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Building deals on bedrock.

David Harding1, Sam Rovit

  • 1Bain & Company, Boston, USA. david.harding@bain.com

Harvard Business Review
|September 29, 2004
PubMed
Summary

Mergers and acquisitions (M&A) are strategic when reinforcing a company's core competitive advantage or facilitating a necessary industry shift. Successful M&A involves frequent, smaller deals aligned with fundamental business models, not just large, transformative ones.

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Area of Science:

  • Business Strategy
  • Corporate Finance
  • Organizational Behavior

Background:

  • Many companies pursue mergers and acquisitions (M&A) for rapid growth or to fix weak business models, often with negative outcomes.
  • High-profile failures like Vivendi and AOL Time Warner highlight the risks associated with poorly conceived M&A strategies.

Purpose of the Study:

  • To identify the specific circumstances under which major mergers and acquisitions (M&A) are strategically sound.
  • To provide a framework for evaluating M&A opportunities based on industry dynamics and competitive bases.

Main Methods:

  • Analysis of extensive data and practical experience in mergers and acquisitions.
  • Case study examination of companies like Kellogg (reinforcing competitive base) and Comcast (shifting competitive base).

Main Results:

  • Major M&A deals are effective only when they reinforce an existing competitive advantage or enable a strategic shift due to industry changes.
  • In stable industries, M&A should bolster the dominant competitive basis (e.g., cost, brand, loyalty).
  • In changing industries, M&A should facilitate a transition to a new competitive basis, often through a series of smaller, frequent acquisitions.

Conclusions:

  • Successful acquirers engage in M&A frequently, executing smaller, strategic transactions rather than relying on single, large, transformative deals.
  • M&A can fuel growth effectively when anchored in the industry's fundamental revenue generation model.
  • Failure to align M&A with the core business strategy and industry economics leads to significant financial losses.

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