by Tom Allen
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Identifying the right acquisition target is arguably the most fundamental component of a successful M&A campaign. A quick search online for “failed M&A” will reveal a myriad of case studies outlining where things have gone wrong. While failure factors are sometimes unforeseeable, it is often the case that M&A goes wrong due to poor preparation in the early stages. Turning poor preparation on its head, adopting a repeatable and systematic approach to M&A can greatly increase the efficacy of an M&A campaign and prove extremely valuable when it comes to identifying the right acquisition targets.
When researching targets and building an M&A pipeline it is important to keep a number of points in mind:
- Market Attractiveness
- Broaden the Search
- Stage Gate Approval
- People Buy-in
There is a misconception among many organizations that they are pursuing an "M&A strategy" even where deals are only loosely aligned to the overall corporate strategy. Crucially, those leading an M&A campaign should be able to easily answer (i) why an M&A campaign in being pursued (ii) what an acquisition will accomplish and (iii) how it will contribute towards an organization’s overall corporate strategy. As outlined in Part 1, an M&A campaign should not be pursued via a scatter gun approach or by making knee-jerk reactions. Rather, establishing a clear vision from the outset and linking each deal to the overall corporate strategy will enable an organization to be proactive and maximize the likelihood of identifying the most suitable targets when building its acquisition pipeline.
Linking each deal to the overall corporate strategy will enable an organization to be proactive and maximize the likelihood of identifying the most suitable targets when building its acquisition pipeline.
Once an organization has defined its overall (and supporting) M&A strategy it can start identifying the right market sector(s) to focus on. Taking a market-driven approach helps in selecting targets in markets that are stable, growing, attractive to consumers and most likely to deliver the expected deal ROI or desired revenue growth, etc. As part of this process, future market demand should be considered – the risk being that if this is not considered an acquisition of a target in a declining market could be made.
In identifying the right market(s) there is an element of crossover with the process of defining an M&A strategy – for instance, answering questions such as “what geographies do we want to operate in?” and “are we prepared to enter significantly different markets?” (this question should also be asked when the M&A strategy is being defined) will help in formulating a number market-driven criteria. Once these criteria have been established (criteria may change over time and/or depending on the nature of the deal being pursued) a deeper-dive research process can be commenced – the idea being that market-criteria will be refined as more about the market(s) is established. Ultimately, defining a number of market criteria will help when it comes to appraising markets against the strategic rationale underpinning the M&A campaign – and therefore, help in the identification of suitable acquisition targets.
Broaden the Search
While the end-goal of an M&A campaign may be the acquisition of just one target, it is very unlikely that pursuing one target at a time will be enough to result in a closed deal. Taking such an approach is risky and could leave an organization back at the starting line if things do not go as planned. For instance, significant time and effort could be invested only for a single target to pull out of negotiations, for a competitor to come along and trump an offer, for the due diligence process to reveal adverse findings or for deal terms to not be agreed upon, etc.
Some estimates suggest that up to 100 potential targets may have to be screened in order to lead to the closing of one deal. Working to this estimate, one way to approach the building of an acquisition pipeline is to view it as a funnel – there will be a lot of targets at the top of the funnel (potentially hundreds) but as the screening process advances, some will be eliminated due to lack of fit against the M&A strategy (remember, this is supporting the overall corporate strategy). The screening (elimination or advancement) of targets is best managed via adopting a well-defined Stage Gate Approval process, and given the volume in play for larger organizations in particular, it's an area where M&A software can be beneficial.
Stage Gate Approval
Any organization pursuing an M&A campaign should adopt a well-defined Stage Gate Approval process in order to support effective decision-making. However, many organizations have poorly managed stage gate processes (or none at all) – leading to altogether lost opportunities with potentially well-fitting targets, or losing out on targets later in the process due to the inability to make timely decisions.
A well-functioning stage gate approval process could be viewed as a three-tiered approach:
- Strategy approval
- Negotiation approval
- Go/no go
The strategy approval process should involve an appraisal of targets from an “outside-in” perspective to help establish whether a target could contribute to the overall strategy (essentially, this process should reaffirm and align with the higher level strategic considerations made at the outset of the M&A campaign). Consideration should also be given to how due diligence would be approached and compatibility of the target from an integration perspective.
Negotiation approval should be centered on valuing a select number of targets – it is notable that if valuations are being derived on the basis of publicly available information they are likely to be far more indicative/ballpark in nature (and subject to greater refinement later in the process) than if preliminary due diligence and management discussions have commenced.
The outcome of a preliminary M&A due diligence exercise (if undertaken) should be to reaffirm the decisions made in strategy approval stage (i.e. the target is a good fit and should be pursued), to assist with pricing decisions and to further identify any challenging integration issues. As part of an initial post-merger integration checklist, thought should be given to the operations of a target, how they align/complement the existing operations of the acquiring organization, what synergies are available (cost and/or revenue) and the magnitude of the integration project that would have to be undertaken.
Whether a target is a "go/no go" will ultimately depend on the key decision makers within an organization (likely to be the board of directors/shareholders and key stakeholders). Here, the stage gate process should build upon the questions and answers covered in the two previous stage gate processes (rather than introducing a myriad of new acquisition criteria and questions – which could muddy the waters).
Key decision makers will be viewing a target from a more objective standpoint in the sense that they will not have been subject to the finer details of the earlier-stage screening process. This gives the advantage of decisions being made on the basis of whether a target would support the overall corporate strategy, in addition to addressing high level matters such as desirability (“what synergies are on offer?”), feasibility (“can the deal actually be closed?”) and validity (compare valuation to expected future performance and anticipated synergies and question “does this look reasonable?”).
The stage gate approval process should be flexed according to the nature of the deal in question – for instance, a deal in the biotech sector may require the adoption of additional/bespoke screening criteria, while a significantly large deal may require that thought is given to regulatory approvals (i.e. is the deal feasible in the sense that it can legally be closed?).
A large number of deals under perform (or result in outright failure) because a one-size-fits-all approach to M&A is taken. As an acquisition pipeline is being built it is therefore important that those driving the M&A campaign (i) understand the nature of the target being considered and (ii) question how those working on the deal may have to adapt to ensure success. For example, some targets may offer cost synergies realizable in the short-term, while others may offer longer-term revenue synergies. In either scenario, the approach to integration is likely to differ. Therefore, depending on the people-resources an organization has at its disposal– and the degree of adaptability – some targets may have to be “killed” (eliminated from the pipeline) for the reason that they fall outside of an organization’s experience and ability to successfully integrate and execute.
In some instances, an organization may be able to adapt from its traditional approach in order to facilitate the successful integration of a target. One possible approach to establishing adaptability is via gap analysis – i.e. where an organization compares its actual ability to perform against the required ability to perform. Where gaps are extreme, or cannot be bridged, this could determine the targets that are eliminated during the M&A pipeline management part of the process. Crucially, considerations of this nature (and gap analysis, if undertaken) should be a key focus of the deal team as an acquisition pipeline is being built – not post-deal – when it is too late for the realization that there is a lack of experience and/or resources.
For a deal to be successful it is important for people buy-in across an organization (i.e ensuring there is universal support for a target). One way to approach people buy-in is to ensure that all stakeholders in the deal process are involved from the point at which the acquisition pipeline starts being built. This could be made possible by utilizing a shared Excel, or via deal management software, where all stakeholders can access information on the pipeline in real-time and make judgments as it is being built.
Regardless of the tool used to build the pipeline, once the pipeline has been reduced to just a small number of targets, a business case presentation should be prepared for each target. The idea is that the presentation brings together all of the criteria considered earlier in the process and focuses the minds of all parties that would be involved if the particular target in question was to be acquired (essentially, this encompasses a pre-deal review).
A business case presentation should help clarify the end-to-end deal process and ensure that the strategic rationale of the deal in question informs both due diligence and integration processes. On the contrary, a business case presentation could result in a target being eliminated from the pipeline/disregarded as a credible acquisition candidate due to a lack of people buy-in. If this happens, a business case presentation should not be viewed as a failed exercise, since it has helped flag the wrong deal before it is too late, and prevented significant costs and resources being dedicated to an unsuitable-fit target.
Building an acquisition pipeline should not be borne out of chance or trial and error. Rather, it should be approached with a number of considerations put at the forefront of the process. An organization should ask itself whether acquisition targets support the overall corporate strategy, whether the markets being considered are attractive, whether a sufficient number of targets are being considered, implement a robust stage gate approvals process in order to “kill” unsuitable targets early, consider adaptability and ensure people buy-in. Keeping these factors in mind as an acquisition pipeline is being built should maximize the chance of the most suitable targets being selected and ultimately, increase the likelihood of a successful M&A campaign.