Companies that pursue a successful inorganic growth strategy, moreover, must treat M&A like any other business function and invest in building their institutional M&A capabilities.

We studied almost 700 growth-stage companies and found that 2/3 of them did at least one M&A deal before going public.  But as the figure below demonstrates, M&A is not necessarily a recipe for success.  Companies that did and did not engage in M&A activity had exactly the same likelihood of reaching $1 billion in revenue, and took almost exactly the same amount of time to grow from $100 million in revenue to $1 billion.  Of those companies that reached $1 billion in revenue, moreover, those companies that had M&A activity tended to be growing slower at $1 billion than they were at $100 million.

Nevertheless, M&A can create value, particularly when the deal creates a difficult-to-replicate corporate competitive advantage.  But doing M&A right requires paying close attention to the strategic rationale for any particular deal and to the capabilities required to source and execute deals effectively.

One key strategic consideration is the structure of the particular sector.  If the sector shows slower growth than the overall SaaS market, that suggests that the sector may be ripe for consolidation.   Another important consideration is the size of the deal.  Large deals tend to be higher risk than small deals.  And a M&A strategy built around several small strategic acquisitions tends to be more successful than one built on a blockbuster or two.

Finally, we have found that M&A capability-building is of critical importance.  Among our surveyed software companies, for example, we found that companies that did less than 1 deal per year on average actually grew more slowly than companies that did no M&A, as well as companies that did 1 or more deals per year on average.  This suggests that deal-making is a competency to be developed.  Those companies that do it often develop the competency and reap the benefits of M&A.  On the other hand, companies that make deals only occasionally or on an ad hoc basis may fall behind.