by Tom Allen
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The nature of deal making is changing. For many organizations, the days of closing just 1-2 deals every few years in a limp to the finish line are over. Today, M&A news is awash with stories of organizations running double figure deal counts. Alphabet, Google’s parent company, and Microsoft have both closed 9 acquisitions year-to-date (two years ago, deal count was at 15 and 19 for Alphabet and Microsoft respectively). If corporate venturing initiatives are added to the mix (rather than just outright acquisitions) the figures relating to closed deals are even more profound.
For many organizations, the days of closing just 1-2 deals every few years in a limp to the finish line are over.
Running Deals in Parallel – The New Normal?
The rationale driving the proliferation of more deals being closed in succession is centered around growth. Managed correctly, M&A can be an enabler of exponential growth. It can provide access to new customers, new markets, new products/services, technological capabilities and people expertise – all of which could take years to develop in-house. When it comes to “buying growth” a study by McKinsey outlines that making acquisitions on an infrequent basis may actually disrupt growth and slow overall revenue gains – while high volume M&A campaigns are more likely to accelerate growth (McKinsey, 2015).
For any organization looking to close a significant number of deals in a year it is likely that they will be running at least several deal processes in parallel. Working off the frequently cited estimate of it being necessary to screen 100 targets to close one deal, some organizations could be running upwards of 1000 targets through their acquisition pipeline each year.
Some organizations could be running upwards of 1000 targets through their acquisition pipeline each year.
How to Approach Pipeline Management
Managing an acquisition pipeline befitting of today’s M&A characteristics is increasingly becoming a juggling act of speed – while at the same time being a process requiring management of confidential information and demonstrable strategic thinking. The key to maintaining consistent high-volume deal flow and effective pipeline management is a systematic and repeatable approach. Taking the time to structure this process, the pattern of workflow and the standard documents to be used in the screening of targets will allow for more informed and timely decisions to be made and ultimately, provide a greater chance of the most suitable targets being pursued.
On a high level, the core workflow of an efficient pipeline management process should include the following stages:
- Stage One –Defining of an acquisition strategy (see Part 1 - Defining an Acquisition Strategy);
- Stage Two – Identification of targets (see Part 2 - Building an Acquisition Pipeline);
- Stage Three – Screening of targets;
- Stage Four – Initial due diligence.
Each stage in the pipeline should incorporate clear entry and output criteria to be met before a target can be progressed to the next stage of the pipeline (or “killed” if deemed to be unsuitable).
The Pipeline Process
It is important to note that the pipeline process does not commence with the identification of targets, but with the defining of an acquisition strategy (or investment strategy if speaking of corporate venturing) – this being Stage One. In essence, this is the degree to which acquisitions could play a part in meeting an organization’s overall corporate strategy.
Research conducted by McKinsey suggests that successful acquisitions align closely with an organization’s growth strategy. Organizations that accelerate revenue growth via acquisitions do not treat deals as opportunistic events. Rather, they use several different deal models—all linked to their overall growth strategy.
In advancing from Stage One to Stage Two it is important to posit a number of questions, such as: (i) would the target support the acquisition strategy? (ii) what risks would the target introduce to the current business model? (iii) what degree of adaptability (people, processes, etc.) would be required to successfully integrate the target into existing operations?
Without answering these questions, there is a risk that initial target screening criteria could be vague or disconnected to the acquisition strategy. The crux of the matter here is that those devising a list of targets (e.g. the deal team and/or corporate development, etc.) should be able to easily explain the deal rationale and strategic fit a target offers. If this is not possible a target should not be advanced to Stage Three.
It should be able to easily explain the deal rationale and strategic fit a target offers - if this is not possible a target should not be advanced through the pipeline.
If the conceptual question of whether a target could provide a strategic fit can be answered with an affirmative “yes” the target can be advanced to Stage Three. Here the objective is to collate and analyze more detailed information in order to support the decision as to whether or not a target should progress to Stage Four – being initial due diligence. The information that will analyzed in Stage Three is likely to comprise documents that are available in the public domain – for instance, abbreviated financial statements, annual reports, press releases, product/service catalogs, etc.
At this stage, an indicative or “ballpark” valuation can be conducted – this is likely to be based on abbreviated financial information bench marked against comparable company data (therefore subject to a number of iterations as more information on the target is obtained further along in the pipeline process). At the same time, a more detailed appraisal of the potential synergies on offer should be conducted. A word of caution, however – if synergies are included in the valuation of a target these should be treated with care so as to avoid over-pricing (see Greater Than the Sum: Estimating Synergies in M&A).
If at the end of Stage Three a target still appears to offer a good fit it can be progressed to the Stage Four – the initial due diligence phase. The purpose of this stage is to screen a target in more detail – typically using information not available in the public domain (therefore requiring an initial approach to be made to a target and an NDA signed by the acquiring organization). It is highly likely that a target will not be open to entering discussions around a potential sale – in such a case this outright eliminates a target from the pipeline.
Where a target is open to entering discussions an initial target questionnaire can be used – this is essentially a precursor to a detailed due diligence exercise and serves the purpose of providing essential information to the acquiring organization. An initial target questionnaire enables a deeper dive into the financials and operations of a target and should help in establishing whether a target should be progressed to a more formal stage of the deal process (being the issuance of a letter of intent/term sheet and detailed due diligence).
Consider A Digitalized Approach
In Stage Three & Four of the pipeline process, a vast amount of information will be in circulation among the deal team. While perhaps obvious, it is imperative that the manner in which information is managed and stored is considered with care. The most basic solution would be to adopt a dedicated folder for each target and each stage. A slightly more advanced solution would enable the sharing of certain documents with individuals inside/outside of the organization (this is most likely to encompass a basic cloud solution such as Dropbox or Google Drive, etc.).
It is important to understand the security limitations of the solution selected (particularly if confidential information has been supplied by targets) and the ease with which information can be analyzed/commented on in a collaborative manner (this requirement becomes increasingly relevant as the volume of targets being screened increases). For organizations that have encountered the chaos of using multiple tools to run the pipeline process (think multiple Excel, Word and PowerPoint documents) a digitalized approach via adoption of a specific M&A tool could be considered (see How Philips Utilizes a Digitalized Playbook for M&A and More in Midaxo).
An M&A specific solution to pipeline management provides unrivaled collaboration for those screening targets.
Adopting an M&A specific solution to pipeline management means that access rights can be assigned to individual users (e.g. only relevant targets can be viewed). The ability to grant specific access (such as to the corporate development team, a business unit, advisors, a target representative, etc.) and to control exactly what can be accessed is a powerful feature that is not possible with basic home-grown spreadsheet-based solutions. Furthermore, an M&A specific solution provides unrivaled collaboration for those screening targets - in addition to real time analytics and reporting functionality.
Deal Capacity & Other Key Success Factors
The target screening process can require a significant amount of time and effort (regardless of the size of targets being screened) – it is therefore important to introduce some additional structure to the end-to-end pipeline process.
As targets are screened and advanced through the pipeline there is often a tendency for organizations to place too much emphasis on the minutiae detail of financials and valuation metrics. However, history shows that acquisition failures are most likely to be attributed to sidestepping key success factors that no end of spreadsheet analysis can insure against – these factors include culture, leadership, management and overall strategic fit.
Cultural alignment is fundamental - it should be considered at the outset of the screening progress and continually re-evaluated as a target is advanced through the pipeline. An assessment of culture should be objective and comprehensive – merely "getting along" during initial discussions with a target should not be taken as sufficient culture fit.
To safeguard against overlooking key success factors it is sensible for a variety of individuals within an organization to screen targets – different experiences and backgrounds can help to provide a comprehensive assessment of a target, rather than a narrow-focused judgment. Furthermore, as part of the screening process the future operating model should be considered – i.e. what changes would be necessary post-deal and how easily would any such changes be to implement? Accounting for such considerations as the screening process is being conducted should help validate any assumptions of a target made earlier in the pipeline process and promote a more holistic appraisal.
Finally, where target screening is being conducted at a high-volume, thought should be given to “deal capacity” – i.e. how many targets can realistically be screened and how many deals can actually be closed in parallel/over a year? Keeping tabs on the number of targets in the pipeline is therefore important – one possible approach to manage this is to only allow a new target to enter the pipeline if another is eliminated.
Pipeline management should be approached in a systematic and repeatable manner – following a minimum of a four-stage approach will enable an organization to screen targets with consistency and advance a greater number through the acquisition pipeline while eliminating those that do not provide a good fit.