The Ups, Downs and Maybes of Mergers and Acquisitions

Mergers and acquisitions (M&A) are pivotal events that can reshape industries, drive innovation and unlock potential opportunities for growth.

The pace and nature of dealmaking have evolved after years of slowing transactions, influenced by economic uncertainty and a tight regulatory regime. As activity begins to rebound, understanding what makes a company an attractive acquisition target — and what factors can make or break a deal — has never been more important.

This article examines the dynamics of small-cap M&A, highlighting the qualities that may attract interest from acquirers and the lessons learned from recent high-profile transactions.

What Drives Successful M&A Transactions?

We believe that a key element of a strong acquisition is when both the acquirer and the target add value to each other. Does the target company offer a product that the acquirer doesn’t already sell? Does the acquiring company provide the target with a distribution scale that would be difficult for it to attain on its own?

The Hillman Group initially focused on organizing and managing the screw and fastener sections in hardware stores. Over time, it has grown by acquiring businesses that produce various hardware store products, whose aisles Hillman then oversees.

For example, Hillman acquired Intex, a manufacturer of wiping cloths, shop rags and cleaning products, in 2024. This acquisition has allowed Hillman to stock and manage the cleaning supply aisles of hardware stores, expanding the company's product range.

Leveraging Dealmaking Track Records in M&A

Similarly, does the deal provide a competitive advantage, such as intellectual property, unique technology or strategic assets that an acquirer couldn’t develop quickly or affordably on its own? Deals that lead to cost savings, increased market share and genuine competitive advantages over peers are more likely to succeed, especially if these benefits can be achieved quickly.

If so, these qualities can lead to deals that are easily absorbed afterward and typically don’t disrupt the combined business. It also helps if the acquirer has a track record of purchasing other companies and knows how to manage them successfully.

Timken, a manufacturing company, diversified its business through acquisitions. In 2008, 97% of its business was focused on manufacturing and selling bearings. Through a series of acquisitions, its offerings have become broader, with 34% of its business coming from other industrial motion products as of 2024.

From a financial perspective, mergers and acquisitions are generally expected to enhance operational efficiency and profitability. Assessing purchase multiples and the financial logic behind the deal is a standard part of the process.

What Can Cause an M&A Deal to Fail?

Making an acquisition or agreeing to be acquired is one of the most important decisions a company can make. Deals that are poorly structured or pursued for the wrong reasons can easily backfire, harming the company, its employees and its shareholders.

Overpaying for a target can result in poor outcomes, even if the deal aims to enter a new product or market that’s expected to generate growth immediately. It’s even worse if the deal forces the acquirer to take on a significant amount of debt or rely on a high level of financial engineering to make it work.

Sometimes, management teams acquire companies solely to drive growth. They see others making deals and conclude that they need to expand their empires. This attitude may lead a management team to an acquisition fraught with risks.

Similarly, making a deal to disguise stagnant organic growth is a lousy reason to buy a company.

Large deals where both parties have significant overlap in their service area, technology or product offerings tend to result in unwieldy transactions. Management teams will sometimes present these deals as “mergers of equals,” but such arrangements often fail to work out over time.

Factors That Can Make or Break M&A Outcomes

Certain aspects of a buyout can lead to positive or negative outcomes, depending on how management teams handle the post-deal enterprise.

A common result of merging companies is the reduction of redundant costs. Where can the company reduce overhead associated with a transaction?

If the company pursues a deal for its strategic value and makes precise cuts to become a lean, efficient organization, this could promote long-term growth. Conversely, broad, across-the-board cuts after a deal as a way to boost earnings can have a negative impact on a company.

Lastly, whether a deal can clear regulatory hurdles is a significant and sometimes hard-to-predict factor. Companies don’t want to go through the expense, time and disruption of knitting together a transaction, only for a federal agency to scuttle the proposal just before reaching the finish line.

Regulatory frameworks change, depending on the industry and the administration in charge. The current administration is widely perceived as more open to corporate tie-ups than its predecessor.

Our Approach to Evaluating Potential M&A Opportunities

The small-cap segment of the equity market is often less efficient, with many companies receiving limited press and analyst coverage compared to larger firms. We believe this environment can present unique opportunities to discover undervalued businesses with potential for growth.

Small-cap companies frequently attract interest for mergers and acquisitions due to their distinctive assets, strong financial positions and appealing industry dynamics. Characteristics such as robust balance sheets, healthy cash flow and competitive valuations can make these companies stand out in the marketplace.

Overall, we believe the small-cap sector remains fertile ground for acquisitions, reflecting its importance in driving innovation and expansion across various industries.