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M&A: Is there an alternative?

Expanding by way of acquisition has long been a popular route for growing a business. However, M&A is not without its risks and, from Time Warner and AOL to eBay and Skype, history shows that maximising the “on paper” upsides when bringing two businesses together is not always straightforward.
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The challenge of integrating different corporate cultures and the fact that even the best due diligence cannot flush out every issue, means growth by way of acquisition is not free from pitfalls.

Against the current economic backdrop, with the uncertainty of Brexit and volatility in both the financial and geopolitical spheres, the risks are even greater. It is therefore unsurprising that more and more companies are actively seeking alternative strategies for growth.

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One option is to develop internal capabilities by investing in and accelerating innovation. The likes of Apple and Amazon have shown how successful a company can be if it relies on such a strategy to enhance product and service lines and so grow market share. By concentrating resources on internal business development, a company can improve its competitiveness and thus deliver more opportunities for growth.

On the other hand, the disadvantages of this approach are obvious. A company needs to commit substantial resources, including manpower and R&D spend, to such a strategy and there is no guarantee that this commitment will lead to developing the next iPhone. Progress on new products and services can be sluggish and the road to eventual success is often paved with failures. In the meantime, shareholders may get nervous and rethink their investments if success takes too long to achieve.

A middle way between acquisition and full reliance on internal capabilities could be strategic partnerships, especially if a key growth objective is global expansion. Breaking into foreign markets can be tough for small and medium-sized companies. Cross-border alliances can provide them with a foothold in a foreign market without the commitment of sharing ownership. Whilst such a strategy is less risky and more flexible than a traditional M&A deal, a company would still need to make sure that it is sufficiently protected in all jurisdictions by an agreement that spells out the parties’ objectives and obligations and contains detailed termination provisions in case the relationship fails.

Franchises and licences are specific types of strategic alliances. If a company has already developed an attractive product or service, it can grow its business by selling a franchise or licence to another company. This enables the franchisor/licensor to expand its business using the capital and resources of the franchisee/licensee, while still exercising control over the brand and marketing. Although franchises or licenses can lead to swift expansion, as successful examples such as McDonald’s and Subway have shown, a company’s success ultimately always depends on the success of the franchisees/licensees.

Another type of strategic alliance is a joint venture between companies pooling resources for the purpose of accomplishing a specific project. Usually the parties to a joint venture form a separate limited company for their project in order to protect the rest of their businesses in the case of failure. A joint venture therefore requires careful planning and comprehensive agreements which govern the new company and the relationship between the parties involved. When joint ventures fail, it is often because the parties have not sufficiently considered what should happen in the event of a stalemate or a party exiting.

As with acquisitions, there can also be tensions because of different management styles or incompatible corporate cultures. If a joint venture is set up and managed carefully, however, it can be a viable road to success. By leveraging the experience of partner companies and gaining access to new markets and networks, a joint venture can create quicker value for shareholders.

There is, of course, no silver bullet guaranteeing a risk-free road to success and prevailing economic uncertainties make finding the right strategy even harder. Creating the right legal framework helps build a solid foundation for company development and business expansion. From there it is a case of skilful implementation and constant monitoring to ensure the chosen strategy works and keeps on working.

Jeanette Meyer is an associate and Melanie Wadsworth is a partner in the London corporate group of the international law firm Faegre Baker Daniels.

Image: Shutterstock

The Office for National Statistics released its statistical report on mergers and acquisitions involving UK companies in the first quarter of 2016. Here are its findings.

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