According to new research from management consulting firm McKinsey & Co, there is strong evidence that there is a “right way” and a “wrong way” to undertake acquisitions in the tech sector, and firms that do M&A right can and do see significant benefits from the strategy.
As McKinsey & Co’s Brian Brian Dinneen and colleagues point out, acquisitions are an effective method to accelerate revenue growth. Moreover, given that growth typically determines whether a company thrives, survives or dies in the tech sector, M&A activity plays an even larger role.
Keep in mind that while 20% revenue growth would be reason to celebrate in most industries, firms in software and online services typically need much more rapid growth to prosper. Earlier McKinsey & Co research determined that software and online-services companies with revenue that grows by over 60% a year when they top $100 million in sales are 800% more likely to eventually hit $1 billion in annual revenue than firms with revenue that increases by less than 20% a year.
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Dinneen et al say their data suggests that firms that employ a “high-volume” M&A strategy to propel growth are the most likely to hit the big time. By the same token, a “low-volume,” episodic acquisitions strategy often actually stifles growth. Even though it seems counter-intuitive, McKiney’s research suggests that acquiring companies on an infrequent basis may actually disrupt organic growth and slow increases in revenue.
The October 2015 study McKinsey analyzed the acquisition activity of 578 software and online-services companies with greater than $100 million in annual revenue and identified three patterns relating to M&A activity:
- Low-volume acquisition programs disrupt growth; high-volume programs accelerate growth. This one was pretty obvious — software and online-services firms who had the most rapid revenue growth had high-volume acquisition programs.
- Successful acquisition programs complement organic growth. The data showed that among tech firms that hit $1 billion in annual revenue, acquisitions maintained or accelerated organic growth. These firms undertook more deals, saw greater growth out of each deal, and maintained high organic growth despite spending considerable time and effort on acquisitions.
- Successful acquisitions align with growth strategy. Tech firms that increase revenue growth through acquisitions don’t just see deals as opportunistic events to capture cost synergies. They analyze deals based on how they dovetail with their fundamental growth strategy.