, you have to figure out where the team fits, handle the onboarding of clients into your systems, and make sure payments are flowing correctly. But at the end of the day, it’s just one more publication, and you know how those work.

You don’t actually know what needs to be done with these new businesses. For example, if you’re running an ad business and suddenly buy an enterprise subscription product, do you know how to manage that? What about the more significant number of developers that likely come with a data product? There are many unknowns for you, and the more unknowns, the more complicated things are.

The issue here is that operators assume the “new business” is not actually that different for them because they think it is related to the core business. According to this other Harvard Business Review article:

Then there’s related diversification, a precarious blend of the other two forms that poses special risks. Management is required to undertake a double challenge. To be sure, integrating two operations is an issue, but this form of acquisition also requires a business model change affecting both acquirer and target.  That’s because existing customers on both sides (acquirer and target) will need to see value in the expanded product range if they are to change their current purchasing behaviors for the products in that range. This was not the case in Quadrant, where customers simply couldn’t see the point of combining the two.

You suddenly have to merge two business models together, figure out how to manage these new people, and you may not have the same economies of scale as you would with a business expansion acquisition. There’s also the DNA issue. In 2020, I wrote about the DNA of companies:

Each business has a DNA. When a business is small, that DNA can change (a term in genetics known as a mutation). As a business grows larger, though, it becomes increasingly difficult for that DNA to change. This is why we find large organizations often get disrupted by little ones.

In media, there’s a specific DNA associated with the business. It’s very much a people business. Day in and day out, your journalists are talking to sources, reporting on what’s happening and filing stories. Each day is a new day and you have to build the product all over again. It also doesn’t really scale without additional inputs.

Typically, business expansion acquisitions fit your DNA, whereas new business acquisitions require you to evolve (mutate) your DNA.

Does this mean you should never do these types of deals? Of course not.

But I do think you need to be unbelievably intentional with these sorts of deals. Each acquisition is unique, but genuinely digging into how the business currently operates and having a very clear-cut plan on getting teams, systems, and products working together is imperative before you sign on the dotted line.

The good thing is that if you can get it right, new business acquisitions can be unbelievably exciting. For example, in that energy business I described above, you may be doing well from ads and events. But add in that data product through acquisition and you can benefit from a high-priced subscription product without having to spend years building it.

M&A can be a lot of fun and it can really move a business toward faster growth. However, so many of these deals fail because operators try to reinvent their businesses with acquisitions without really appreciating how complicated the integration is. You can’t fast-track this process. And if you try to, you’ll find yourself contributing to that $1.4-$1.8 trillion in wasted money every year.

Thanks for reading today’s newsletter. If you have thoughts, hit reply or join the AMO Slack channel. Have a great weekend!