The M&A Question Executives Often Ask Too Late: Are These Two Businesses Actually Compatible?

The M&A Question Executives Often Ask Too Late: Are These Two Businesses Actually Compatible?

An interview with Dr. George Monray on a strategic framework he developed to assess mergers and acquisitions before the deal is signed

By Andrew Harton

Mergers and acquisitions are usually presented as exercises in valuation.

How much is the target worth? What premium should the buyer pay? What synergies can be extracted? How quickly will the transaction become accretive?

But there is another question that can be considerably harder to answer: what happens when the two strategies are put together?

That question was at the heart of research published by Dr. George Monray in 2011, when he was publishing under the surname Jorge Mongay. His paper, Modelo de compatibilidad estratégica aplicado a procesos de fusiones y adquisiciones, proposed a framework for examining strategic compatibility between an acquiring and an acquired company before a merger or acquisition takes place. (Contribuciones a la Economía)

The model uses strategic product-market combinations, or “strategic binomials,” and overlays the portfolio matrices of the two companies using the Boston Consulting Group framework. The purpose is to make potential areas of synergy, competition and conflict more visible before management commits to the transaction. (Eumed)

More than a decade after the paper was published, Monray argues that the underlying management question remains highly relevant.

Q: Why did you feel that M&A analysis needed another perspective?

Monray: Because an acquisition is often evaluated primarily through financial and asset-based considerations. Those are obviously important. But a company is not simply a collection of assets and financial statements. It is also a portfolio of products, markets, capabilities and strategic objectives. Two companies can look attractive financially and still have very different strategic directions. My question was therefore quite simple: can we develop a structured way of looking at what happens when the strategic portfolios of two companies are combined?

Q: Your paper describes “strategic compatibility.” What exactly does that mean?

Monray: It refers to the degree to which the strategic positions of two organizations can coexist and potentially reinforce one another after the transaction. Imagine an acquiring company entering a market where the target already has a strong position. That could create a synergy. But imagine that both companies have products competing for essentially the same customers. The same transaction could create cannibalization or strategic conflict. The important point is that both situations may not be obvious from the headline financial numbers.

Q: Your model uses the BCG matrix. Why that particular tool?

Monray: The BCG matrix provides a relatively intuitive way of visualizing strategic portfolios through market growth and relative market share. I was interested in using that visualization not simply for one company, but for comparing the strategic positions of two companies. By superimposing the portfolios, you can begin to see where the businesses complement one another, where they overlap and where potential conflicts may emerge. The objective is not mathematical precision for its own sake. It is to make the strategic picture more visible to the decision-maker.

Q: So the model is essentially asking management to look at the deal before looking at the deal price?

Monray: I would not put it quite that way. The financial analysis remains fundamental. But I would argue that management should not stop there. A transaction can have an attractive valuation and still present significant strategic problems. The question should be: what will the combined company actually look like after the transaction? That requires moving from the acquisition itself to the post-acquisition strategic configuration.

Q: What can the model reveal that a conventional financial analysis might miss?

Monray: One example is cannibalization.Suppose the acquiring company and the target both have strong positions in similar product-market combinations. After the acquisition, the two businesses may not generate the additional growth that management initially expects. Another possibility is that one company's portfolio fills a gap in the other's strategy. You can therefore identify both potential synergies and potential conflicts. The value of the exercise is in making those possibilities explicit before the transaction.

Q: Your article says the model can help anticipate success or failure. Would you still make that claim today?

Monray: I would be careful with the word “predict.” A model can help reduce uncertainty and structure the analysis, but it cannot guarantee the outcome of a merger. There are factors that are difficult to capture in a portfolio matrix: organizational culture, management power struggles, employee integration, hidden costs, financial complementarities and the execution of the post-merger strategy. A model can give management a better map. It cannot drive the car.

Q: That sounds like an important limitation.

Monray: It is. One of the conclusions of the research was precisely that the BCG-based approach has limitations because it relies principally on two variables: market growth and market share. It should therefore be considered one analytical component rather than a complete M&A decision system. The real contribution is visualization. Executives sometimes have large amounts of information but no clear way of seeing how the pieces fit together. A good strategic tool should help transform information into a picture that management can discuss.

Q: More than a decade later, has your view of M&A changed?

Monray: The markets have changed, technology has changed and the nature of many businesses has changed. But the fundamental strategic problem has not disappeared. Whenever two organizations are combined, management has to answer the same basic question: why should these two businesses be together? If the answer is simply that one company can buy the other, that is not enough. There has to be a strategic logic.

Q: What would you tell a CEO considering an acquisition today?

Monray: I would ask the CEO to imagine that the transaction has already happened. Forget the announcement. Forget the press release. Forget the acquisition price for a moment. Look at the combined portfolio. Which businesses grow faster? Which overlap? Which complement each other? Where could there be cannibalization? Where are the genuine strategic synergies? And then ask a more uncomfortable question: What does the combined company do better than either company could have done independently? If management cannot answer that clearly, it is worth examining the strategic logic of the transaction again.

Q: Is that ultimately the message behind your research?

Monray: Yes. An acquisition should not be viewed simply as the purchase of another company. It is the construction of a new strategic organization. The financial transaction may take months to negotiate. But the strategic consequences can last for years. That is why compatibility should be examined before the deal—not after it.

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The research: Jorge Mongay, “Modelo de compatibilidad estratégica aplicado a procesos de fusiones y adquisiciones. Un enfoque a través de analíticas en binomios estratégicos y superposición matricial,” Contribuciones a la Economía, Vol. 8, No. 1, published February 7, 2011. The article is also indexed through EconBiz/RePEc. (Contribuciones a la Economía)

Note: The original paper was published under Jorge Mongay. Monray's current academic profile states that the surname was formally changed to Monray in 2019 for family-related reasons. (George Monray corporate experience)