The significance of M&A transactions 

M&A involves transferring or consolidating companies or business units through various transactions. While often seen as an investment tool, M&A serves multiple purposes:

• Expanding business operations
• Deploying excess liquidity
• Acquiring talent, assets, or patents
• Diversifying products or brands

For growth-stage companies, M&A drives market expansion and operational scaling. Acquiring a tech or operational unit abroad can cut costs and boost efficiency.

For companies being acquired, M&A can unlock new revenue streams or help consolidate underperforming units. It offers access to better technology, operational expertise, and new customer bases.

Reasons to pursue M&A as an SME

M&A transactions are driven by many factors, but at their core, they serve two purposes: accelerating growth and boosting go-to-market strategies.

Quick market entry

M&A offers companies a fast track into new markets by leveraging the brand, expertise, market presence, client base, local talent, and operations of established competitors.

In regulated industries, acquiring local licenses and permits through M&A can significantly cut down entry time and effort. These deals let companies build on the trust, networks, and know-how of the acquired business.

Portfolio diversification

M&A also accelerates portfolio diversification. By acquiring companies in different sectors, businesses gain instant access to new markets and expertise – bypassing the slow process of building knowledge from scratch.

Acquire expertise and talent

M&A deals often target intellectual property, tech expertise, talent, or brand recognition – key drivers for economic, cultural, or technological growth.

Boost revenue

M&A can open new revenue streams, fuel growth, scale operations, and enhance shareholder value, while also serving as powerful PR and marketing tools. For example, Event Inc has used M&A to boost its growth and get a stronger foothold into new market segments – all funded with re:cap.

Self-protection

Less frequently, M&A acts as shields – blocking competitors from gaining an edge. Companies may acquire rivals to eliminate threats, secure market share, or prevent the loss of key assets like patents or top talent. In some cases, they aim to preempt disruption from emerging startups or fend off hostile takeovers.

M&A best practices for SMEs

Mergers and acquisitions offer growth opportunities but come with complexities that can trip up even seasoned businesses. For SMEs and first-time dealmakers, limited resources heighten the stakes. A meticulous approach is key to avoiding costly missteps.

Here are essential rules to boost your chances of M&A success:

1. Set clear, measurable goals 

Before pursuing an M&A deal, companies must define precise, measurable objectives. These goals should be realistic, align with both short- and long-term strategies, and secure approval from all relevant stakeholders.

Stakeholders aren't limited to executives or board members. They include all team members affected by the transaction. Those with hands-on operational experience often bring valuable, practical insights. They can flag potential workload increases or operational challenges, helping management avoid costly missteps and allowing teams to prepare for transitions early.

What could happen?

Ignoring on-the-ground feedback can derail even the biggest deals.

Consider Microsoft’s failed 2014 acquisition of Nokia – a prime example of misaligned expectations leading to operational and financial fallout.

2. Evaluate assets and assess accessibility

Once objectives are set, companies must evaluate their assets to determine what’s accessible and at what cost.

Review resources across the board:

• Human capital
• Technical capabilities
• Budget
• Timelines

Budget planning should factor in best- and worst-case scenarios, accounting for potential delays – whether from title transfers, licensing, regulatory approvals, or competition authority reviews. A thorough asset evaluation upfront ensures smoother integration planning down the line.

What could happen?

Regulatory hurdles or unexpected market shifts can lead to prolonged waiting periods, inflating costs beyond the original budget. Delays of up to a year aren’t uncommon, draining resources and momentum.

Operational misalignment poses another risk. For example, bank-fintech mergers often hit roadblocks when legacy banking systems clash with cutting-edge fintech platforms, limiting the anticipated value of the acquisition.

3. Evaluate candidates thoroughly

In M&A, partner selection can make or break the deal. Every acquisition or merger candidate, whether acquiring or being acquired, must be rigorously assessed. Even if one candidate seems like the obvious choice, it’s critical to explore other options. Comparing multiple candidates over a few months helps uncover the true value of the deal and provides essential benchmarks.

What could happen?

If a deal looks too good to be true, it probably is. Rushed decisions can lead to the wrong partner, resulting in unexpected costs, wasted resources, and public setbacks. A bad fit can trigger a messy breakup, damaging reputation and market confidence.

Take J.P. Morgan’s $175 million acquisition of startup Frank – a hasty decision that turned into an expensive lesson.

4. Conduct thorough due diligence – or pay the price later

Once a target is identified, rigorous due diligence is essential to verify the company’s assets and true value. This process should cover: 

• Financial health
• Operational models
• Legal and regulatory standing
• Potential risks

Only a deep, detailed review ensures an accurate valuation and helps determine the fair price of the acquisition.

What could happen?

Rushed due diligence can overlook critical issues – ongoing lawsuits, regulatory red flags, or even conflicts within the management team. These oversights can lead to legal troubles, unexpected costs, and a sharp drop in the asset’s value.

The Bayer-Monsanto merger is a textbook example: mounting litigations and PR fallout have led many to question whether the deal was worth it.

5. Get yourself experts

No matter how seasoned your team is, M&A deals demand legal, financial, and industry specialists. Experts help spot risks early, assess deal consequences, and streamline the process to save time and money. This is especially crucial when entering unfamiliar industries or markets with different dynamics.

What could happen?

Market and domain experts can steer you toward M&A opportunities that align with your strategic goals. Their insights can prevent hostile takeovers, undervalued acquisitions, or poorly structured deals. When M&A is part of a go-to-market strategy, consultants’ networks and market know-how can open doors, minimize effort, and sidestep unnecessary PR noise.

6. Implement a management and governance strategy

The success of an M&A hinges on effective management and governance. Companies must carefully design structures that align with both organizations' business goals, management styles, and cultures to ensure a smooth integration.

What could happen?

Often, the acquiring company replaces the target's management with someone from their own team or network, leading to immediate or long-term disruption. Ideally, the target company’s founders or key managers should remain involved, even in a limited capacity, until the integration stabilizes. In go-to-market scenarios, appointing managers unfamiliar with the new market or industry can disrupt operations and demoralize teams.

7. Transparent communication

A clear communication strategy is essential for a smooth transition and optimal PR impact. Addressing all stakeholders – team members, partners, clients, and the public – helps prevent the secrecy and negativity that can surround an M&A deal. Since news spreads quickly, a proactive, unified internal communication plan can guard against rumors that overshadow the deal.

8. Cultural aspects matter

Finally, management must recognize that M&A is as much about culture as it is about economics and operations. Prioritizing cultural compatibility is crucial for long-term success.

When is the best time for M&A?

The optimal time for an M&A depends on the company's stage and an assessment of the factors mentioned earlier. M&A should only proceed when needs and expectations align, and when integration and cultural planning are fully prepared.

Economic and political factors

While company-specific factors play a key role, periods of economic and political uncertainty often present prime M&A opportunities. During these times, valuations become more realistic, and more companies begin to consider merging or acquiring. For SMEs, this is when larger market leaders are actively seeking M&A deals, creating more exit and funding options.

The 2024 Landscape

Unfortunately, the number of company insolvencies in Germany reached a record high in 2024, with projections for further increases in 2025. While this is unfortunate, it also opens up significant opportunities for growth through M&A.

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This article was written by our partner Contextual Solutions GmbH. Contextual Solutions GmbH is a Berlin-based strategy, GTM, and innovation consultancy, specializing in tech business models. If you want to explore growth and revenue diversification options via M&A, please contact us for a free-of-charge discovery call. All projects and workshops using the code “recapxcontextuals” will benefit from a 10% partner-only discount in 2025.