Acquisitions following this strategy can, according to research, achieve up to fifteen percent more growth.
By Killian McCarthy
Mergers and acquisitions are inherently risky: research consistently shows that about seventy percent fail. One of the most well-supported predictors of success or failure in academic literature is the degree of relatedness between the target company and the acquiring firm.
In related acquisitions, the acquiring company operates in the same sector as the target company. This reduces information asymmetry, improves synergy estimates before the deal, and facilitates smoother post-acquisition integration. Companies such as construction company Heijmans have built part of their success through related acquisitions.
Research shows that related acquisitions experience forty percent fewer integration problems and achieve up to twenty percent cost savings due to economies of scale.
Unrelated acquisitions, on the other hand – where companies from different sectors merge –carry significantly more risk. These deals often involve higher integration costs and increased uncertainty due to differences in business models and cultures. Data indicates that, all else being equal, unrelated acquisitions are fifty percent less likely to achieve their financial goals.
Less risk, less growth
While related deals reduce risk, they also often limit the potential for significant growth or innovation: the acquirer is already familiar with the target company and its sector. For growth-oriented acquirers, the optimal approach often lies in adjacent acquisitions – deals in which the acquirer enters a new but still familiar market.
A great example is Ahold Delhaize’s acquisition of Bol.com, which allowed Ahold to leverage its logistics expertise while diversifying into online retail. Research suggests that such acquisitions can lead to fifteen percent more growth compared to more closely related deals.
Adjacent acquisitions enable a company to combine the benefits of familiarity with the opportunity to expand into new areas, striking a balance between risk mitigation and growth potential.
The optimal balance lies in the middle
Research indicates that there is an inverted U-shaped relationship between relatedness and performance. At one extreme, we find successful but uninspiring related deals. At the other, grand visions and promises that fail to materialize. The optimal M&A strategy usually lies in the middle – adjacent markets. These deals offer enough novelty to drive growth while keeping risk manageable.
Inverted U: Relatedness vs. Performance in Mergers & Acquisitions
Adjacent Market (Optimal)
Key takeaways:
• More than seventy percent of acquisitions fail to deliver the expected results.
• Related deals experience forty percent fewer integration problems and twenty percent more cost savings.
• Unrelated deals are fifty percent less likely to achieve their financial goals within three years.
• Adjacent markets offer achievable growth, up to fifteen percent higher.
• There is an inverted U-curve between relatedness and performance.
Dr. Killian J. McCarthy is a Professor of Strategy at Radboud University, which ranks among the top 100 universities worldwide. His research focuses on the impact of corporate tools – such as corporate venture capital, strategic alliances, divestitures, and especially mergers and acquisitions – on companies’ financial and innovation performance. He has analyzed the performance of over 500,000 acquisitions, primarily in high-tech industries such as pharmaceuticals. His work has been published in leading academic journals like Research Policy and influential outlets such as Harvard Business Review.
