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So You’re Thinking About M&A

A Framework for Evaluating Whether you should Pursue an Acquisition

Key takeaways:

  • Buyer beware! M&A is inherently risky, quite often does not work out
  • Companies with healthy organic growth (30%+) should not let M&A distract them
  • Companies should not invest time and resources in M&A until:
    • ROI from investing in M&A outweighs ROI from investing in organic growth
    • They reach a scale where they can successfully absorb an acquisition

Leaders at companies we interact with – both within and beyond our portfolio – regularly express interest in M&A. They understand that M&A can generate tremendous opportunities, including vertical expansion, product enhancement, and market consolidation. However, it is also important to recall the risks M&A entails: distraction from the core business, failure to realize synergies, inability to integrate products or technology, disruption of culture – the list goes on.

Top reasons why M&A transactions have not generated expected value

Source: Deloitte, “The State of the Deal, M&A Trends 2019

Quite often, an acquisition will not generate the value expected:

M&A Return on Investment

Source: Deloitte, “The State of the Deal, M&A Trends 2020

Accordingly, we caution our companies against pursuing M&A until the time is right.

As investors across 50+ companies – several of whom have completed multiple acquisitions – we have developed a framework to help leaders determine when and how much time, energy, and resources they should devote to M&A opportunities:

Market Awareness/
Adjacent Market
Company Size & Organic Growth EITHER:
Size: <$20m
Growth: <30%
Size: $20m+
Growth: <30%
Size: $20m+
Growth: <20%
Emphasis on home market and adjacent markets (probing competitive opportunities & threats) Consolidation and
adjacent market entry
Typically in company’s
home market
Dedicated Resources


Board of
CEO/CFO/Board of Directors, Relevant business unit head CEO/CFO/
Board of Directors,
full time M&A leader
Leaning forward Active
Frequency of Internal Alignment

1-2x/year or
as-needed, depending on importance of competitive threats
Quarterly 2x/month
Objectives Competitive awareness

Explore buy/build/partner decisions

Selective tuck-ins for product gaps (<5% of platform revs)

Selective consolidation
to increase

Expand TAM;

Build M&A integration capability

Increase scale of business

Growth EBITDA with
meaningful operating leverage


Our framework is centered on the size and growth rate of a portfolio company’s core business. Why? As growth equity investors, we fundamentally believe that organic growth creates more equity value than any other factor. There is an opportunity cost to M&A; effectively pursuing M&A opportunities requires the investment of significant resources and dedicated time and attention from the management team. Our framework discourages pursuing M&A until organic growth diminishes (<30%) because as long as organic growth remains high, we expect a greater return on investment in the core business than acquisition targets. We also recommend putting off M&A until a company reaches a certain scale ($20m+), such that it can absorb an acquisition target without meaningful disruption to the core business.

Once a business reaches a scale and organic growth rate outlined above, the opportunity cost to M&A diminishes – there are more resources available to invest and less risk should the acquisition fail – and the potential to create value increases – there are greater potential synergies and acquisitions can supplement declining organic growth.

In summary, corporate development and M&A activities can be hugely accretive to your business; by equal measure, they can be hugely distracting. With a thoughtful and deliberate approach to this category, a company can have a well calibrated level of market awareness and be prepared (a) when opportunity arises and (b) when the company and market is ready for it.

Sam Major

Sam Major

Knicks and Mets fan. Running addict. Gluten-free before it became cool.