One of the most effective ways for strategic buyers to grow through acquisitions is to “take frequent small bites of the apple,” or to conduct a series of smaller, strategic acquisitions in order to achieve a growth goal. Even those these deals might not be as “exciting” as mergers between two huge competitors, they can be just as (or even more) impactful for an organization’s success.

A recent example of this approach is German chemical manufacturer Evonik, which is building its cosmetic ingredient business through acquisitions. On March 13, the company announced it will acquire cosmetic ingredient manufacturer Dr. Straetmans GmbH for $107 million. The deal is Evonik’s second in the cosmetic ingredient sector; last year, the company acquired Air Products and Chemical’s coatings and additive operations for $3.8 billion.

It is possible to achieve significant growth by executing smaller deals and sometimes an iterative process can be more effective than one sweeping change. Most of us have probably taken a class or read an article on leadership about achieving goals where a common suggestion is to break down a large goal into achievable steps. Executing a series of strategic acquisitions is similar. Each deal builds on the previous one, like a step in a staircase, bringing you closer and closer to your goal.

Change, even good change, can be difficult to process and many companies struggle when it comes to post-merger integration. This risk is greatly reduced with a small deal because it is easier to digest and there are fewer moving pieces. In between deals you have time to adjust, evaluate your newly merged company and determine when and how to pursue your next deal. This time of re-calibration between deals will help you build a strong foundation for achieving your dreams.

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In light of recent FTC rulings against market domination, Sysco has changed its M&A strategy to focus on smaller, strategic deals rather than large transformative deals. Although Sysco’s change is motivated by regulatory obstacles to larger acquisitions, using strategic, smaller deals is an excellent approach from a strategic perspective. We have long recommended that our clients pursue a series of small transactions to achieve their long-term growth goals. We call this strategy taking “frequent small bites of the apple” because it’s much easier to eat an apple one bite at a time than to cram the whole fruit into your mouth!

Among the advantages of pursuing a series of smaller deals:

1. Focus on One Reason

You may have many needs to meet before you reach your long-term growth goals, for instance improving talent and technological capabilities and expanding geographically. If your vision is growing into a worldwide paint manufacturer and distributor, but you only have manufacturing operations on the East Coast, you will need to expand geographically, build your distribution networks, and perhaps improve on your manufacturing capabilities. Doing all this with only one company may dilute your efforts, or you might acquire a company that really doesn’t fulfill any of your strategic needs.  A better approach: first focus on acquiring a company with an excellent distribution network in the U.S and then another company with quality manufacturing capabilities that match your acquisition criteria. Once you’ve adjusted to this change, you might look at acquisitions outside the U.S.

2. Stay Below the Radar

Large transactions draw attention, especially the mega-deals valued at over $5 billion that have boosted M&A value to record levels. But many transactions are much smaller than these multi-billion dollar deals; in the U.S. from November 1, 2014 to October 31, 2015 there were 12,663 M&A transactions, according to Factset data. 95% of these deals were under $500 million or undisclosed. (Undisclosed deals are typically privately held, smaller transactions that are too small for financial reporting). Smaller strategic transactions allow you to make moves below the radar, out of sight of your competition.

4 reasons why smaller acquisitions are better

3. Adjust to Integration Challenges More Easily

Even the most carefully planned acquisition encounters integration challenges as people and systems adjust to the newly merged company. By acquiring a smaller company, you dramatically limit your integration challenges. Once you’ve had time to work out any kinks and make sure your new company is operating smoothly, you can begin pursuing the next acquisition.

4. Minimize Risk of Acquisition Failure

Although acquisitions are inherently a risky undertaking, smaller strategic transactions are much less risky than large transformative deals. Because integration challenges are minimized, you can remain focused on your strategic objectives, increasing your chances of realizing synergies from the deal. There’s also less financial risk associated with smaller acquisitions; you can minimize capital outlays while rapidly growing your company to reach your long-term goals.

Executing a series of strategic acquisitions is a proven way for middle market companies to grow.

A small deal is also ideal for first-time acquirers who have never pursued growth through mergers and acquisitions. All in all, smaller acquisitions allow you to remain focused, move covertly in the market, and increase your chances of success while still rapidly moving you closer to your vision for the future.

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On May 18, Endo announced it would acquire Par Pharmaceutical for $6.5 billion cash and $1.5 billion stock. The acquisition is the latest consolidation in a robust M&A market, especially in the healthcare sector. Endo has stated multiple reasons for the deal, including building its generic drug platform as well as significant operational and tax savings.

The transaction will save the company $175 million in tax and operational synergies the first 12 months. While these savings are an important part of the picture, they are not the primary driver for the deal.

Adding more products to build out Endo’s generic drug business is where real growth lies. The Wall Street Journal describes it this way: “Tax benefits are widely seen as juicing an otherwise hot deals market, particularly for health-care M&A over the past year and a half.”

Once the acquisition is completed, the expanded generic drug pipeline will be a gift that keeps on giving, unlike cost saving benefits, which can only be reaped once. New generic drugs will help Endo grow now, over the next few year, and for many years to come.

The acquisition will:

  • Create a generic drug business that is one of the top five as measured by U.S. sales.
  • Create one of the fastest-growing generic drug divisions in the industry
  • Add 100 products to Endo’s portfolio, some of which are more expensive, injectable medicines
  • Double revenue for the generic division

By acquiring Par, Endo is fulfilling one specific need – growing its generic drug business. This approach is what we call having only one reason for acquisition, which allows you to remain focused on your strategy for growth and increases your chance for success. Rather than trying to fulfill multiple needs with one acquisition, which can lead to a diluted and unfocused strategy, have only one reason for acquisition so that you have a clear path for moving forward.

If you do have multiple needs, you can always take a second bite of the apple, which is what Endo has done as a serial acquirer throughout the years. By acquiring multiple companies, Endo has grown considerably. Since 2013, the market value of the company has quadrupled.

Endo’s recent deals include:

  • Auxilium Pharmaceuticals, a Pennsylvania-based biopharmaceutical company, for $2.6 billion
  • Natesto (testoternoe nasal gel) for $25 million from Trimel BioPharam SRL
  • Generic pharmaceuticals company DAVA Pharmaceuticals for $575 million
  • Expanding in Latin America with Grupo Farmaceutico Somar, a privately owned pharmaceutical business based in Mexico City
  • The rights to Sumavel DosePro, a needle-free delivery system for subcutaneous use, from Zogenix Inc. for $85 million
  • Paladin Labs for $2.7 billion, which allowed the business to reincorporate in Ireland
  • Specialty generics company Boca Pharmacal for $225 million

There was a different strategic reason for each deal. For example, the Auxilium Pharmaceuticals transaction specifically focused on men’s health and urology while the acquisition of Grupo Famaceutico Somar focused on growing in key emerging markets in Latin America. Often frequent, smaller, strategic deals can help a company grow more effectively than a single large, transformative deal.