by Tom Allen
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The most successful acquirers in M&A take a proactive, systematic and repeatable approach to screening targets and originating deals; these are core M&A best practices. They actively manage a pipeline of suitable acquisition targets rather than making knee-jerk reactions to deals. They do not require intermediaries to source deals for them. They screen potential acquisition targets in line with the organization’s overall strategy.
Acquirers that adopt a systematic and repeatable approach to their M&A process can benefit from lessons learned on past deals, and therefore can improve their deal-making capabilities on an on-going basis. Of course, no deal is the same and it is impossible to foresee all eventualities that may arise as a deal progresses across its life-cycle. However, it is advisable to adopt a systematic and repeatable approach to M&A to safeguard against unwanted surprises and loss of value. Pursuing acquisitions that do not fit with an organization can cause strategic and cultural issues or may destroy value rather than creating it.
“M&A will never be 100% successful and we learn from every deal we do, and so not to pick on any specific deal, but I’ve learned, based on relative success of deals we’ve done in the past, is making sure the strategy drives the M&A, as opposed to the M&A driving the strategy.”
Don Harrison, VP of Corporate Development, Google (source: Fortune.com, 2017)
A systematic and repeatable approach to M&A can act as a safeguard to value loss and should begin with the development of an acquisition strategy. To do this, an organization should seek to determine its business plan drivers and question how realizing its strategic objectives can be fast-tracked via M&A (if at all). The organization’s business plan can then be translated into a set of drivers and requirements addressable by an M&A strategy.
An organization should seek to determine its business plan drivers and question how realizing its strategic objectives can be fast-tracked via M&A.
Define the Strategy
Successful M&A requires that the right deals are pursued via a well-judged approach to target screening, and a successful target screening relies on a well-defined acquisition strategy. An M&A strategy can help identify the most attractive market sectors, determine whether organic or acquisitive growth is best (and therefore, whether M&A is suitable) and assist in tackling the typical hurdles associated with an M&A campaign.
To become a successful acquirer, an organization needs to utilize an established set of best practices. One such best practice is taking time to build a well-defined acquisition strategy before any checks are signed. To do so, an organization could start by contemplating a number of questions – the idea of such an exercise is to trigger thoughts around the rationale for pursuing an M&A campaign (such introspection can uncover some potentially expensive truths).
The 20 Key Questions an organization should ask itself when defining its acquisition strategy are:
- Why are we doing this?
- What are our alternative options (outside of M&A)?
- What lessons have we learned from previous acquisitions?
- Could growth via acquisition provide a good strategic fit and align with our objectives?
- Can any growth objectives be achieved more effectively via acquisition than organically?
- What products/technology requirements does our road map require? (Note: balance the cost of acquiring such products/technology against the cost of build options – buying may not provide 100% of what you are looking for);
- What products and/or services could we conceivably acquire via acquisition?
- Do we understand the structure, size, growth and trends of existing markets we are in?
- How much risk are we willing to take – what is acceptable to shareholders and stakeholders?
- Are we prepared to invest in pre-revenue/early-stage companies?
- What geographies do we want to operate in? (Note: as part of this, consider the order of preference for international market entry);
- Are we prepared to enter significantly different markets?
- What synergies could typically be realized from an acquisition in the sector(s) we are considering?
- What is the maximum size of deal we are comfortable with?
- What is the minimum size of deal we are prepared to dedicate resources to?
- What level of funding is readily available? What level of additional funding could be obtained, if necessary?
- How many acquisitions can we execute and integrate in a year without over committing?
- What types of people, skills and experiences do we need that could be obtained via acquisition?
- What financial returns do we want to achieve over the next X years? What financial metrics are most important to us?
- Are we considering a particular acquisition merely to prevent a competitor from accessing an opportunity in the market? If so, what is the value of this competitor not accessing the opportunity?
Answering questions such as "what geographies do we want to operate in?" and considering risk-appetite can be useful in defining an acquisition strategy.
Consider the Motives
As part of defining an acquisition strategy, an organization should be mindful of the motives on which they are basis acquisition decisions. Three motives could be considered here – these are proactive, reactive and opportunistic.
Proactive acquisitions are most likely to be successful (in terms of actually being closed and providing a suitable strategic fit) – they directly address points raised in strategic analysis. They are borne out of proactive target screening - with thought given to how the acquisition can support the organization’s strategic objectives. As part of the screening process, the acquirer will likely have given thought to desirability (what synergies are available) feasibility (can the deal be closed) and validity (compare purchase price to expected future performance and synergies – does this seem reasonable?).
Reactive acquisitions are characterized by where the acquirer responds to an approach from a seller. In such a situation, the seller (perhaps via an M&A advisor) will typically be approaching numerous potential buyers in the same or a related industry. While a potential acquirer will usually be given a reasonable amount of time to consider such an opportunity (and can therefore screen the target in context to strategic objectives without making a knee-jerk reaction) the acquisition process may become competitive and provide little scope for negotiating on price and deal structure (e.g. deferred consideration or earn-outs may not be accepted). Furthermore, it is unlikely that the opportunity will represent a compelling strategic fit. Nonetheless, an organization in the market for acquisitions may feel obligated to pursue the deal for the reason that it “needs to buy something”. This is a dangerous strategy and likely to result in the need for crisis management.
Opportunistic acquisitions are the least likely to be successful in terms of enhancing an organization’s operations and have the lowest probability of closure. They are associated with where an organization is approached with a seemingly attractive deal – often from a seller in a non-related industry and perhaps attractive in terms of price or deal structure. While such an opportunity may ostensibly represent a means of diversification (which may be one of the over-riding objectives of an organization's overall and acquisition strategy) such deals should generally not be pursued for the reason that the target is very unlikely to relate to a well-defined acquisition strategy or provide a compelling strategic fit.
Understand the Types of Acquisition Available
Acquisitions may fall under a number of categories – it is useful to understand these since it can help contextualize an acquisition strategy:
- Synergistic – a synergistic acquisition target may/may not compete directly in the same geographic market, but be involved in the same line of business in terms of products/services and end markets/customers. A synergistic acquisition will naturally offer immediate synergies in terms of added customers and market share, streamlining of office/admin functions and other operational and purchasing efficiencies.
- Strategic – a strategic acquisition target will offer similar products/services to the acquirer, but sell to other end markets or will offer different products but sell to the same end markets. The cost synergies available from a strategic target are usually less profound – however, potential revenue synergies and growth opportunities may be vast.
- Complementary – a complementary acquisition target will fall disparately from the acquirer’s core competencies. A complementary acquisition could provide an element of overlap in products/services, markets or capabilities, but is unlikely to offer any significant synergy value (where available, synergies are likely indirect and involve sharing resources/know how/operational best practices).
- Diversification – a diversifying acquisition is characterized by where the target has no overlap with the acquirer. This type of acquisition is usually high-risk and has the lowest probability of success in terms of enhancing an organization’s operations and probability of closure (a diversifying acquisition may be borne out of an opportunistic motive).
- Transformative – transformational acquisitions (those associated with creating value by fundamentally transforming core operations, processes and/or business units) can offer significant potential for innovation and breakthrough performance. However, transformational acquisitions involve complexity that can go beyond the capabilities of management – therefore providing the potential to bring operations to a standstill if not properly managed. It is therefore vital that any organization considering an acquisition of this nature ensures it has the sufficient people-resources to manage it.
Acquisitions may fall under a number of categories – it is useful to understand these since it can help contextualize an acquisition strategy.
Build An M&A Team (Or Make Sure Your Existing Team Is Up To The Job)
The type of M&A team an organization requires depends on its M&A strategy and the type of deals being considered. An M&A team is best able to support an acquisition when it is underpinned by a well-defined acquisition strategy. As already outlined, an acquisition strategy defines an organization’s approach to M&A – part of which is the type and number of deals that are to be closed. Accordingly, this sets the level of activity and expertise required for building and screening a pipeline of opportunities, conducting due diligence, negotiating and closing deals and running the post-merger process.
Many organizations determine the size of their M&A teams on the basis of due diligence requirements (arguably the process requiring the most people across the deal lifecycle). However, determining the size of an M&A team on this basis can result in a team that is too focused on the detail or lacking in commercial and strategic awareness (essential capabilities to an acquisition strategy). While vitally important, due diligence is only part of the deal lifecycle – if an M&A team lacks the skills and expertise to effectively screen targets in line with an acquisition strategy it could easily end up conducting due diligence on an unsuitable target.
If an organization carefully considers its acquisition strategy and looks at its available people resources it may realize it requires a larger M&A team (and perhaps, dedicated expertise) to manage the number and/or complexity of planned deals. Conversely, an organization may be targeting a lower number of simple acquisitions and conclude that its current M&A team is fit-for-purpose. Ultimately, an organization should take an overarching view when considering the M&A skills and expertise it has available now and what its future requirements may be. To a large extent, this will be driven by a longer-term approach to M&A - supported by a well-defined acquisition strategy.
With a well-defined M&A strategy in place, and a suitable M&A team on-board, an organization can turn its attention to building a pipeline of potential acquisition targets and screening these for best fit against the acquisition strategy.
Stay tuned for next week's Part 2: How to Build an Acquisition Pipeline.