Different Types of Strategies in MA
Depending on the kind of business you're joining or what stage of their life cycle, you'll probably employ different strategies. But broadly, especially in the tech world, they boil down to three different paths.
1. Acquihires - Also known as talent-led deals. This is where you're accelerating existing roadmaps by fulfilling a resource constraint in the talent aspect. Make sure you accelerate hiring or your plans over the next 12 to 18 months over a few quarters.
2. Tuck-ins -where the main thing you're acquiring are assets. Assets could be IP (intellectual property) which people often think about as technology. They could be customer lists, customer bases, knowledge or know-how. It's similar to an acqui-hire where a team of people who know how to solve very specific things has built many of the hard-fought learnings over the years. It's like a combination of assets plus some talent.
It's not just accelerating the roadmap; you're also buying things that you think would be difficult or too time-consuming to build, especially in a more mature market.
3. Strategic deals - Strategic deals are buying self-contained or fully-operating businesses. The strategy there is expanding into a new market or a new geography. Or, maybe you're expanding your product offering.
In doing that, it's really the higher leverage or a needle-moving type of transformative acquisition. Obviously, it's the more complex one and has a lot of different considerations.
The acqui-hire or talent deals tend to be smaller. The tuck-ins are more in that middle category and then the strategic ones are bigger.
Considerations for Every Strategy
As the acquirer, there are a few considerations there. If you're a smaller company, especially a private company, you have less currency by which you do M&A.
You probably can't use your venture or investors' cash to go get acquisitions. You can if it's a part of your fundraiser, but you have limited dry powder to make acquisitions. If you're using your own or private stock, the target may not see the valuation similarly. And, it takes more work to get those deals done.
You're looking at a smaller set of companies that would even entertain an acquisition conversation. Just because they're smaller or maybe earlier stage themselves, they will probably fit into this talent or kind of tuck-in type acquisition.
They may not have full-fledged operations. They may have a product that people want, and they may have pre-revenue. By virtue of the limited opportunities that you have as the acquirer, the companies you're looking at fall through those first two buckets.
If you're an early-stage acquirer or a growth-stage acquirer, you may not want to acquire strategic businesses because they're more mature. Potentially, you're likely in a more high-growth or emerging space. There will likely be a drag on your growth if you're acquiring a more mature business. It might help you on a margin basis, but you're probably being valued more on growth than margin.
Are you willing to trade slow business or drag growth for margin at that stage? Maybe not, it depends on what you're optimizing for from a financial perspective. Cultures may clash, and the acquisition might be difficult.
One of the things about acquiring a fully-operating business is that they have their own set of cultures and people's philosophies. They also have their mission. So by virtue of that, you're often looking at acqui-hires and tuck-in-type acquisitions.
Lastly, when you're thinking about talent growth, engineering talent, or some specialized talent in a highly-regulated space, there's a knowledge set that is coveted and scarce to the market from a labor perspective. So if you're at an earlier stage, and your union economics are good, one of the biggest constraints to your execution or plan is the people.
This is when a lot of companies turn to acqui-hires. The "acqui-hires" allow you to potentially get higher or more premium elite talent that otherwise you wouldn't get in labor.
For those reasons, growth-stage businesses tend to look more at the first two (acqui-hire and tuck-in type acquisition), But that is not to say that it doesn't always make sense to look at the strategic ones.
Identifying the Strategy to Use
None of these things exists in the vacuum. The worst-case scenario is when you start acquiring items because you're reacting to opportunities being presented to you.
M&A is a tool to accomplish your business needs. So the first question you have to ask is, what does your business need? Or, what is the problem statement?
When you think about buying, think about the North Star and what you want to solve.
- Are you trying to solve an engineering problem?
- Are you trying to acquire something?
- Are you trying to build an asset that will be very difficult where there's very specialized knowledge needed to build it?
- Are there certain licenses you need, and those are very scarce?
Aligning what you're trying to accomplish will help you decide what kind or type of acquisition you will carry out.
You would rarely acquire a business strictly for their go-to-market. And there's a clear distinction between B2B and B2C frameworks. For B2B, it's unlikely that you will acquire a business for their sales team or their marketing strategy alone.
If their product is not a fit, are you going to throw it all out to win one channel over for a sales strategy that may not work for your product? On the other hand, if the product category is the one you want to be expanded and the second is that there's cross-selling potential, then it could work.
As for the consumer side, it has more complexity. For example, maybe there is a user demographic that your product hasn't resonated with to date. But will that be a by-product of your product? Or, is that because you've employed a very successful marketing campaign toward a certain demographic and now toward others?
Sometimes, it may be a very similar product, and the ability to use that to think about the acquisition to move a little bit up the market is interesting. But, on the other hand, it can be an expensive proposition depending on the target's expectations.
Deals are generated in three ways. The best way is a bottoms-up and proactive deal generation, this is where you understand a business partner's needs. You've identified folks, not just at the executive level but within the business or the working group, plus one or two from the executive team.
You understand what their objectives are; you recognize what their roadmap is and other needs and gaps. So, this is the best type of deal you're making. So, you're actively going and understanding what's going on in the market.
There's also a dialogue. You have conversations around what might make sense to build versus buy for a partner. And over time, you come with a view. When you identify those gaps from a first principal's basis that you want to acquire rather than build, the CorpDev team will find opportunities to fit into that.
Then, you have to build consensus, kind of a bottoms-up, right? You then go to their manager, executive, C-suite, and finally, you go to the board. That's the best deal-making strategy because it's something the businesses need.
You collaborated on it and understood both from a financial and product perspective. Do they have the right culture? Are they going to accelerate my roadmap and plans? Are they going to be a distraction? You marry those two things and build a strong consensus before going after that acquisition.
There's another kind, and that's more inbound. Historically, we think about investment bankers, but over the last decade, it's also included venture investors, PEs (private equity), or growth equity shops that are calling you.
And, you're building relationships with them. They know what's out there, they provide you leverage, and you learn from them. But, they give you inbounds and there's differing interests and incentives on why they're reaching out to you. So, you still have your work to determine if it all makes sense.
These inbounds are less likely to go forward but are still important conversations. Sometimes, they bring in a new perspective. There is "shiny object syndrome" because a company that's gotten a lot of great press may come to your doorstep, and people can get excited.
But, ultimately, if you're talking about a working group level plus two from the executive teams, there's only so much they can do to chase the shiny object. They still need buy-in from their seniors.
The shiny object syndrome comes the most from the third category when deals tend to be more top-down. These are the more transformative acquisitions. They are the ones where the C-suite often dictates the space the company needs to be in. They'll often say stuff like:
- This company understands something that we don't.
- They built something we haven't, and the marriage of our brands will be amazing.
- This will be an accelerant to our plans and especially the vision.
But, the "how" isn't always there. You haven't figured out if the business is what you think it is. And as a CorpDev, your job is to provide a view that is as objective as possible.
If it's pretty clear that this can be valued destructive to our business, you have to raise your voice. You have to find a way to make your voice be heard and that's the way you overcome the shiny object syndrome.
Driving Deals to Success
There are multiple stages and checkpoints as you go through a deal process. It's different for every company but at minimum, you'll need to check in with a C-suite before you put out a non-binding offer.
Whether that's an LOI (letter of intent), IOI (indication of an interest) or term sheet, depending on the weight and reputation around M&A, and how serious you are about that stage.
You also need to check in with the diligence before signing definitive agreements, and there's going to be some sort of approval or check-in that happens in that stage.
Depending on the type of deal, especially on the more transformative ones, there are going to be a lot more check-ins. Sometimes it's weekly. Once it goes towards the end, as you're wrapping up diligence and you're coming to a decision, you might have daily conversations around it. Especially if it's a public-to-public deal.
Remember to keep doing the work, keep learning, and surfacing and escalating the flags. There are two reasons why you wouldn't do a deal. But, regarding how I categorize it, there are two reasons.
First one is disagreement with the strategy. There are many assumptions that if I tweak them in a more upside case, the deal might make sense. But, I disagree with the belief that drivers should be in an upside case.
It also depends on who's sponsoring the deal. If it's the chief product officer, they probably need the CEO's and the CFO's buy-in. If it's somebody else, like a GM of the business, they need some or one of the seniors' buy-ins. Then, they also need the C-suite's buy-in.
It gets tougher as the CEO and CFO lock arms together and wants to do a certain deal. In those instances, it's hard to overcome it. You also have to recognize that, but it's still your job to continue surfacing the problem.
It's two parts. It's data and storytelling. If you work at a good company with good decision-makers, it's unlikely they will decide against the data. On the other hand, if you project out the business, look at unit economics, and if it's going to burn more and more money over time, there isn't a path to break even.
It's not impossible, but it's very unlikely that you'll have an executive who's still willing to do the deal. But data is not sufficient, and you need to tell stories, and you need to tell good narratives.
I don't mean to fabricate things, but you have to paint the picture.
- How these synergies are going to happen.
- Why is it important that these synergies happen
- What does it do for our market position.
- How does it get us closer to that five-year vision?
- What does this business do that we're not doing today?
- What are the things you can accomplish together?
You must go back to the mission statements, values, and culture. Unfortunately, corporate professionals sometimes overlook those pieces. Because we're trained as lawyers, bankers, and private equity, you're looking at numbers or negotiating contracts all day long, so you sometimes forget that, ultimately, people and cultures are meshing.
It's the ability to work together against a problem scheme and a certain mission to make an acquisition successful. You can also include other operational metrics, too. You need to tell a story and bring executives along on that story.
I've learned that it's harder to tell a compelling story to a receptive audience if you tell them one time in a meeting. You need to start painting the picture earlier on. You need to preview it, share it, and you have to piecemeal it.
You can also share some readouts on that. You have to do some kind of a buildup before you finally get to those last couple of meetings where you decide whether it's a go or no-go for the acquisition.
Because, if it's the first time somebody's heard about it, even if you're telling the best story, it's probably harder to get them to pay attention. Not only that, they're going to interrupt you and ask a bunch of different questions that will violate your ability to tell a narrative.
If you warm them up a lot and bring them along the way, you can actually have success. When you do storytelling, present that with information when looking for a decision.