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M&A strategy – ‘string of pearls’ vs
big ticket acquisitions
By Chandru Chawla, Head Corporate Strategy, M&A and New Ventures, Cipla
It seems to be M&A season in India – with
Snapdeal, Flipkart, Myntra, Jabong and
Vodafone amongst many others, in the
spotlight. Globally, M&A activity stood at
about $3.9 trillion last year. India alone
saw about $61.2 billion worth of M&A
activity in FY17, a figure that is more than
double the previous year.
It’s worth taking a look at the entire M&A
space in India and analyzing what’s
happening. The central idea of any M&A
is to shape corporate development.
Therefore, the most common factors that
drive M&A activity are diversification and
growth, a good example of which would
be Amazon’s acquisition of Whole Foods
and Zappos. Other factors include the
need to secure the supply chain by
acquiring units for backward integration.
Companies also use M&As as an entry
ticket to new markets or geographies.
The Vodafone-Idea merger is an example
of going the M&A route to gain
marketshare and reduce competition.
But of late, we have seen examples of new
factors driving M&A strategies – for
instance, the role of matchmaker played
by the US government in the Bank of
America – Merrill Lynch acquisition.
Sometimes, a new acquisition is targeted
to get access to its investors, who then
come on board the parent entity. Then
there is the need for new competencies in
the age of Industry 4.0 – companies find
M&As a fast route to gain critical
technical capabilities and shorten the
time-to-market.
On the flip side, divestment of units is
also a core part of M&A activity as it
allows companies to trim assets and
realign the business strategy to meet the
growth vision.
At Cipla, we look at all three aspects –
mergers, acquisitions and divestments –
as elements of a long term strategy to
enable our vision for the future.
Two approaches
Typically, companies follow one of two
approaches – the string of pearls
approach, where the M&A strategy is to
acquire a series of smaller units, or the
big ticket approach, where the
acquisition is substantial in size and
valuation. Interestingly, some of the
effort in both cases – such as identifying
and understanding the opportunity, and
the execution of the M&A – is similar.
So what drives the choice of approach?
Often, the M&A strategy is dependent on
the maturity level of a company and the
industry. More mature companies may
opt for a big ticket, more impactful
acquisition that will help consolidate the
position in the marketplace.
Early stage companies may prefer the
string of pearls approach as it allows
them to diversify risks across smaller
bets. A disclaimer here: although,
intuitively the string of pearls approach
appears to be less risky, often smaller
companies carry a higher discount factor.
When we model the integration, we
factor in more conservatism in the
numbers, because there is a higher risk in
assimilation. So the string of pearls
approach may not be a sure bet in all
cases.