Text Version of the Interview
Importance of M&A Strategy
It's a very pricey game to play if you don't have a clear M&A strategy. It can suck out the management time in areas where you don't want to, which can derail the organization from the most important things you want to do.
You will end up wasting a lot of time and money in diligence. And if you are a listed company, that makes a difference and can hit your APS reporting and very sensitive stock price. You need to know what you're doing about where you spend your time and money.
The Benefits of a Good M&A strategy
A good strategy is about alignment. You will know what you have to do and where you have to plant your flag. There is alignment across the organization:
- What's the strategy?
- What are your capabilities?
- What do you want to build on your own and what do you want to buy?
The good part about having a strategy is that you can focus on spending your efforts exactly on things that you want to buy. You can avoid boiling the ocean and exactly go into a proactive search process. And you can articulate your script and articulate what's the value that you get on the table. So it becomes a very proactive approach.
Success is not guaranteed, but at least you can constantly calibrate to learn, improve, and adjust your strategy and your mechanisms, and your offer on the table.
Shaping the strategy
The strategy should be related to your capability. Strategy is a very broad word, and no two people can define it the same way. Organizations have a limited team, and people have day jobs.
It starts by asking:
- How many resources do you have?
- What choices do you need to make?
- What's the best you can do with your capability and the resources?
- What you're really good at? What can you stretch to do?
- What's the market?
- How can you make the market big using your capability?
You can use capabilities as a filter to see what opportunities you can chew and what fits you. It's about making choices based on credible evidence of what you are good at, and based on those capabilities,
- How am I looking into the market?
- What are my customers saying?
- What's the market saying?
- What's the outside-in perspective?
Many people think it should be an inside-out exercise, but it should be an outside-in perspective. Look at the market and benchmark with others. How tall you are, how good you are, and what are you good at. Don't put your money where you're not capable of just because your competition is going there.
You need to allocate the time and spend the resources in a way where your team can deliver something beyond your competition. It's about making those choices with these filters in mind.
The worst thing that can happen to an organization is to make the strategy exercise a budgeting exercise.
It needs to be outward-looking, and it needs to be a broader market exercise, the macro trends and like how it fits in and how you see in outside.
Who are the people involved in formulating the strategy?
The typical people involved are:
- The client service
- The account managers who are managing the big accounts will be involved
- The operations team who are running the business day-to-day
- The finance folks
Then you start with what you did last year and what you can do next year.
Once you become a more mature organization, the next level is to bring in an outside perspective. These can be consultants, the voice of your customers, your existing relationships, and how the market is trending.
You can also consider startups in the field and other companies distracting the market segment. They may be very small now, but they can sweep you off the floor 20 years down the road. You need to think about their perspective and how the industry is changing.
M&A Strategy vs. Company Strategy
M&A is a tool to execute an organization's strategy. So if I'm a new corporate development leader, I have to be a listener for the first months. Work across the organization with different stakeholders starting from:
- the board members and what they want to be done.
- the financial shareholders
- the customers
- the leaders across functions
- from sales
Then I have to understand the business:
- What's the business?
- Where are we playing?
- Who is the competition?
- What are the key levers of the business in terms of the macro trends?
- What's playing out?
- What's the service we are offering right now and how it's differentiated in the marketplace?
- How does the revenue model work?
- Why the customer is paying?
- What they're paying for?
- What's the value positioning in the market?
- How are customer fees? Are we price low or high?
To play a meaningful role in corporate dev and defining strategy, then articulating the M&A strategy as a subset of it, then to go after the market, you need to understand the business.
So you need to understand the macro factors and define and understand the segment play. Then you can go back to say, now look at it from a different perspective.
I've heard it from you inside-out, now go back and from outside-in, go back to the team and present with the details of how you see the trends and factors.
Formulating an M&A Strategy
Let's say I'm selling a healthcare service, and my customers are my insurance payers. And my corporate strategy is to offer enrollment services, helping insurance companies sell their services or policies to the members.
If this is your strategy and you want to grow your company to a hundred million dollars and be the best in this segment, you need to come up with an M&A strategy.
Do an inside-out comparison then outside-in. If it turns out that you have a good sales engine, but you don't have good technology, that's where M&A comes in. If you cannot sell that well, you're lacking the consultative front-end to sell.
All of these things become the criteria. The goal of your M&A strategy is to bridge those gaps by means of a transaction.
- What's the size of the company that I'm looking for
- What's the capability
- How much I can spend on it
- What's my timeline
Then you go out in the market and check the companies that fit your criteria, check what's available out there, and map the competition.
Your M&A strategy must come out based on your overall strategy and what your company is lacking.
Also, there are many things to buy in the market. You need to know how to prioritize your targets. If you want to have a powerful M&A strategy, you need to identify the transactions that will move the needle for your company to create massive value for your stakeholders. And then consider what will move the needle for your customers and for your financials.
The biggest thing to remember is that you're not going to buy the target company for what they are. You are buying them for what you can make out of them and what they cannot do by themselves. That becomes a huge selling point to differentiate, acquire, add value for everyone.
Integration's role in strategy
Honestly, integration is 80% or 90% of it. If I'm on the buy-side on my own example, integration is everything. Even if you bought a great company if the integration sucks, then everything is out of the drain and everything is a waste.
If you are buying a company based on your internal capability, you already know that you have people who know the business and can grow the business post-close.
But if you are entering a new market segment, you need to know how you are going to run the business after you acquire it.
- What're the combined customers look like?
- Who needs to be the market-facing people?
- Who are the ideal person to run the organization?
It's an old mindset to assume that the buyer will always run the acquired business. In this new age business where technology is disrupting, sometimes the incoming team is the best people to run the business. They already know how to engage with the customers and create value.
To get your synergies right you need to put the right people in place to run the business. Otherwise, I buy a business that I do not know, and I don't have a plan and I go and mess it up and I drive out the talent and then the business walks out of the day one. It's a value leakage across.
The integration plan needs to be clear at the time that you're prospecting a target.
Dealing with Deal Fever
If a business leader or a CEO wants to do with the outside of the overall strategy, then you need to question the integrity of that decision. M&A transactions are a great way to move money from one to another so it's important to understand the rationale behind it.
It happens all the time when CEOs want pet projects and there is big money involved, so you need to understand its model. If they cannot explain the strategy in two lines, it's not a convincing strategy and could be a distraction to the organization.
Reassessing your strategy
I would say this is industry-specific. If you are in a standard industry, you have to do it once a year. You do an annual strategy planning life cycle and you look into the changes and you redefine your strategy.
It can be longer for certain industries.. But for certain industries that change faster, you need to reassess your strategy every six months.
Relationships affecting strategy
In a broader strategy framework, relationship matters a lot because you get the truth out of your customers and stakeholders to get an honest why should feedback in any strategy process.
Even the customers who are not happy with you have a great relationship. They can decide to stay with you and give a voice back in the process for you to make corrections and give you an option to make the course corrections and that's valuable from an organization strategy.
From an M&A strategy aspect of it, a relationship is very good. Like even if you start a deal, a stronger relationship can save deals. No matter what happens in the deal, you can have hard conversations with the target if you have a good relationship.
Reputation is extremely important. If you are not making good deals and the acquired company don't get to make money, you will be called out. The market will see you at someone who is not worth spending time with and you will have a hard time buying.
But if you buy good companies and they make money and all your acquisitions are successful, people will see that. That can put you on the top spot among other competitive offers, which can change the entire game.
We've actually done a deal where we proactively prospected a company, they were not up for sale, we kept in touch with them for a year. And after that, we introduced them to someone we have acquired and told them the opportunities that come with working with us.
That company ultimately decided to sell their company to us so repudiation really does help. They can serve as references.