Strategic Acquisitions: How to Tell If an Acquisition Is the Right Play

An acquisition is the right play when three things are true at once: you can name the goal in one sentence, buying gets you there faster or more cheaply than building it or partnering for it, and the synergies you are confident of are worth more than the premium you will pay. If any one of the three is missing, the deal is a bet on luck. The first test is the one buyers skip most often, and it is the cheapest to run.

That sounds harsh until you look at the record. The authors of Harvard Business Review's "The New M&A Playbook" (Christensen, Alton, Rising and Waldeck, 2011) put the failure rate of acquisitions somewhere between 70% and 90%, against more than $2 trillion of deals a year. Their fix was to get three decisions right: which target, how much to pay, and whether to integrate. This guide works through those decisions in the order a buyer actually meets them.

Start with the goal, not the target

Write down what the acquisition is for, in a sentence a finance director could check in two years. "Grow" fails that test. "Add $4 million of recurring maintenance revenue in Selangor and Johor that our existing technicians can service" is one.

McKinsey's "The six types of successful acquisitions" (Goedhart, Koller and Wessels, 2017) is the best short list we know of what a value-creating goal looks like. In their experience, deals that create value fit at least one of six patterns:

1. Improving the performance of the target, usually by taking cost out.
2. Removing excess capacity from an industry.
3. Creating market access for the target's products, through the buyer's sales force or channels.
4. Acquiring skills or technology faster or more cheaply than building them in-house.
5. Exploiting scale that is specific to the industry, as opposed to generic back-office savings.
6. Picking winners early and helping them grow.

The same article names the rationales that tend to show up in the less successful deals: "pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio." If your board pack uses any of those phrases, it does not have a goal yet. The authors say the list comes from their advisory work rather than empirical research. We use it anyway, because the vague rationales are easy to spot and the specific ones are easy to test.

What an acquisition actually gets you

When you buy a company you get revenue on day one, a customer list, a team that already knows how to do the work, and the licences, contracts, premises and supplier terms that took the seller years to put together. In Indonesia, Thailand or Malaysia the licences and local relationships can be worth more than the revenue, because they are the slow part to build.

You also get the seller's tax history, the key employee who leaves in month four, the customers who drift to a competitor when the brand changes, and an integration project that eats management time. McKinsey's study of 160 mergers, "Where mergers go wrong" (2004), found the average merging company loses 2% to 5% of its combined customers, and some lost more than 30%. That loss belongs in the model from the start.

Build, borrow or buy

Laurence Capron and Will Mitchell's Build, Borrow, or Buy (Harvard Business Review Press, 2012) frames the choice well. You can develop what you need internally, get it through a contract or an alliance, or acquire a company that has it. Buying is the most expensive and least reversible of the three, so it should be the answer only when the other two fail. Our working version of their logic looks like this:

If this is true	The better route is usually
Your team already has most of the skills, and time is not the constraint	Build: hire, invest, launch
What you need is well defined and someone will sell or license it to you	Borrow by contract: licence, distribution or supply agreement
You need close collaboration but not control, or you want to test a market first	Borrow by alliance: joint venture or partnership
You need control, the capability is bundled inside a company, and you can integrate it	Buy

An opinion we will defend: many owner-managed businesses that want to make an acquisition would get there sooner with one senior hire or a distribution agreement. If the thing you want could be written into a contract, try the contract first. It costs a fraction of a deal and you can walk away from it.

Which goals acquisitions are good for

Each goal has a version of the deal that works and a version that does not.

Goal	When buying works	What usually goes wrong
Add revenue in your existing market	The target is subscale, or the overlap lets you take out real cost	Customers leave during integration; the scale benefit was generic
Build a new line of business or enter a new market	You can push the target's product through your channels, or theirs carries yours	Revenue synergies arrive late or not at all
Buy a capability or technology	It would take years to build and the people will stay	The people who held the capability leave
Fix an underperforming business	The target has low margins and an obvious cost problem	The target was already efficient; there was nothing left to fix
Raise the value of the group	Add-ons are bought cheaply and also grown	Prices for targets rise, rates rise, and the arbitrage disappears
Consolidate a fragmented market	Density in a city or region lets sites share costs	Copycat buyers bid up prices

Adding revenue

Buying a competitor in your own market is the obvious deal, and it is where scale arguments are weakest. McKinsey's six-types article warns that "rarely are generic economies of scale, like back-office savings, significant enough to justify an acquisition"; scale has to be specific to the industry to carry a premium. The savings that do hold up are the cost ones. In "Where mergers go wrong", managers in about 60% of mergers delivered their planned cost synergies almost in full, though in about a quarter of cases the estimates were at least 25% too high.

A new line of business

For large companies this is now the usual reason to buy. Bain's review of M&A in 2025 found that 60% of deals valued above $1 billion in the first nine months of the year were scope deals, meaning deals "intended to accelerate top-line growth by entering or expanding into faster-growing segments." The model that works is distribution. Between 2010 and 2013 IBM bought 43 companies at an average of $350 million and pushed their products through its global sales force, which it estimated accelerated their revenues, in some cases by more than 40% in the first two years. The risk is the one McKinsey measured in 2004: almost 70% of the mergers in its database missed the revenue synergies they expected, and revenue synergies are exactly what a scope deal is built on.

Buying a capability

Cisco is the standard example. From 1993 to 2001 it bought 71 companies at an average of about $350 million, and nearly 40% of its 2001 revenue came directly from those acquisitions. For a mid-market buyer the capability is usually smaller (a licence, an engineering team, a certification), and the question is whether the people who carry it have a reason to stay once the founder is paid.

Fixing an underperformer

McKinsey's arithmetic shows why the target's starting margin matters. Take a company with a 6% operating margin: cutting costs by three percentage points lifts the margin to 9%, which could add about 50% to its value. A company already at a 30% margin would need to reach 45% for the same gain, a 21% cut in its whole cost base. Buy the low-margin business with a fixable problem, not the efficient one.

Raising valuation

This is the private equity version. Bain's 2019 private equity report notes that smaller companies "consistently trade for lower multiples than bigger ones," and its 2024 follow-up defines multiple arbitrage as "the practice of creating a large, high-multiple company by tucking in add-on acquisitions at lower multiples." It works on paper. The 2024 report looked at 44 buy-and-build deals from 2010 to 2019: those that relied on multiple arbitrage alone returned an average 1.4 times invested capital, while those with a strategy for organic growth or better margins returned 2.2 times. The cheap entry multiple helps, but the growth and margin work decide the return.

Consolidating a market

Roll-ups work when sites share costs because they sit close together. McKinsey's example is Service Corporation International, which grew from one funeral home in Houston to more than 1,400 funeral homes and cemeteries by 2008, with several sites per city sharing vehicles and back offices. The catch is that roll-ups are easy to copy, and copycat buyers bid some funeral home prices up past the point where further deals made sense. Our piece on food and beverage roll-ups in Southeast Asia looks at the same pattern in the region.

What acquisitions are bad for

Acquisitions do not fix a weak core business. If your own margins are falling and your team is stretched, a deal adds an integration project to a business that cannot absorb one. Diversification for its own sake is the "third leg" rationale McKinsey flags, and shareholders can diversify more cheaply themselves.

Big one-off bets are the other trap. McKinsey's 2021 research on M&A strategies, tracking the 2,000 largest listed companies, found that programmatic acquirers (more than two small or midsize deals a year around a clear theme) averaged about 2% more in annual excess shareholder returns than their peers, and 65% of them beat their peers. The large-deal approach, buying targets worth 30% or more of the buyer's own market value, "essentially amounts to a coin flip." Those are listed companies, but the lesson carries down to a $20 million business. Three small, related acquisitions teach you how to integrate, and one large one leaves you no room to learn.

How to work out whether a target is worth buying

A good business can still be a bad acquisition. The question is whether the target is worth more in your hands than the price, after everything it costs to get it there. Four checks answer it, and the first carries the most weight.

1. Synergies against the premium

Aswath Damodaran's valuation lecture on synergy sets out the method. Value each firm on its own, add the two values together to get the combined firm with no synergy, then rebuild the cash flows with the synergies in. The value of synergy is the difference between the two combined values. The premium you pay over the target's standalone value is your payment for that synergy in advance.

Premiums are not small. The six-types article puts the average premium for corporate control at almost 30% of the target's pre-announcement share price, and "Where mergers go wrong" found that on average the buyer pays the seller all of the value the merger creates, through premiums of 10% to 35%. Mark Sirower has written two books on this. In a review of The Synergy Solution (Sirower and Weirens, 2022), Martin Fridson cites Conseco's purchase of Green Tree Financial at an 83% premium: the shares fell 20% on announcement, were down 50% a year later, and the company filed for bankruptcy four years after the deal.

An illustrative example in round numbers: A target earns $2 million of EBITDA and is worth $12 million on its own at 6 times. The seller wants $15.6 million, a 30% premium of $3.6 million.

Item	Value
Cost synergies of $500,000 a year, valued at 6 times	$3.0 million
Less one-time integration costs	($0.8 million)
Net value of cost synergies	$2.2 million
Premium paid	$3.6 million
Value given away on cost synergies alone	($1.4 million)
Revenue synergies: $1.5 million of cross-sales at a 20% margin, valued at 6 times	$1.8 million
Result if every revenue synergy arrives	$0.4 million gained

The deal only works if the cross-selling works, and that is the synergy McKinsey found missing in almost 70% of cases. Our advice is to price revenue synergies at zero in the bid and treat them as upside. If the deal only clears its premium with revenue synergies, it does not clear. The integration line deserves suspicion as well: in one case in "Where mergers go wrong", a chemical company committed to $250 million of one-time costs where earlier deals suggested the real figure would be at least $450 million.

2. Return on the full price against your cost of capital

Divide the after-tax operating profit you expect from the target, synergies included, by everything you pay: the price plus integration costs. In the example, with $300,000 of depreciation and a 24% tax rate, the target makes about $1.29 million after tax, or $1.67 million with cost synergies. On $16.4 million invested that is 7.9% in year one and 10.2% once synergies run fully. If your cost of capital is 12%, the deal is not paying for itself even on the good case. An acquisition is an investment like any other, with an unusually large cheque at the start.

3. Earnings per share, as a secondary check

Listed acquirers run accretion and dilution analysis: per the Corporate Finance Institute's definition, a deal is accretive if post-deal earnings per share are higher than the buyer's standalone figure, and dilutive if lower. Treat it as a financing test. Fund the example above with debt at 6% and earnings per share go up, because the interest costs less than the profit bought, even though the return sits below the 12% cost of capital. An accretive deal can still destroy value.

4. Multiple arbitrage, honestly modelled

If your plan is to buy at 5 times EBITDA and fold the target into a platform the market values at 9 times, model the exit at the multiple you can defend, not the one you hope for. Bain's 2024 example is a platform bought at 12 times earnings with 7 turns of variable-rate debt, whose financing by 2024 cost roughly double what investors modelled in 2020. Higher rates squeezed exactly the platforms that leaned hardest on the arbitrage. Build the case on growth and margin, and treat a higher exit multiple as a bonus.

Is this acquisition the right play?

1. Can you write the goal in one sentence that someone could check in two years?
2. Have you tried to build it, license it or partner for it, and do you know why each of those fails?
3. Does the goal fit one of the six patterns, or is it "scale", "growth" or "filling a gap"?
4. Do the cost synergies you are confident of, net of one-time costs, exceed the premium on their own?
5. Is the return on the full price above your cost of capital by year three?
6. Have you modelled losing 2% to 5% of combined customers?
7. Do the people who hold the capability you are buying have a reason to stay?
8. Do you have the management time to integrate this without neglecting the core business? (Our guide on when to acquire covers readiness.)

A "no" to question 1, 2 or 4 is reason enough to stop. The others can usually be fixed with structure: an earnout, a retention package, or a staged purchase. Our article on earnouts, escrows and rollovers shows how those structures share the risk with the seller.

If the answers point to buying, the next steps are a target profile and a search. What type of company should you acquire turns the goal into screening criteria, and how to acquire a company walks through the process from sourcing to integration. Our buy-side team runs that search off-market across Indonesia, Malaysia and Thailand. If you would rather test the logic first, tell us the goal and we will tell you whether we would buy, build or partner. Sometimes the honest answer is a distribution agreement.

Frequently Asked Questions

What is a strategic acquisition?

A strategic acquisition is one where the buyer is an operating company that expects the target to be worth more combined with its own business than on its own, through cost savings, new markets, capabilities or scale. A financial buyer, by contrast, underwrites the target's standalone returns over a holding period. Our comparison of strategic and financial acquisitions covers how each prices a deal.

How much of a premium is normal in an acquisition?

For listed targets McKinsey puts the average control premium at almost 30% of the pre-announcement share price, and higher when several bidders compete. Private deals are priced on multiples instead, but the rule is the same: whatever you pay above standalone value has to come back as synergies you can deliver.

Should a small company make acquisitions?

Yes, if it has a specific goal and the management time to integrate. McKinsey's research on large listed companies found that a steady run of smaller deals around one theme outperformed both organic growth and occasional large deals. For a smaller company the first acquisition should be small enough that a failed integration hurts but does not threaten the core business.

Are revenue synergies worth paying for?

Rarely. In McKinsey's database of 160 mergers almost 70% missed their expected revenue synergies, while about 60% delivered planned cost synergies almost in full. Bid on the cost synergies you can evidence and keep the revenue ones as your reason to expect to beat plan.