THE only 2 questions
post #0001
september 20, 2022
Anyone who has taken a look at the historical outcomes of mergers & acquisitions understands that most M&A deals fail. Even the built-in definition for ‘acquirer’ from the dictionary on my Mac states: “many acquisitions failed to create value for the acquirer's shareholders because too much was paid to the target's shareholders.”
In fact, statistically it is usually a coin-toss at best for an M&A deal to drive relative outperformance (vs. non-acquiring competitors/ peers), and less than 1/3rd of deals end up generating significant shareholder value. Either way, if those are odds you want to beat or if they are going to keep you up at night, then read on.
Obviously, I would posit, and it has been my experience, that there are proven ways to increase those odds and maximize your return for the risks you take on as a buyer. Additionally, no selling CEO or founder wants to have their company destroyed or destroy value as a result of doing a deal. Revealing and navigating these best practices is the very reason professionals like myself exist.
Maybe you are wondering how acquirers are able to buy the ‘right’ companies, or, perhaps, you are scratching your head in disbelief like those who were confused by the seemingly irrational $20 billion price tag that Adobe recently paid to acquire Figma. You are not alone.
In fact, many CEOs interested in acquiring companies often ask me the same two, interrelated questions, “how should we identify which company to acquire?” This is subsequently proceeded by a second, “how much will it cost us?” No, these are not the two questions that I allude to in the title of this post. Here, I will address the former and save an in-depth discussion of the latter for future posts.
So, how does one select the right company to acquire?
To answer that oft-debated question, what I present most CEOs with ends up being what I consider to be one of the hidden secrets of all successful M&A. I let them know that the answer takes the form of two fairly straightforward questions. That is it, nothing more than two questions. However, the answers to those questions are where the hard work begins.
Here they are, THE only 2 questions that all successful buyers must start with before they pursue M&A:
Often times, the answer to the first question begins as superficial waste and must evolve into something specific and relevant to the acquirer’s strategic needs. The former might sound something like, “we should acquire Target Company X… because I just read about them in The Information” … or …”because they just raised another round of capital”… or … “because their founder and I used to work together at my last company.”
While most of this post is focused from the buyer’s perspective, these same 2 questions are applicable to those being acquired. In that case, one of the very first things that you should do as CEO/ founder is to ask the buyer these same two questions! It may surprise you to learn that I have worked with numerous founders who cannot articulate why they are being courted by a certain acquirer, what their rationale is, or how they will fit into the future world of the acquirer.
To step back for a moment, it has been my experience and observation that, irrespective of industry, all acquisitions fall predominantly into one of the following categories. These can serve as generic versions of a more substantive answer(s) that a buyer might provide to the first question. To make these easier to recall, I refer to them as “the 4 P’s”:
It is either one, or a combination of the above reasons that inform a more refined answer to the first question. And each acquirer’s answer varies. This is their “why” behind their rationale.
The best acquirers in the world not only understand this, but they get to a level of specificity and conviction that benefits their ability to act decisively and with certainty when it comes to answering the second question. As importantly, such buyers trust that their rationale carries enough economic value internally that any external criticism of being irrational is simply seen as noise that lacks the same future insights to justify the present value that they are investing. If you want examples of what more substantive answers may be, then take a look at some press releases from acquirers who have a proven track-record of doing deals.
Moving on, the second question is the “how” or what folks in the business often (incorrectly) frame as the build-versus-buy analysis. I like to remind folks that this is not a binary choice and there are actually several complex alternatives that must be weighed against one another:
Unfortunately, more often than not, the last bucket of “do nothing”, or what one might call stasis, is the easiest bucket for potential buyers to end up in. Some mistakenly think that this is also the safest or most conservative choice as well. Or, also commonly, potential buyers will believe that they can build things instead without recognizing that path also carries inherent risk, and sometimes risk far greater than acquiring. I will share more thoughts on that in a future post that I am going to title for now “No Risk = No Magic.”
Should buy be the decision, then what should be our output? The best next step is to determine who to acquire. The extent of that identification process is where the hard work starts. The short version can best be described by stating the obvious— you should only acquire the company that best fits your answer to the first question. Not the second or third best, THE best, and whatever you do, never settle for anything less!
There you have it, THE only 2 questions you need to answer to do great M&A, along with how to think about answering them. If you are thinking about pursuing an acquisition(s), in the midst of one, or simply want to learn more by diving a bit deeper or getting more tactical with any of this, you can always reach out to me gary@kokua.ventures
In the meantime, keep an eye out for my next post, “No Risk = No Magic”