Deciphering M&A Theses

Explore the fundamental strategies that define the success of mergers and acquisitions, and how to apply them.

Why should you understand M&A theses? In an M&A deal, everything starts with a thesis. We're not talking about academic theses, but the rationale behind a business deal. If there is no rationale, there is no transaction. Understanding the possible motivators is the starting point for motivating a business deal and for you to influence it to happen.

"Thesis: A proposition that is presented or set forth to be defended in case of dispute."

— Oxford Languages

A estratégia macro por trás de cada movimento de fusão ou aquisição, é essencial tanto para quem compra quanto para quem é comprado. Aquela explicação que alguém na empresa vai ter que dar para a pergunta: "porque você comprou (ou quer comprar) a empresa XYZ?" 

Então, se o deal não começou com uma tese bem elaborada, pode ter certeza de que vai precisar de uma para ser concluído. Até porque um negócio destes não sai sem muita contestação, de todos os lados da mesa.

Então a tese é a estratégia macro por trás de um movimento de fusão ou aquisição. Se a sua empresa é o alvo, você pode até não saber a tese por trás da vontade, pelo menos inicialmente. Mas para o sucesso do negócio, em especial se parte dele estiver condicionada à performance futura, se colocar no sapato do comprador vai ser crucial.

Thesis Cards

For those who have played the game Risk, the thesis is similar to the objective. In our "game" of Exit Strategy, we will also represent the thesis as a card. To help you understand the possible acquisition and merger theses, we have developed a set of 12 cards.

Each card features a representative figure of the business logic behind that thesis. This figure represents two elements that come together meaningfully, either to fill a gap or to expand in a certain direction.

Let's discuss some examples:

Acqui-hire

The acquisition of hard-to-hire talent is often the motivator, the thesis, behind an acquisition. This is a good example of a deal made to fill a gap, a lack on the part of the acquiring company.

A good example was the acquisition of the consulting firm Plataformatec by Nubank in 2020. The bank does not provide consulting services, nor did it start to do so because it bought a consulting firm; its interest was in the dozens of brilliant minds it brought into its team.

Horizontal Expansion

A company typically focuses on a single market or market segment. This becomes apparent when discussing a very specific market, such as dental clinics. Horizontal expansion is associated with growth into an adjacent market.

For example, suppose your company offers software for dental clinics. An acquisition by another software company that focuses on medical clinics would represent horizontal expansion.

In my experience as the M&A Director at TOTVS, this was one of the main theses in the field. We will delve deeper into these examples in an article dedicated to this thesis, coming soon.

Vertical Expansion

This thesis involves expansion along your supply chain, such as the acquisition of a strategic supplier or a distribution channel. If a retail chain acquires a manufacturer of a product that is significant in its sales, it is integrating its supply chain, i.e., expanding vertically. The same could be said for the opposite movement, a manufacturer acquiring a network of stores, or distributors to capture a larger portion of the margin along the chain.

Diving Deeper into the Thesis Cards

In the upcoming articles, we will delve deeper into the examples and practical application of each of the thesis cards. This in-depth content and a guide on how you can use it will be part of the exclusive, paid content of Exit Strategy. If you want to ensure early access under an exclusive condition, you can secure your subscription here:

Reasons to Understand M&A Theses

An M&A deal is like fitting two pieces of a puzzle together. If you understand well the other piece and how your company can fit into it, it will be easier to:

• Identify the best-fitting opportunities that tend to have a higher perceived value.

• Understand the motivation behind the approach, favoring your leverage in negotiations.

• Facilitate communication with the counterparts on the other side of the table.

• Provoke the intention to unite forces by "planting the idea" of the thesis.

What Comes Next

Understanding the thesis is the foundation for the next step, that is, mapping which organizations fit with that thesis. Thus, starting from the knowledge of theses to this mapping is also a tool for expanding horizons. It functions as a kind of brainstorming facilitated by the methodology that will help you see opportunities for Mergers and Acquisitions that a superficial analysis would not reveal. More opportunities represent more negotiating power and, ultimately, more freedom for you as an entrepreneur. You have this right and this power, use it.

Bonus: Difference Between M&A Theses and Venture Capital or Private Equity Theses

VCs also talk a lot about their investment theses. Having a fit with a VC's thesis is also essential for a founder who wants to raise investment for their startup. But what is the difference between the theses of VCs and those of M&A?