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Luiz ZorzellaKen SmithFirms should have customers in mind when structuring a deal, write Luiz Zorzella and Ken Smith.

When one company acquires or merges with another one in search of revenue synergies, they both face greater risks than if they were aiming at cost synergies: while cost synergies can be forced top-down, revenue synergies depend on customers’ reactions.

Business leaders often equate “risk” to “things can go wrong”. This notion is reinforced by stories of catastrophes (like the merger of AOL and Time Warner), bumper sticker statistics (like “half of M&As fail”) and managerial processes designed to minimize risk.

But the other side of risk is that, if things click, revenue synergies can be the gift that keeps on giving. Leaders who fear risk can kill this upside. Mergers and Acquisitions criteria and controls that limit risk often stifle the upside. We thus looked into cases in four types of revenue-driven M&A and how the companies killed or captured the upside.

1. How Google beat the banks: Growing revenues in current markets with current products

Merging within markets and product categories, unless it results in improved products, is likely to cause loss of revenue. That is what happened in the US bank consolidation: in-market mergers performed worse than cross-market deals because during integration, executives tended to re-price products using the lowest common denominator of the merging banks for fear of losing customers. Besides, some customers, who had rejected the acquirer before the deal, had no reason to accept it after the deal and left.

M&A that results in improved products, however, have the potential to both expand a company’s market and its market share. For example, Google’s acquisitions of in 2001 improved Google’s search capabilities, Applied Semantics in 2003 its text processing and Picas in 2004 its photo recognition.

2. Why IBM cross-sells better than McKinsey: Adding new products to current markets

Most failures in M&A that add new products to a company’s existing markets result from the use of unsuitable channels. The basic problem here is cross-selling. For example, McKinsey & Company acquired Information Consulting Group (ICG) in 1989, planning to offer IT services to its strategy clients. McKinsey tried to fully integrate ICG but learned that sales of strategy and IT are very different, cross-selling failed and by 1993 more than half of the ICG staff had left.

The story was different when IBM acquired Lotus in 1995. Despite IBM’s history of crushing the entrepreneurial culture of acquired companies, its new leadership took care to integrate only what was necessary to sell Lotus products through its channels. Customers got increased value from being able to buy hardware with software, Lotus thrived under new ownership and the deal successfully launched IBM into software.

3. How Target missed in Canada, while others bridge great cultural divides: Taking existing products into new markets

M&A to take existing products to new markets is common, especially for companies expanding internationally, and have good success rates. However, geographic expansions almost always create risks from crossing cultural borders. For example, in 2011 Target assumed its brand would draw crowds in Canada and purchased 220 leaseholds from Zellers for $1.9 billion. Canadian customers rejected the inferior selection and pricing, forcing Target to pull out in 2015 with massive write-offs.

On the other hand, Wal-Mart has been very successful using acquisitions and joint ventures to take its value proposition to new markets. It acquired 122 Woolco stores to enter Canada and 21 Wertkauf units to enter Germany, and it entered China and Korea through joint ventures. Using existing stores capitalized on existing loyalties and operations, and Walmart brought instant value by reducing the cost of goods and improving selection, layout, operations and brand added value.

4. Why Upjohn went down while Henckels goes up: Entering new markets with new products

Using M&A to enter new markets with new products is very risky and has low success rates as revenue synergies are often a stretch and execution is challenging. The classic case, in the pharmaceutical industry, is Upjohn’s acquisition of Pharmacia of Sweden in the 1990’s. Upjohn paid $13 billion, seeking the products in Pharmacia’s research pipeline and entry into Europe. Much of the purchase price was later written off as the new owner was rejected by both the lab and the customers.

However, companies that pull it off can create a lot of value, by shortcutting building new skills and resources and acquiring customers. For example, the German manufacturer of cooking knives Zwilling J.A. Henckels has expanded through acquisitions to new markets on products such as beauty (e.g. Tweezerman in 2008 in the US) and cookware (e.g. Staub in 2004 in France and Demeyere in Belgium), simultaneously taking the new products to its existing channels and taking its products to new markets.

The lesson is clear: revenue-based M&As need the blessing of customers to work. This should be factored not only during the structuring of the deal and due diligence, but also during integration when new sources of upside can be discovered. A well-managed M&A program focused on revenue growth can deliver high returns to shareholders.

This article was originally posted on LSE Business Review.

Featured image credit: Davidlohr Bueso CC-BY-2.0

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Note:  This article gives the views of the author, and not the position of USAPP – American Politics and Policy, nor the London School of Economics.

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About the authors

Luiz ZorzellaLuiz Zorzella – Amquant
Luiz Zorzella is an expert on new markets and a strategy consultant at Amquant. He is a former McKinsey consultant and former JP Morgan investment banker. He co-authored “Revenue Growth: Four Proven Strategies” (McGraw-Hill). Follow him on Twitter @lzorzella Email:


Ken Smith
Ken Smith
Ken Smith is a 25-year consultant in strategy and governance.  He has written extensively on the business and public policy issues associated with growth through M&A, including “Losing (Ownership) Control” for Harvard Business Review and his book “The Art of M&A Strategy”, with Alexandra Lajoux, McGraw-Hill.  Email: