Amit Ashkenazi is VP Business Strategy at Fiverr, and also formerly a Partner at Viola Growth. This post was written during his tenure at Viola.
One of the most important goals for us as Private Equity investors and advocates of value creation is to help our portfolio companies to accelerate their growth and expand their margins. The direct scope of organic growth can often be limited however, so in order to maintain high growth rates and ultimately reach critical mass, inorganic growth can sometimes be an effective course of action.
So, what exactly is inorganic growth?
Investopedia defines inorganic growth as follows: “Growth in the operation of a business that results from mergers or takeovers, rather than an increase in the company’s own business activity. Firms that choose to grow inorganically can gain access to new markets and fresh ideas that become available through successful mergers and acquisitions.”
‘Mergers and Acquisitions‘ (M&A’s) is basically a term that refers to the consolidation of companies by either combining them into a newly established company (merger) or adding a company to an existing one without a new company being formed (acquisition),
Inorganic growth can be very beneficial for many reasons, such as:
- Expand your assets, your income and your market presence immediately
- Build up your operation and bring you closer to a dominant market position
- Realize cost efficiencies through economies of scale and synergies
- Gain access to new management talent that will enable further growth
- Boost your valuation thanks to multiple expansion based on higher growth rates
Some industries are more prone to see M&A’s than others, especially highly fragmented industries with no dominant player serving the market as a “one stop shop” and also limited-growth industries where companies struggle to gain enough traction, M&A’s are likely to take place.
Here are some of my own insights on things that are worth bearing in mind if you’re considering inorganic growth for your company:
Know what you acquire: It makes sense to expand into new products for your existing customers/market or to gain access to new customers/markets for your existing products. This way you can leverage synergies to create value from day one, both in terms of top line growth and margin improvement. Approaching new customers with new offerings may prove to be too big a distraction that may eventually cause diminished value. Approaching existing customers/markets with the same products can be achieved by acquiring direct competition, which will enable mainly cost synergies and margin improvement and limited revenue synergies that could enhance growth over time.
Assemble the right management: Not every manager is equipped to build and execute an M&A strategy and Post Merger Integration (PMI). Make sure that you have an executive with M&A experience in your team. There are many advisors that can help, be it in terms of sourcing, transaction support and PMI, but nothing beats internal experience and efforts.
Focus on execution: Transactions often fail not because of bad strategy, but due to poor execution and integration. There will suddenly be many more employees to manage and more assets to monitor, use and dispose of as your business changes. Significant planning is required to make sure that you are not losing business or talent, and that multiple company cultures are blended effectively.
Financial discipline: Pay the right price and have sufficient funds. It is critical for the deal to make financial sense and to be well structured. Build a business case and analyze what the target company is worth to you, assuming you are implementing your strategy and synergies. Keep in mind that some of the synergies may bear significant costs, such as layoffs and shut down costs.
Remember that transactions are considered successful not just by making the deal happen, but by creating long term value for shareholders.