How to Avoid a Bad Case of ‘Deal Fever’

The frenzy to snap up competitors as they come onto the market is ill-advised. You should do the proactive work upfront to avoid bad M&A decisions.

Don't come down with 'Deal Fever' when a competitor comes onto the market.

Most mergers and acquisitions (M&A) are opportunistic. Either you find out that one of your competitors is up for sale and decide you need to react quickly, or one of your salespeople suggests that a competitor has a better product that would be a great addition to your portfolio. These situations can cause otherwise rational management teams to get caught up in “deal fever,” which often leads to bad decisions.

To get the most out of your acquisitions, you’re better off taking the time to establish a robust pipeline of potential acquisitions and partnerships. A formal process to consider strategic alternatives leads to better discussions about strategic paths and forces your team to prove why one alternative is better than another.

An M&A pipeline also facilitates new ideas—What if we build instead of buy?—that might otherwise be overlooked.

Constructing a pipeline is relatively easy. Surveying the sales force and doing some market research will give you a base understanding of potential targets that could be a good fit for your growth ambitions. Additional digging will help you estimate their size and identify specific strategic assets that may be valuable.

The next step is to reach out to those companies, perhaps scheduling an informal meeting to discuss various ways to help each side grow its business. Talking to a potential target will help you identify potential partnership opportunities—and also whether they are open to a sale.

Building a pipeline with a handful of potential targets will help you better assess which acquisitions are most in line with your growth plans. You may ultimately decide that going it alone is the best route. Either way, an M&A pipeline will replace “deal fever” with a richer discussion around how to build value for your business.

Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark