What is an M&A thesis
How we think about it is developing a view of the specific areas where M&A could be deployed and could act as an accelerant to the broader corporate strategy.
We try to form that investment thesis in advance of evaluating specific opportunities, and it doesn't always work out that way. But ultimately, our goal is to have an investment thesis developed around specific areas that would support our business and allow us to be in a position to be efficiently reactive when opportunities come up.
These are predicated on the broader corporate strategy. But these are the questions that we're trying to solve when we develop an investment thesis:
- What areas do we need to strengthen to be in a better position to deliver on that strategy?
- Which ones are viable to be supported by M&A? There are going to be certain areas that are more likely to be supported by organic investment.
- What specific targets would you rank on your list as being the most attractive ones that can support your goals?
It's not a single investment thesis. There tend to be several different thesis around specific areas of our business where we are focused on M&A, and we think M&A will be an effective lever in growing parts of our business.
It tends to be driven by iterative discussions of our business unit leads. The individuals close to the operation, see how the business functions day in and day out.
Perhaps there are certain specific functionalities where we determine that we don't have the engineering expertise to tap into a specific component organically. Is that something that corporate development by itself can decide?
Through those detailed conversations with our partners, we determine if we can do it ourselves and need to think about M&A as a way to accelerate what it would take to build it on our own.
You're doing both organic and you're thinking about inorganic as well. It's determining the areas where you want to build an investment thesis that tends to be a combination of collaboration with your operating partners, where you can jointly pursue organic and inorganic activities.
What the end state looks like depends on our learning that assessment today, a year ago, and a year from now. But it is a question of:
- Where do we want to be in terms of numbers?
- Where do we want to be regarding who we're serving?
- How broad of an audience we're serving?
- What markets we're tapping?
- How do we get there?
- What combination of classic buy build and partner is the right approach for that end state considering your internal resources?
- What are the options that are out there in the market?
It's easy to say we want to acquire in this very specific area and we want something that moves the needle. Well, the simple answer maybe not be that many assets fit within the criteria that you have modeled up, not all of them are going to be necessarily actionable. So there are practical constraints when you're doing this exercise around what's the ideal versus what's actionable and doable.
Developing an M&A thesis
1. Corporate Strategy
Any M&A thesis is closely aligned with your corporate strategy. And as you peel away layers of that, you get into more detail about the components that help you get there.
Strategy can have a lot of meetings and it's the same concept that you have a broader corporate strategy, where are we going? That type of overarching corporate-level strategy needs to be ultimately endorsed and driven by the C-suite.
But right below that umbrella strategy, you have a lot of much more nuanced business unit level strategy work that needs to happen around.
Let's say we want to be a leader in streaming. How do we get there?
- What do the products look like?
- What parts of the market are recovering?
- What do we need to have to get there regarding our offering?
All of those questions require a next-level workaround for developing the strategy. I think of the M&A thesis around specific business areas as a very direct byproduct of that next layer of discussions and strategy work.
Effective partnership between corporate development and the business unit counterparts is the first step. It allows us to work out that type of investment thesis cohesively. It's not something that is done in isolation by a single corporate development team sitting on the sidelines. That's never going to be an effective way to drive forward M&A for a company.
But having a close collaboration and working through understanding the needs of the business and thinking through with them, this full concept of where we could spend our time, where M&A could be helpful in helping you meet those business needs. It is where we start to coalesce around several areas of M&A priority.
3. Capital Allocation
Companies, including ours, have to make decisions around how we are allocating capital between organic investment, inorganic, return of capital, etc.
We know that we have a confined pool of capital that could go toward inorganic activities. When you consider that, you may have a specific piece around four or five, or six areas of your business where you believe that M&A is a good lever of growing to business.
But the reality may be that the capital you have available and the M&A targets out there and the skill of such, it's not viable to put all five or six at the same level in terms of priority. You have to ultimately decide where you're really putting your time and effort. You do have to look at each other and say:
- Who are the targets that could address our growth priorities in this specific area?
- What's the size?
- What's the actionability?
- And how does that play into the capital that we have available?
4. Targets available
A handful of small players will simply not move the needle. And then there are one or two really large flares that will take a substantial capital investment need that may preclude you doing many other things.
It's a judgment call based on some of those parameters as to within the 4, 5, 6 areas that you're focusing on and do have an investment thesis. Which ones would you elevate a higher priority at any given point in time?
That's not a single point in time decision, and it's not a decision that is purely made by corporate development. That's the byproduct of consistent conversations with the C-suite, and with the business unit leaders.
5. Getting the buy-in from the leadership of the business unit
Not just buy-in to the concept, but really championship of that concept is key in moving it beyond that. Ultimately, if we pursue an acquisition, the business unit will help integrate that acquisition and run it in most circumstances going forward.
If you don't have a true champion in the business unit, it isn't easy to see a path to a successful M&A outcome. That's why having the initial process being a collaboration with the business unit is so important.
Managing Business Unit Leaders
There's a wide spectrum of perceptions around M&A. As a corporate development professional, one has to be in a position to work with the whole range of personas and know that going in.
If you are thinking about an opportunity in an area led by a business unit leader who you know is deal happy, it's important to manage expectations and excitement early on to make sure that you're focusing on the right target before we endeavor too far.
If you're dealing with a persona that is M&A shy, there are other things that you may focus your time. One is thinking about how much the company can run fairly efficiently.
Will there be a crossover of management? Will there be components to the deal structure you can think about and emphasize that will mitigate some of the transition risks that a leader may be focused on to the integration risk that will naturally happen? Think about emphasizing what the two outcomes are with and without M&A.
What does that look like from a financial and P&L standpoint? So it needs to change your approach and focus on how you run the process depending on the business units you're dealing with.
They're going to be the ones ultimately tasked with running that business. We have to be conscious of making sure that we are there as partners to help them make the right decision around whether it makes sense to pursue an acquisition or not.
Unlike when you're in banking, we sometimes have to be in a position to say, no, this is not the right deal. We shouldn't be pursuing this or the value has gone to a point where it no longer makes sense for us to follow it.
When I initially joined the company, there was a bit of that effort like M&A one on one type sit-downs where we talked through M&A and what the process looks like, what the steps may require, and level of effort commitment.
What does it take to pursue M&A? What could it mean for a business? Those were helpful discussions to have, but it requires ongoing conversation for individuals to get more at ease with the topic.
That is important if you are an organization that hasn't had a recent track record of being very M&A heavy. And mainly, some of the strategic focus is now on having increased M&A activity.
Establish consensus among other constituents within the company that will be directly impacted by any M&A approach we want to pursue.
Even though there may be a single business unit leader driving the M&A, they're not going to be the only ones within the company impacted by that approach.
Go to those other various teams and get their take, get their buy-in, get their services out of their interest level. Whether they agree pursuing one specific area will be beneficial across the board.
That takes time, and you're naturally going to have different perspectives whenever you're going out to four teams with four different sets of focuses. But again, ultimately, to be in a position where you're taking an M&A thesis, you're taking it to your corporate leadership and saying, this is where we should invest.
Having consensus and buy-in across the organization is what allows you to get the buy-in of your corporate leadership. Once you have that buy-in, then you're in a position to be proactive or reactive.
If we determine that we are going forward in a specific area and we've identified 10 targets that we think are valuable, perhaps we've ranked them, we have a sense of which ones we want to approach.
We've determined that doing an initial proactive outreach is the right next step, we'll figure out where we have existing relationships. Where is there an existing dialogue? And it tends to be a close, combined effort between the business unit and corporate development in terms of going out and making those calls.
In some circumstances, you're better served to initiate dialogue from a commercial perspective.
You want to try to form a relationship, and often forming a business unit-level relationship with a counterparty is helpful. Laying the groundwork, understanding whether there's a natural rapport between yourself and the company. Whether there's the commercial benefit or strategic benefit based that you are anticipating based on public information, you don't really know until you engage with a company.
And so, in those cases, it's really preferred for the approach to be done on the business unit side. In other circumstances where perhaps it's a company that is already in a commercial collaboration with us, where we already are aware of the fact that they would be an excellent partner to us, corporate development may undertake a certain outreach.
So I think we tend to look at it a case-by-case basis and determine whether corp dev or a business unit outreach is the right strategy.
Inbound deals that don't fit into the M&A thesis
More often than not, it's not that it doesn't fit into an M&A thesis, and it usually is that we just haven't done the work to develop an M&A thesis in the specific area where that inbound opportunity is focused on.
So, you have to do everything within that short period that one has available for a first-round bid. It's a lot of work, and you may determine that the business unit that could benefit from this is willing to allocate the time to run it to the ground, and that's what we do.
It comes down to making a decision around allocating a team's time. It's prudent that you can't have the answer be yes in all circumstances. I think some that are an educating intuition that you're not going to get to something, ultimately that's a yes on that transaction if you decide you don't want to allocate time to it.
Running against PE
There's the awareness that if you have corporate participants, you're going to benefit from the synergy play that is inherently there. Still, you're also going to impact the timing and your process. Naturally, you must allow for some incremental time in rounds one and two.
In general, that tends to be built into the process timelines; whenever you have a process that's started, build financial and corporate players. And in some cases, you want to go out and do some pre-marketing. We have found that helpful in cases where a sell-side advisor does pursue a bit of that preview approach.
From a sell-side standpoint, you want to be best positioned to have as many participants involved in your process as possible.
We do appreciate that. There are going to be some situations where you just don't have the benefit of that. It's a decision that is made with our senior leadership to fast-track our approach. You need those types of flexibility in your own internal process if you are going to be competitive.
I think being rigid in your process and never deviating from your process will naturally box you out of certain opportunities.
We hope that if you're a sell-side advisor and you're planning to run a process on an asset within the media ecosystem of where we focus, it is a call that we would receive. But sellers tend to run different kinds of processes, and it's not always guaranteed. As a corporate development professional, staying in the flow of information, it's one of the facets of the role.
You have to have a mix of everything. It's wonderful to go out and find a deal proactively. But those tend to be a lower probability. Some companies may be interested in engaging, but a large number may say this is not the right time.
And that's a fine answer, by the way. Even if it's not actionable on day one, it could be actionable in a year or two. And we tend to play the long game.
Biggest Challenge in developing an M&A thesis
A lot of it is around bandwidth. Bandwidth by operating teams who need to run a business. If we are trying to use it more proactively, and you're trying to get time commitment to sit down, work through the thesis around the specific area, and work through a list of companies that requires a particular time commitment by business unit counterparts.
In some cases, there's a view that they appreciate that this is something they need to do, and they want to allocate the time, and they're ready to go in that respect.
It's just getting the ongoing engagement and time commitment in some cases that could be challenging. If you develop strong partnerships internally and have a good dialogue where you want to work collaboratively, that certainly helps establish that relationship.
Anyone in corporate development. You have a C-suite, business unit leadership and working teams, or strategy business development teams at various parts of your business.
Each of those properties will have teams focusing on the more granular strategy within the business unit. And that's on the sourcing/ planning side.
Then you're talking about partnerships on the execution side, which beyond the business teams, as a corporate development professional, you have to have a strong relationship with your corporate legal team that focuses on M&A.
You're really close partners there in executing M&A; you're leasing with the tax, the accounting team, litigation, compliance, and other areas.
In a corporate development role, you're touching many parts of the organization, corporate functions, business unit functions, and leadership.
We will sometimes have deal teams that are 40, or 50 individuals. Deal team that will do the diligence, and participate in various functional parts of negotiating agreements. We tend to have a centralized Corp dev function, but they will certainly have business development and strategy individuals. And those are our close counterparts when we look at M&A.
Time allocation between all the functions will naturally differ over time. There will be certain weeks where you're focused on execution and time to proactively source some additional deals. And also a study mix. And then I think you need to handle all of those different facets.
Certain parameters are consistent across different parts of our business. Then there will be certain more specific parameters, depending on what subset of companies we're trying to categorize or prioritize.
Actionability tends to be certainly a metric across the board that we look at. Does it mean we can't approach a company where we don't know the level of actionability? No, of course not, but it certainly is helpful to understand which companies on our list we've heard are thinking about doing something proactive versus not.
The other parameter, related to some of our earlier conversations on capital, is size. And I think it's trying to get a sense of size, which is not always easy, by the way, because we're relying initially on, on public information.
Sometimes there's helpful public information out there; sometimes, there's not. But trying to get just a sense of size and how that fits within the realm of what moves the needle but is not prohibited from a capital standpoint.
Then you go into the area of more specific parameters like IP. Whenever we look at those IP opportunities, we may look at things like, what's the longevity in, how long has it been out there? What exists in terms of created content versus the ability to create the refreshing content around that IP? What is the IP covered?
There are a lot of softer qualitative drivers that inform where we want to focus our time. When you're down to just a tiny handful of opportunities, and you engage with them, you get that next layer of information and you do have enough to really build a business plan around what you could do with that property specifically, then I think what you're mentioning, which is what does the ROI look like? What's our return? What is our ability to pay?
All of those questions come into play, and we can answer them. What does this look like with or without the acquisition? What is the impact to our business?
When we're in the initial screening phase, we can gather enough information from a qualitative view on the strategic benefit of pursuing an asset. But getting into the detail of it is where we focus on our time as we get into a process, and you get the benefit of the actual diligence information.
Adapting to changes
It's tough to solve something, draft it and say, okay, this is for next five years. At any given point in time, the view is to where the market will be in five years changes adding the perspectives from the broader macro community have shifted over time in terms of where they think that market is going.
What will profitability look like when you get the profitability? How many players are going to be out there that are really within the leadership set, etc? What does pricing look like?
As expectations change over time, we must continually consider what our corporate strategy looks like and not just the corporate strategy at the high level, but also the within sub-components. How do we think they evolve in current market given where things are and what does that mean in terms of what we need to spend time on from an M&A standpoint to help them get there?
We make it a point to have recurring, whether it's weekly or biweekly recurring, discussions. Make sure that as we see a change in the market, we are thinking about where to go.
They could be discussing areas where they feel like they don't have enough of the resources to do what they're doing organically. They could be discussing very specific targets that we're in the process now of assessing and specific processes that were in mid-execution. It tends to be a combination of everything in that line of topics that tend to get covered. Having some flexibility around where you're focusing your energy and oscillating between them is helpful.