Despite the widespread perception, even within business studies, that over half of mergers and acquisitions fail—sometimes disastrously—the reality is more nuanced. Are these infamous failure stories accurate? At their worst, such narratives can undermine the confidence of growth company management in their pursuit for growth.
Sensational headlines about massive goodwill write-downs in takeovers or the glorification of successful business leaders as 'rainmakers' are easy fodder for the media. However, the truth is far more complex.
A goodwill write-down doesn’t necessarily indicate that the strategic goals of the acquisition haven’t been met. For instance, a growth company might overpay for a business but not for the long-term economic benefits it will yield. This might be done to secure a strategic competitive advantage from the acquired company, which can be significantly more valuable than the easily measurable short-term gains.
Most mergers and acquisitions are likely to encounter some form of failure, reinforcing the negative and mythical perceptions surrounding M&A. However, this does not automatically negate the possibility of achieving a strategic competitive advantage or positive long-term shareholder value.
The true measure of an acquisition’s success lies in whether it adds or destroys value over time. It is essential to remember that acquisitions are inherently investments.
Monitoring the success of these investments requires appropriate financial indicators. For unlisted SMEs, valuation necessitates expert advice. A competent owner understands the value of their company.
At Grannenfelt Finance, we regularly assess the valuation of our clients' companies. For growth companies, especially those in the early stages and not yet profitable, valuation demands significantly more expertise. Unlike real estate, which can be easily appraised by an external evaluator, valuing a growth company is far more complex.
Is now the right time to consider an acquisition?
Acquiring an established business can be a safer path to entrepreneurship. With a proven business model, existing customer base, and established sales and cash flow, the risks are significantly reduced compared to starting a new venture from scratch.
Anna-Mari Palo of Finnvera notes that interest rates have peaked, which is anticipated to positively influence the number of acquisitions in 2024*. According to Finnvera’s recent study, acquiring a company is safer than launching a start-up, with SMEs boasting a success rate of over 90% in M&A transactions.
*) Finnveran omistajanvaihdoskatsaus 1-12/2023
