How to thrive after M&As have redefined the market

May 18, 2016By Industry Intuition, Views


By Dave Wendland for “My Turn” in Chain Drug Review

April 18, 2016

Editor’s Note: This article is the first in a four-part series.

There should be no disagreement that 2015 was a remarkable year of mergers and acquisitions, with nearly $5 trillion in announced deals.

M&A activity is expected to continue to grow worldwide. The transactions have been increasing in number and value from year to year — with 2015 breaking previous records. Recent M&A activity has also been marked by a growing number of international combinations, with especially strong interest coming from companies in China and other Asian countries. Individual transactions have become larger, with a dramatic increase in the number of deals over $10 billion.

It may surprise those who believe M&A fervor may be slowing down that as many as 50% of companies are in conversation or giving consideration to mergers at this very moment.

According to Bob Rubino, executive vice president and head of corporate finance and capital markets at Citizens Commercial Banking, “More than half of midsize U.S. companies, those with annual revenue between $5 million and $2 billion are looking for transformative deals to help them jump-start revenues.”

Although the idea of merging with another company or making an acquisition is not new, the driving force has evolved. The most common reasons to consider a merger include fortification of a competitive position/ footprint in the market; expansion beyond current markets; stockholder satisfaction by accelerated growth; use of capital that is not generating the return it once did (some companies are very cash rich at present); and pushing beyond borders to enhance global presence.

The increased activity may also be fueled by governmental policies and regulations forcing smaller organizations to improve their influence by becoming larger or to offset other increased costs (e.g., health care expenses or corporate tax structures).

There is virtually no industry that has been immune from M&A activity. Competition in the financial services industry is quite constant, and therefore prepared counter-reactions are likely already in place. The same could be said of the pharma industry. On the other hand, recent influence among established food manufacturers in the organic and natural space is somewhat unprecedented and therefore counterattacks and strategies may largely remain unprepared.

In the retail health care space, we have witnessed activity moving closer to full vertical integration — in other words, controlling interest from the point of manufacturing through distribution, to retail, related health services and ultimately benefits management. Should this direction continue to emerge, most — if not all — stakeholders will be affected by the new shape of this health care landscape. How an uninvolved firm that remains standing reacts after the M&A dust settles can be telling, and the reactions vary widely. Conventional wisdom suggests that a counterattack may be warranted — causing a chain reaction of similar acquisitions. However, there may be more calculated reactions worthy of consideration before making such a potentially tumultuous decision. Some look to gain advantage by turning to innovation and organic growth. Still others may buff and polish their operation to appeal to other suitors.

So how should an organization react after competitors merge? The most prudent reaction to a merger that directly or indirectly affects a business is to use the threat to survival to jumpstart internal change. It’s an ideal time to take stock of the assets and unique capabilities of a company.

In this editorial series, we will focus on retail reactions and address such issues as in-store innovation, pricing strategies and service levels. Although the list of potential areas of attention goes much deeper than these three topics, at a bare minimum attention must be given to these essential elements that can protect, improve and fortify a survivor’s role within the newly shaped market.

With few exceptions, the aftermath of mergers and acquisitions causes market disruption. Those that thrive in this world of seemingly constant disruption ensure that their customers can trust them, and they make prudent investments in those customers. Unfortunately, the companies that keep riding their current model and attempt to lock in customers without acknowledging the disruption caused by M&A activity are likely doomed.

The process begins with an honest assessment of the extent of the industry disruption. This is followed by an analysis of potential responses. Then organizations must work to engage and coalesce stakeholders within the company and direct all efforts toward the selected path forward, while at the same time reassuring customers that their loyalty will be protected despite tumultuous waves caused by the M&A activity in the industry.

Resisting the temptation to strike back with a deal of its own following an industry merger is paramount. Carefully considering a broader set of strategies — and, when appropriate, implementing one of them instead — may help avert a devastating outcome.

The focus of this editorial series is on retail reactions to competitive mergers and acquisitions and addresses such issues as in-store innovation, pricing strategies, and service levels.