True story from my ops background: When I was running through emails one morning, I found one that stopped me in my tracks. The VP of a recently acquired product line had sent an incendiary note to the CFO and copied dozens of people internally, using coarse language to declare the integration systems team completely incompetent and their product flawless. All this was in response to a very visible enterprise, large system-level roll out at a major multi-site client.
The crazy thing, was that each player was acting rationally, and the stage for this had been set months earlier. After all, most major misunderstandings occur when the relationship is just getting started…..
M&A is on the Rise as a Transformation Tool
In the last 36 months, the market for M&A has been red hot. This helpful graphic from Deloitte shows what the high-level view looks like. There are three key takeaways here: the deals are bigger, divestiture is on the rise and there is a big increase in technology acquisition underway.
This in turn has driven the complexity of finding, evaluating and getting to the table with the right firms more intense and complex. Leaders in Corporate Development are the steely-eyed missile men (and women) of the team, listening to and interpreting the Corporate and business unit needs, and supporting the C-Suite in getting to the table with a deal that makes sense. The higher stakes of bringing in less tangible value (IP, Know How, Market Presence), has required the work in this space to get more complex and require higher more diverse expertise.
The Odds are Stacked Against Smooth Integration
Here are the resisting forces that I’ve seen again and again in M&A driven innovation:
- The strongest resistance will come from the internal team that was closest to having developed the acquired know-how organically. In every firm there is a small group that has been working (sometimes for years) on the innovative product or service. While the senior team expects them to be supportive, many times the emotion of not getting the internal project to scale creates unanticipated push back.
- Even the best acquired products and services have been developed in a “cut and try” environment for a very specific group of customers. Yet chances are very good that you’ll be using it in ways and at a scale they hadn’t anticipated. The demands of a much larger distribution organization doesn’t allow the “tips and tricks” that smaller firms use as they are growing. I have seen it over and over: the acquiring firm imputes much higher performance and quality to the acquisition…only to find that substantial incremental investment is necessary.
- The “earn out” (financial performance incentives) for the acquired senior leaders will work at cross purposes to that learning. Many times there is a substantial compensation “hold back” for the principals of the acquired firm based on the continued sales performance of the product or service. The dark side of this is that the acquired team works to make sure their product or solution is quickly written into every possible spec, and when issues arise, they make sure it’s “not their product” that’s at fault.
- The demand for support quickly exceeds the acquired team’s ability to provide it. It is one thing to scale a product through a sales team going to market, it is quite another to effectively equip the multiple technical centers of an enterprise organization to build it into their complex web of systems and services.
It used to be about “getting the costs out,” now it’s about “getting the tech (and know how) in.”
Innovation Raises the Stakes
When an innovation agenda is part of the transaction, it makes the before, during and after work much more complex. It goes without saying that the first gate is culture, especially when intangible value is on the table. If the embedded culture of the potential acquisition target gives you any pause, it’s a deal killer.
Before: When M&A is on the table, it’s imperative that we have a more robust strategy process that allows everyone to get on the same page, as we discussed in this post. Recall that the hallmark of this strategy is to build key domains of interest, informed by carefully vetted internal and external experts. By co-developing the key insights and decisions cooperatively, when it’s time to do the hard work of integration, the senior leadership team is much more cohesive and focused. This will allow the Corp Dev leader to be much faster and focused in finding and quickly vetting potential opportunities.
During: The pre work allows a much tighter deal team to go after the target, and not get bogged down in developing emergent strategy while trying to get a deal done. While there are always blue birds and black birds, with the deal narrative well in hand, the Corp Dev team can move faster and with more confidence. Forming the win-win mutual objective is job one: this serves to keep the overall transaction on track, and to make the cultural fit a visible asset. To assure that the less tangible assets are captured, it’s important to make use of Subject Matter Experts (SME’s) to contribute to the deal dialogue, know how transfer mechanics and terms. Timely and specific discussions can save months of painful post transaction revisions and misunderstandings.
After: This is the tricky bit – it used to be all about “getting the costs out,” now it’s about getting the tech (or know how) in.” Tech transfer is hard enough when it’s done within the same firm, however when you introduce the complexity of two cultures becoming one, it can be easy to let value drain away. So much to say here, but let me limit this to a few key points:
- Keep the prize in sight – Decide early on what the three most important and valuable reasons for the acquisition are and stay ruthlessly focused on capturing the value. Build a joint steering team and a day-to day-ops team charged with learning-based metrics. (More on that here)
- Build narrow value bridges. Narrow means be very careful how much demand you put on the acquired organization – especially in the first 120 days. At a minimum, look at hard value (operations), soft value (IP, Know How, Personnel), and systems (processes, tools, techniques).
- Be sure it’s good before it goes big. Limit early scale. Deliberately structure a couple of “sandbox” projects that allow the two teams to interact and build value for a client who will appreciate and value the new capability your team will bring. The strategy must be to go slow upfront to allow a big ramp later – “earnouts” need to be longer term.
- Reward mutual success – By establishing some joint metrics and rewards for the value capture teams, you can work through the “I told you so” from the internal team, and allow acceleration and customer feedback to build the new and valuable capability that you put in the acquisition business case.
One of the privileges of having multiple decades of experience is seeing trend lines with clarity, and none is higher stakes or more interesting than the role of Corporate Development in innovation. In the last three decades we have seen deals that were largely about building capability or market share morph to deals that were intended to have a strategic impact on both the parent and the acquired firm.
You’ve probably gathered that there are a large number of process details, decision making methodology and facilitation know-how that go into doing this well. If you’d like to have a deeper dive on how this all works, give me a call at 847-651-1014, or click here, and set up a no strings attached, 20-minute phone call.
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