by Tom Allen
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For many companies, M&A pipeline management is a misnomer. The term suggests an organized, collaborative and efficient evaluation of targets. In reality, it often resembles a clumsy lurch through the deal process where companies are left hoping that value awaits on the other side.
Now, that may be a bit of an exaggeration, but a grain of truth persists. Pipeline management can and should be an efficient end-to-end process to prioritize and evaluate deals – even if it may not feel that way today.
Managing the acquisition pipeline is a crucial skill for companies intending to use M&A to support corporate growth objectives. Building competencies here generally boils down into two fundamentals:
- The strategic appraisal of targets before they enter the pipeline and building execution.
- Process rigor to move opportunities to a point of decision making.
One way for a company to assess the relative strength of its pipeline management process is to look at how it performs in the areas where industry-wide processes tend to be deficient. At Midaxo, we recognize these as the common points of failure in the deal efforts of many companies pursuing M&A campaigns. These are not company-specific, but rather, universally challenging for most companies active in M&A. These pipeline management pitfalls are discussed in detail below. Consider company proficiency in each of these areas and opportunities for improvement.
Additionally, it may be worthwhile to assess general M&A and pipeline process maturity using Midaxo’s M&A Maturity Grader.
Pitfall #1: Undefined Acquisition Strategy
Effective processes are only as good as the targets, or deals they are being executed against. If what goes into the pipeline is weak, companies cannot expect successful deal outcomes. Strong pipeline management begins with the overall company strategy in mind. Companies need to look to business plan drivers and establish if a target can contribute to the broader company goals. Without a rationale that is set and adopted by company leadership and its board, nearly every target will appear attractive in some way. A defined strategy moves deal teams from “shiny object syndrome” to a repeatable, equitable and unemotional screening of targets. While freedom should be given to explore opportunistic deals from time to time, a defined strategy will bring opportunities in that offer performance potential of the right kind.
Reflection Question: Do we have a defined acquisition strategy and decision criteria to steer opportunity considerations? See here for guidance.
Pitfall #2: Too Many Pipeline Builders
Who is responsible for building the pipeline is nearly as important as what gets put into it. In particular, clear pipeline ownership improves the likelihood that suitable targets are added. Of course, business line leadership should have the opportunity to raise potential targets, but these should flow through a central owner or team. This ensures that the same level of rigor, appraisal and strategic review is happening on each target. As well, it reduces bias and subjectivity – and supports a well facilitated buy-in process internally.
While it may not be practical to have a single point of contact for pipeline gate-keeping, central management and administration needs to be introduced in some way. Large companies in particular struggle with this; they may have teams with overlapping duties (e.g. corporate development team, deal teams, partnership teams, etc.) that can result in multiple different pipelines and outdated or repetitive review. It is important that the team with central responsibility holds regular meetings to discuss the deals in the pipeline with all data updated in advance. The regular meeting also determines the reporting cycle for individual projects and keeps stakeholder groups apprised of what is being added, removed or pursued for further due diligence.
In large companies where there is a dedicated corporate development team, a team meeting is usually held weekly. In smaller companies, the board meeting cycle usually determines the timing for review meetings. Unfortunately, it is not uncommon for teams to be reviewing opportunities in parallel, even approaching targets that are already in discussion with other parts of the company. While the eagerness is admirable, lack of coordination wastes resources and appears amateurish.
Reflection Question: Is it widely known and accepted on who has central ownership of the deal pipeline?
Pitfall #3: Outdated or Incomplete Process
M&A deal making may be tool for growth, but only to the degree that the freshest, most relevant and strategic opportunity set is under review. A McKinsey study suggests that companies employing high-volume M&A campaigns are more likely to accelerate growth. This presupposes that a rich flow of target and prospects is continually open. Should this be the case, then it is critical that a systematic and repeatable process is followed for tasks, sharing and reporting on targets under consideration at various pipeline stages. Pipelines should be maintained/purged on a regular basis and reviewed on a stage by stage basis. The responsible party is functioning as a quality control leader - moving workflows on, capturing project updates and tracking progress in a central space (such as M&A software) where stakeholders can quickly see and understand the state or stage of pipeline opportunities.
Reflection Question: How effective is the current tracking tool/software at reporting on all deal prospects through each stage of pipeline, including: Prospect, Initial Study, and Initial Due Diligence?
Pitfall #4: Inconsistent Reporting
In each deal stage, teams will collect and analyze information, as well as produce reports and presentations. Reporting outputs vary, but timing and ownership are critical to keep internal and external teams in-sync on next steps and outcomes. At a minimum, pipeline overview reporting should be incorporated that provides visual representation of the state of current deals being worked. This basic reporting should:
- Filter deals by country, business unit, deal owner, etc.;
- Highlight changes since the last meeting or update;
- Allow easy movement of a target from one stage of the pipeline to another;
- Allow drill-down to the status, issues and documents of any individual deal;
- Enable easy export in a few clicks;
- Switch between a visual pipeline view, a spreadsheet view and a project overview.
Introducing automation and/or self-service into reporting can help deal teams deliver needed updates to business owners and company leadership in a scalable way. A static spreadsheet solution makes this process more difficult, is prone to error, reduces collaborative ability and is one-dimensional. By graduating to a platform solution, pipeline owners manage M&A deal flow, documents, tasks and issues/risks, while enabling robust reporting. Visual enhancements also help stakeholders digest the state of active deals in a timely manner. By having a single tool, process owners can update a single source of truth and ensure all relevant parties are looped in.
Reflection Question: What is the frequency of deal reporting and do reports offer valuable insight quickly to recipients?
Pitfall #5: Inadequate or Missing “Stage Gates”
A company pursuing M&A activity with any frequency needs a defined stage gate approach for making and managing decisions. Undefined, or poorly defined processes, create friction that results in lost or delayed deal making. At best, a pipeline lacking stage gates is unreliable and at worst, it invites deals that destroy culture or business value.
Stage gates are simply a preset collection of review and evaluation steps. As discussed earlier, general strategy appraisal is a stage, and should be managed like one. Deal teams apply specific acquisition questions and rationalize the target’s attractiveness and potential to enhance company objectives. Assuming the opportunity passes this, it moves to an initial study or preliminary due diligence stage. Here, a basic business case presentation and high-level integration plan may be crafted - with thought given to the target’s operations, cost- or revenue-improving synergies and integration requirements. An illustrative pipeline stage diagram is below. Each stage should be ‘protected’ by clearly defined gates, or approval requirements. Deals move on, or down and out as represented by the arrows.
Reflection Question: What deal questions or criteria currently exists at the entrance of each stage?
Effective M&A pipeline management doesn’t have to be an intimidating proposition. By pairing the right tool set with strategic intent, companies can create the process and organization needed to succeed in a fast-paced era of deal making. The impact is surprising. Committed companies find themselves with better quality targets, accelerated go/no-go decision making, transaction agility and collaborative engagement. And it starts with practical pipeline management improvement.