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Hey entrepreneurs,

Many business owners see mergers and acquisitions as shortcuts to scaling. However, not every deal is successful.

In 2005, eBay acquired Skype for $2.6 billion. Two years later, eBay wrote down $900 million from the deal, admitting that the entire acquisition was based on a flawed assumption.

This isn’t the only case. Google bought Motorola for $12.5B to enter the phone market, but a few years later, it sold it for $2.9B.

The takeaway? Acquisitions fail because companies think they are buying ‘growth’, in reality, they are actually buying work.

Let’s break down M&A, when it works, when it fails, and how to make the right call.

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Quick Poll:

Overpay for an acquisition, overlook cultural alignment, or overestimate synergies, and your growth strategy may turn into a multi-million-dollar mistake.

But before we dive into the pitfalls, let's understand the potential upside.

Why Consider M&A in the First Place?

M&A can be a game-changer for growing businesses for various reasons, some of them being:

• Expand market share faster than organic growth would allow.

• Potentially multiply your company's valuation.

• Achieve cost savings through reduced overhead and improved supplier contracts

Imagine a regional logistics company acquiring a smaller last-mile delivery startup to increase delivery speed, making both businesses more competitive.

Sounds great, right? But before you make a move, let’s talk numbers.

Financial Readiness: Can you afford the deal?

The success of any M&A is intricately tied to the financial readiness of both the entities involved. Key questions to ask:

For the Acquiring Company:

1. Liquidity Position: Do you have enough cash reserves? M&A requires strong liquidity to cover the purchase price, legal fees, integration costs, and potential unforeseen challenges.

2. Current Debt Load: How leveraged is your company? If you already carry significant debt, adding acquisition financing could strain your financial stability.

For the Target Company: 

Some key metrics to evaluate are:

1. Revenue Trends: Look for potential growth over the last 3-5 years. A healthy target company should demonstrate at least 10-20% annual growth.

2. Cash Flow: A company with strong, consistent cash flow indicates they can sustain operations even during economic uncertainty. However, it’s important to differentiate it from EBITDA. 

Financials aside, numbers mean nothing if the companies can’t work together. That’s where operational fit comes in.

Operational Readiness: Is it a good fit?

These include non-financial factors that can cause MAJOR financial issues. 

1. Culture Fit: Merging two distinct company cultures is challenging. If employees and the leadership don't align with the new management, morale drops and key talent leaves..

2. Tech & Process Alignment: Merging different IT infrastructures, workflows, and customer service systems can cause massive operational inefficiencies.

Remember, not every acquisition leads to growth. But there’s hope to land a deal that creates real value if you know... 

How to Spot a Good Acquisition Opportunity

Now we know a good acquisition isn’t just about buying growth.

Imagine you sell industrial materials to pharmaceutical companies.

Currently, you only control a part of the supply chain, the raw material supply. But if you acquire a pharmaceutical manufacturer, you own more of the process, gaining better pricing power and reducing reliance on third parties.

Now, how do you know if it’s a smart move? Here’s what to look for:

1. Strong synergies: Will the combined company be more profitable and efficient than when they were separately?

2. Cost reduction opportunities: Can merging cut redundant costs, streamline operations, and increase profitability?

3. Speed to market: Does this acquisition help you expand faster than organic growth would?

As shown in our chart, cost synergies remain the most reliable source of value.

A key question: Can the combined entity function better than the sum of its parts?

If the answer is yes, the acquisition might be worth pursuing. There are roughly two types of situations where this might be the case: 

A good deal on paper can quickly turn into a nightmare. Watch for these warning signs.

Red Flags That Can Kill a Deal 🚩

A bad acquisition doesn’t just cost money, it drains resources, time, and focus. Here are the biggest red flags to watch for:

1. Overpaying for Synergies That Don’t Exist: Many companies overestimate cost savings, leading to unrealistic expectations.

Example: eBay assumed Skype would increase auction transactions, it didn’t. The synergy was a myth. $900M lost.

2. Skipping due diligence:  It’s so important to assess potential targets carefully, considering their market position, financial health, cultural fit, and growth prospects.

3. Excessive Balance Sheet Leverage: If the target company has too much debt, it places a financial strain on the acquiring firm, making it difficult to reinvest in growth or manage economic downturns. You need to think like a CFO here! 

M&A Success Goes Beyond the Deal Itself

A strategic M&A can multiply your valuation, but before proceeding, ask yourself:

☑️ Are you financially and operationally ready for an acquisition?

☑️ Does the deal align with your long-term strategy?

☑️ Have you done the due diligence to uncover hidden risks?

Mergers often fail not because of a bad deal, but due to poor integration, cultural clashes, operational disruptions, and overlooked transition costs.

Recently, I shared the inside story of a €15 million acquisition fraud, how it unfolded and what went wrong. If you haven’t read it yet, check it out here.

And this? Just the tip of the iceberg. Next Wednesday, I’ll tackle the #1 financial struggle every founder faces. See you then.

Matteo Turi, 
Your Personal CFO

P.S. Got questions? Hit reply,  I read and respond to every email.