The M&A Canvas for analyzing the strategic fit of acquisition candidates (Part 1)

1. Introduction: Measuring the „strategic fit”

Companies that are reaching the limits of their time- or market-related or technological opportunities can fix the strategic bottleneck under certain time restrictions only through external growth, i.e. by acquiring another company. Another strategic necessity for many companies is the extension or transformation of their business model(s) towards more digital parts or completely digitalized business models which is often done by employing M&A as an instrument for business development.

A central decision problem in such M&A transactions is the selection of adequate candidates for reaching the strategic objectives, or formulated as a question: Which acquisition candidate is showing the highest strategic fit?

The objective of this paper is to develop an instrument for solving that decision problem with the help of a method with high practicability.

There is ample literature, both theoretical and practical, on this issue.[1. See for example Ansoff: Management-Strategie, München, 1966; Porter: Wettbewerbsvorteile: Spitzenleistungen erreichen und behaupten, 3th edition, Frankfurt am Main and New York, 1992; Rödl: Strategische Unternehmensbewertung im Rahmen des Akquisitionsprozesses, München, 2002; Köppen: Synergieermittlung im Vorfeld von Unternehmenszusammenschlüssen: Beurteilung der Vorgehensweise anhand eines Referenzmodells, Wiesbaden, 2004; Wöginger: Das Synergy-Value-Konzept: Synergien bei Mergers & Acquisitions, Wiesbaden, 2004; Rockholtz: Due Diligence-Konzeption zum synergieorientierten Akquisitionsmanagement, in: Due Diligence bei Unternehmensakquisitionen, edited by Berens, Brauner, Strauch and Knauer, in: Schriftenreihe Der Betrieb, 7th edition, Stuttgart, 2013, pp. 205-227. Lucks/Meckl: Internationale Mergers & Acquisitions, 2th edition, Berlin and Heidelberg, 2015.] Nevertheless especially with the increase of uncertainty for example due to technical disruptions like digitalization, a practical and efficient instrument is missing. Such an easy-to-apply model would be of high relevance for companies, since the strategic fit must often be tested with a high number of potential candidates and must structure a complex problem. Furthermore, a procedure for screening which is explicitly relating to the whole business model of the acquirer and putting an emphasis on the connection capability of the business model of the target company has not been developed yet in literature. In times of strategic digital transformation when whole business models are adapted and changed, such an instrument, taking into account the adequacy of the target business model, would improve the M&A decision.

The first is to develop a scheme for measuring the strategic fit. Our proposal is to refer already at this early stage of the M&A process to a construct which will become a central issue in the transaction phase, especially in the evaluation of the target companies synergies.[2. Generally to synergies see for example Meckl/Riedel: Shareholder-Value-Steigerung durch
Mergers & Acquisitions, in: Zeitschrift für Controlling & Management, 55 (6), 2011, pp. 377-386.]

When M&A transactions are not reaching their objectives, mainly when they are not creating additional value, the incompetence of realizing enough synergies is often cited as the ultimate reason for the economic failure of the deal which gives evidence that they are a highly relevant part of the M&A process.[3. See for example Miles/Borchert/Ramanathan: Why some merging companies become synergy overachievers, Bain & Company Report 2014, retrieved November 13, 2019, from www.bain.com/Images/BAIN_BRIEF_Why_some_merging_companies_become_synergy_overachievers.pdf, 2014, pp. 1-4.]

Generally speaking, synergies are universally defined as “combined performance that is greater than the sum of the parts”.[4. Cf. Ansoff: Corporate Strategy, London, 1986, p. 72.] However, this synergy term refers not only to the realization of qualitative competitive advantages, but also defines three main effects:

• increase in revenue (without input change),

• cost reduction,

• investment reduction.

Thereby various kinds of synergies are classified according to functional areas of a company (see Figure 1).[5. Cf. ibid, p. 75.]

Source: Rotering 1993, p. 43.

If these synergies do not emerge, this will usually lead to the – as known about outsourcing processes from the literature – negative effects in the organizational structure of the companies involved. Declining risk appetite, decreasing motivation of employees and as an effect even declining productivity are the consequences of the often mentioned “merger syndrome”.[6. Cf. Helm/Stumpp: Management von Outsourcing-Aktivitäten, in: Der Betrieb, 52 (42), 1999, pp. 2121-2125. Generally to the merger syndrome see for example Mirvis/Marks: Managing the Merger: Making It Work, Washington, DC, 2003.]

In general, synergies, which are considered a goal of M&A, arise from the interaction or interplay of objects. Synergies can only develop if there is a certain degree of similarity and/or complementarity (fit) between the considered objects.[7. Cf. Paprottka: Unternehmenszusammenschlüsse: Synergiepotentiale und ihre Umsetzungsmöglichkeiten durch Integration, Wiesbaden, 1996, p. 69; Wirtz: Mergers & Acquisitions Management. Strategie und Organisation von Unternehmenszusammenschlüssen, 3th edition, Wiesbaden, 2014, p. 62; Angermayer-Michler/Oser: Berücksichtigung von Synergieeffekten bei der Unternehmensbewertung, in: Praxishandbuch der Unternehmensbewertung: Grundlagen und Methoden – Bewertungsverfahren – Besonderheiten bei der Bewertung, edited by Peemöller, 6th edition, Herne, 2015, pp. 1373.] The strategic fit is a pre-condition for the realization of synergies which makes it a central objective of M&A deals.

The acquisition is a special case of external growth of a company and is characterized by the fact that it is especially, as well as the various forms of inter-firm cooperation, time-saving. In the strategic considerations of companies from various sectors, M&A options are an integral part now. In the literature there are a variety of workouts about M&A. Many of them consider the management of an M&A transaction as a process and develop proposals for an efficient structuring of such a process.[8. See for example Meckl: Organising and leading M&A projects, in: International Journal of Project Management, 22 (6), 2004, pp.455-462] Others are focusing on a working package within such a M&A process. Most of the times these are company evaluation,[9. For example Sebastian/Niederdrenk/Tesch: Market Due Diligence: Bewertung von Unternehmen aus Sicht des Marktes, in: M&A Review, 9 (5), 1998, pp. 207-211; Hölscher/Nestler/Otto: Handbuch Financial Due Diligence: Professionelle Analyse deutscher Unternehmen bei Unternehmenskäufen, Weinheim, 2007.] due diligence,[10. For example Gleich/Kierans/Hasselbach: Value in Due Diligence: Contemporary Strategies for Merger and Acquisition Success, Farnham and Burlington, 2010; Rockholtz, 2013.] negotiations or the post merger integration.[11. For negotiations for example DePamphilis: Mergers and Acquisitions Basics: Negotiation and Deal Structuring, Amsterdam et al., 2011. For post merger integration for example Colombo/Rabbiosi: Technological similarity, post-acquisition R&D reorganization, and innovation performance in horizontal acquisitions, in: Research Policy, 43 (6), 2014, pp. 1039-1054.] The working package of assessing the strategic fit of potential takeover candidates received relatively little attention in the literature.[12. Cf. Alfs: Strategisches Portfoliomanagement als Aufgabenfeld des Konzern-Controllings: Risiko- und erfolgsorientierte Evaluierung der Kapitalallokation im Kontext der Corporate Strategy, Wiesbaden, 2015, p. 111.]

The present work deals mainly with the presentation of a new approach to the analysis of the strategic fit. It is true that literature, and M&A consultants, have already developed screening methods. But scoring models or sequential selection models focus on single criteria. A holistic assessment is still largely ignored in the previously published models. We therefore introduce the M&A Canvas with the intention of providing an approach to screening in a M&A process which is regarding the whole business model and thus is creating a better basis for the ultimate acquisition decision. For reaching that target, the role of screening in the M&A process is briefly explained in chapter 2.

Source: based on Lucks/Meckl 2015, p 99. Planning

The basis for the M&A Canvas is the canvas business model method, which has its origin in the subject area of business model innovation and is often used in the start-up environment, but also increasingly in the area of strategic corporate development. The original business canvas with its description of business models is presented in chapter 3. Part 2 of this article deals with the adaptation of this method to the M&A screening case which results in the above mentioned M&A Canvas. There the extension and evaluation of the canvas model is described.

2. Screening in the M&A process

M&A is an inconsistently defined expression in the literature.[13. Cf. Lucks/Meckl, 2015.] The basic characteristic of M&A is the change of control of the equity of a company so that M&A transactions are often depicted as a process (Figure 2).[14. Cf. Hohnhaus: Erfolg der M&A-Beratung bei Unternehmenstransaktionen: Strukturelle Voraussetzungen und funktionale Beiträge aus Kundensicht, Wiesbaden, 2004; Lucks/Meckl 2015.]

The working package of “screening” is located in a very early stage of the process, for it ultimately gives a recommendation which target company is an adequate candidate for acquisition. Many authors recommend a sequential screening approach. From a so-called “long list” of candidates which contains all known potential targets, in a first selection stage those companies with a high strategic fit are chosen. The remaining ones are analyzed with respect to for example organizational, cultural and financial fits.[15. In the literature there is a series of similar names, cf. Jansen: Mergers & Acquisitions. Unternehmensakquisitionen und -kooperationen: Eine strategische, organisatorische und kapitalmarkttheoretische Einführung, 5th edition, Wiesbaden, 2008, pp. 216-217.]

In this paper we focus on the first selection stage of the screening, on the “strategic fit” which proves to be the “gatekeeper” for the other stages since it examines the basic match of the strategic objectives of the buyer with the characteristics of the target. Here, the strategic fit means a match and an accordance with the transaction partner in view of the company’s strategic objectives.[16. Cf. Coenenberg/Schultze: Akquisition und Unternehmensbewertung, in: Betriebswirtschaft für Führungskräfte: Eine Einführung für Ingenieure, Naturwissenschaftler, Juristen und Geisteswissenschaftler, edited by Busse von Colbe, Coenenberg, Kajüter, Linnhoff and Pellens, 4th edition, Stuttgart, 2011, pp. 357; Wirtz, 2014, p. 188.] The analysis of the strategic rationale is an essential basis for decision making for selecting appropriate transfer candidates.[17. Cf. for example Hohnhaus, 2004, p. 56, which in turn refers to Jung: Erfolgsfaktoren von Unternehmensakquisitionen, Stuttgart, 1993, p. 163.]

3. Presentation of the Canvas method

“The essence of a business model is in defining the manner by which the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit. It thus reflects management’s hypothesis about what customers want, how they want it, and how the enterprise can organize to best meet those needs, get paid for doing so, and make a profit”[18. Teece: Business Models, Business Strategy and Innovation, in: Long Range Planning, 43 (2-3), 2010, pp. 172.].

In recent times, the topic of business models has received a high degree of attention, since digitalization as the major technological trend in management forces companies to transform large parts of their activities, hence their business models. Theoretical and practical literature on business model and the usage of this construct is ample.[19. See for example Eckert: Business Model Prototyping: Geschäftsmodellentwicklung im Hyperwettbewerb. Strategische Überlegenheit als Ziel, Wiesbaden, 2014; Becker/Eierle/Fliaster/Ivens/Leischnig/Pflaum/Sucky: Geschäftsmodelle in der digitalen Welt: Strategien, Prozesse und Praxiserfahrungen, Wiesbaden, 2018.]

Quelle: Osterwalder/Pigneur, 2010, p. 18–19

An often quoted, very pragmatic approach to the idea of business model was developed by Osterwalder and Pigneur.[20. Cf. Osterwalder, A.; Pigneur: Business Model Generation: A handbook for visionaries, game changers, and challengers, New Jersey, 2010. For further reading on the literature of the two authors see for example Clark/Osterwalder/Pigneur: Business Model You: A One-Page Method for Reinventing Your Career, Hoboken (New Jersey), 2012; Osterwalder/Pigneur/Bernarda/Smith: Value Proposition Design: How to create products and services customers want, Hoboken (New Jersey), 2014.] Osterwalder and Pigneur together have developed the so-called “Business Model Canvas”, which is intended to simplify working with this complex, elusive matter. Derived from the term “canvas”, this is a firmly defined structure with which business models can be developed, documented and further developed on one sheet.

In practice, the Business Model Canvas is very frequently employed. One important reason for that is the intuitively understandable and simple structure of the model. A second, strong aspect for the use of this concept is the ability to demonstrate a complex business model on only one page. A third, recently important aspect of the canvas is its potential to be used as a basis for transforming a business model, for example towards a digitalized structure.

The Business Canvas consists of nine fields, which are briefly described in the following section.

3.1 Value proposition

According to the definition of Osterwalder/Pigneur, the “Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific customer segment”[21. Osterwalder, 2010, p. 22.]. From this perspective, this section of the canvas grapples with the portfolio of all offered services and products, and documents them.

The starting point in the consideration of the own, but also the business models of competitors, is the “solution-independent customer benefit”,[22. Cf. Stöger: Strategieentwicklung für die Praxis: Kunde, Leistung, Ergebnis, Stuttgart, 2007, p. 53.] which the offered product range provides to the customers, as well as the company’s performance-based answers to the needs and problems of the customers. It is advisable to follow the drivers of demand, the triggering customer problems, regardless of the presumed benefit.[23. Cf. Helm: Marketing: Strategische Analyse und marktorientierte Umsetzung, 8th edition., 2009, Stuttgart, p. 48.] An explanatory example of the value proposition in the Canvas is the business with the rental of DVDs and Blue-Rays. Looking at the “solution-independent customer value”,[24. Cf. Stöger, 2007, p. 53.] for the customer it simply consists of a central aspect: entertainment. The purchase of the DVD or Blue-Ray does, at least in most cases, not matter directly.

Accordingly, it is about cost leadership in its broadest sense, because although the customer acquires no product, however, the desired benefit, i.e. entertainment, can be achieved at relatively low cost – and this aspect is threatened by the internet streaming.

3.2 Customer Segments

Even before the value proposition, the customers represent the most important dimension of a company. Therefore, the analysis of the customer groups, which the offered value proposition addresses, is of central importance. The segmentation process is very complex and usually also must be considered critical. That’s because many different influential criteria such as in geographical, demographical, psychographical and behavioral terms play a significant role.[25. Cf. Helm, 2009, p. 212.]

3.3 Key Resources

This field “describes the most important assets required to make a business model work”[26. Osterwalder/Pigneur, 2010, p. 34.]. Similar to the theory of resource-oriented approach (“Resource-Based View of Strategy”), whose core statement reflects company-specific equipment on resources and their combination as the source of the corporate success, for canvas, the question about central, available resources is highly relevant.[27. Cf. Welge/Al-Laham: Strategisches Management: Grundlagen, Prozess, Implementierung, 6th edition, Wiesbaden, 2012, p. 87.] In general, resources can be defined as any tangible and intangible goods, assets and utility factors which a company owns.[28. Cf. Hungenberg: Strategisches Management in Unternehmen: Ziele, Prozesse, Verfahren, 8th edition, Wiesbaden, 2014, p. 149.]

Resources are subdivided in tangible and intangible resources, such as human or process resources, image or technology know-how.[29. Cf. Helm, 2009, p. 117.] In addition to the presence of the resources, also the capacity must be given to bundle these so-called core competences optimally.

3.4 Key Partnerships

Key partnerships can be considered as a complement of the array of key resources, but as their external category.[30. Cf. Milberg/Schuh: Erfolg in Netzwerken, Berlin and Heidelberg, 2002, p. 13.] Here, all relevant partnerships are noted that contribute to the success of the company, because very few companies have internalized the entire value chain process.

Therefore, often there are central, indispensable partners as key suppliers or external companies that are essential for the respective organization. This canvas segment is formed by these partnerships, which are important for optimizing processes, reducing risks or securing risky resources.[31. Cf. Osterwalder/Pigneur, 2010, p. 38.]

3.5 Key Activities

Products and services must pass through different value activities to reach the market maturity.[32. Cf. Baur/Hopfmann/Schneider (1994): Re-Design von Wertketten durch Make or Buy, Wiesbaden, 1994, p. 13.] In the context of the key resources, it is advisable to examine the products in terms of their use-creating core elements.[33. Cf. Helm, 2009, pp. 259, 267.] All relevant activities in the process of the so-called value chain, which the company has internalized, are analyzed and documented here.

In addition, this section also includes all activities that are necessary to ensure the functionality of the undertaking. In addition to production and R&D, financial and personnel activities as well as other processes (for example a legal department) are also documented here.

3.6 Revenue Streams

In addition to the area of customer segmentation, this section deals with the company’s profitability and therefore also with the customer segments served. Based on the basic principle that profit is derived from turnover minus costs, here the question arises as to whether and with what activities the company creates earnings.[34. Cf. Osterwalder/Pigneur, 2010, p. 31.]

3.7 Customer Relationships

This field links the company to its customers. It deals with the nature and the depth of relationships that both parties mutually have established. This can lead to significant differences between different companies even within the same market segment.

A vivid example in the consumer goods industry is the production and distribution of food. While a consumer can hardly establish a relationship with a manufacturer of private label products of a food discounter, well-known producers (brand manufacturers) certainly try to establish a deep and long-term customer relationship with feedback possibilities, design possibilities of new products and so on.

3.8 Channels

In addition to customer relationships, communication, distribution and sales channels build another interface between the company and the customer groups.[35. Cf. Osterwalder/Pigneur, 2010, p. 26.] The field deals with the different ways in which a customer can acquire a product/service from the company or gain access to the product, not only at the time of the first transaction, but also during use. This is relevant, for example, for products whose use involves recurring interaction between supplier and customer. Sales channels can be subdivided into direct and indirect channels, whereby the tasks in the sales channel are fulfilled to different extents and of different quality.[36. Cf. Sauer, A. (2005): Veränderungsprozesse in der Distribution: Strategien für einen erfolgreichen Wandel der Absatzkanäle, Wiesbaden, 2005, p. 86; Helm/Mauroner/Steiner: Marketing, Vertrieb und Distribution, Konstanz, 2015, p. 125.]

3.9 Cost Structure

This field includes all costs incurred in order to exist in a business area. These may range from R&D costs to compensation payments (or guarantee payments) and are closely linked to internal accounting or budgeting. Depending on the fields in which a company operates, the cost structure can be very clear, especially for companies with cost leadership. It is closely related, for example, to key partnerships (make-or-buy).

The described nine fields closely interact in the business canvas and form as an entity the business model of a company, which is shown in figure 3.

4. Conclusion

The screening in the planning phase of the M&A process includes a check for strategic fit, which in turn is accompanied by a check for possible synergies. So far, a fully suitable instrument for this purpose in the literature is missing. The Canvas business model, popular for its use in business model development, is also useful as an instrument for synergy identification. The following Part 2 will present how this method can be applied in depth in this context.